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101 Concepts for the Level I Exam

Essential Concept 1: Ethical Responsibilities Required by the Code and Standards


I. Professionalism

A. Knowledge of the law

  • Understand and comply with all applicable laws, rules and regulation.
  • In a case of a conflict, comply with the stricter law.
  • Do not knowingly participate in any violation. Disassociate from such activity.

B. Independence and objectivity

  • Use reasonable care and judgment.
  • Maintain independence and objectivity.
  • Do not offer, solicit or accept gifts; however, small token gifts are ok.

C. Misrepresentation

  • Do not omit important facts.
  • Avoid plagiarism (the practice of taking someone else’s work or ideas and passing them off as one’s own).
  • Do not guarantee investment performance.

D. Misconduct

  • Do not lie, cheat, steal or behave in a manner that affects your professional reputation or integrity.

II. Integrity of capital markets

A. Material nonpublic information

  • Do not act or help others to act on material nonpublic information. (Information which would be likely to affect a stock’s price once it becomes known to the public).
  • However, mosaic theory (material public information + nonmaterial nonpublic information) is not a violation.

B. Market manipulation

  • Do not manipulate prices/trading volumes to mislead other market participants.
  • Do not spread false rumors.

III. Duties to clients

A. Loyalty, prudence, and care

  • Act with reasonable care and exercise prudent judgment.
  • Place client’s interest before your employer’s or your interests.
  • Soft dollars must be used for the benefit of the client.
  • Seek best execution.
  • Vote proxies in the best interest of clients.

B. Fair dealing

  • Do not discriminate against any clients when disseminating recommendations and taking investment action.
  • Different level of service is allowed, as long as it does not negatively affect any client.
  • Different service levels should be disclosed to all clients and prospects.

C. Suitability

  • In advisory relationships, develop and update an IPS periodically. Understand the client’s risk profile.
  • In fund/index management, ensure that investments are consistent with the stated mandate.

D. Performance presentation

  • Do not misstate performance.
  • Make detailed information available on request.

E. Preservation of confidentiality

  • Maintain confidentiality of current, former and prospective clients.
  • Unless (1) disclosure is required by law (2) information concerns illegal activities by a client (3) client permits the disclosure.

IV. Duties to employers
A. Loyalty

  • Do not harm your employer.
  • Obtain written consent from the employer before starting an independent practice.
  • Do not take confidential information, client lists, financial models etc. when leaving an employer.

B. Additional compensation arrangements

  • Do not accept gifts, benefits or compensation that will create a conflict of interest with your employer.
  • You may accept if you obtain written consent from all parties involved.

C. Responsibilities of supervisors

  • Prevent employees under your supervision from violating applicable laws, rules, regulations and the Codes and Standards.

V. Investment analysis, recommendations, and actions
A. Diligence and reasonable basis

  • Have a reasonable and adequate basis for any investment analysis, recommendation or action (even when using a third party research).

B. Communication with clients and prospective clients

  • Tell clients about your investment process.
  • Distinguish between fact and opinion.

C. Record retention

  • Maintain records (Standards recommend storing records for at least 7 years).

VI. Conflicts of interest
A. Disclosure of conflicts

  • Disclose conflict of interest in plain language.

B. Priority of transactions

  • Client transactions come before employer transactions which come before personal transactions.
  • Avoid front running.
  • Fee-paying family member should be treated no different than any other client.

C. Referral fees

  • Disclose referral arrangements to clients, prospective clients and employers.
  • Disclosure of referral fees helps the clients evaluate any possible partiality shown in the recommendation of service.

VII. Responsibilities as a CFA Institute member or CFA candidate

A. Conduct as participants in CFA Institute programs

  • Don’t cheat on the exams.
  • Keep questions and exam information confidential.

B. Reference to CFA Institute, the CFA designation, and the CFA program

  • Fill professional conduct statement and pay membership dues annually.
  • References to partial designation not allowed (wrong usage: I am a CFA Level I). However, you can say that you have passed Level I, II or III.
  • Not to be used as a noun. Only use it as an adjective.
  • Do not state that holders of CFA charter are better than others or that they produce better investment results.


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