101 Concepts for the Level I Exam
Concept 99: Ethical Responsibilities Required by the Code and Standards
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.
- Do not guarantee investment performance.
- Avoid plagiarism (the practice of taking someone else’s work or ideas and passing them off as one’s own).
- Do not omit important facts.
- 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 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.
- 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
- 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.