CFA Level I: Ethics and Professional Standards (University)

What is the CFA Institute Code of Ethics (6 components)?

Answer: Members/candidates must: 1) Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, employers, colleagues, and other market participants. 2) Place integrity of the profession and client interests above personal interests. 3) Use reasonable care and independent professional judgment. 4) Practice and encourage others to practice professionally and ethically. 5) Promote integrity and viability of global capital markets for the benefit of society. 6) Maintain and improve professional competence of self and others.

Who must comply with the Code and Standards?

Answer: CFA Institute members and candidates enrolled in the CFA Program, regardless of job title, local law, or whether they hold the charter.

Standard I(A): Knowledge of the Law — core requirement?

Answer: Understand and comply with all applicable laws, rules, and regulations (including the Code and Standards); when laws conflict, follow the more strict law; must dissociate from known violations.

Standard I(B): Independence and Objectivity — what does it require?

Answer: Use reasonable care and judgment to achieve and maintain independence and objectivity; do not offer, solicit, or accept gifts/benefits that could reasonably be expected to compromise independence.

Standard I(C): Misrepresentation — what is prohibited?

Answer: Knowingly making false or misleading statements about investments, services, qualifications, or professional activities; guaranteeing investment performance (except for genuinely guaranteed instruments); plagiarism.

Standard I(D): Misconduct — what does it cover?

Answer: Prohibits any professional conduct involving dishonesty, fraud, or deceit, or any act that reflects adversely on one's professional reputation, integrity, or competence.

Standard II(A): Material Nonpublic Information — rule?

Answer: Members/candidates who possess material nonpublic information (MNPI) that could affect security value must not act or cause others to act on it (trade or tip).

Standard II(B): Market Manipulation — what is prohibited?

Answer: Practices that distort prices or artificially inflate trading volume, intended to mislead market participants — includes both information-based (spreading false rumors) and transaction-based (wash trades, pump-and-dump) manipulation.

Standard III(A): Loyalty, Prudence, and Care — core duty?

Answer: Act for the benefit of clients, placing client interests before the interests of the employer or the member's own interests; exercise prudence, care, skill, and diligence.

Standard III(B): Fair Dealing — what does it require?

Answer: Deal fairly and objectively with all clients when providing investment analysis, recommendations, or taking investment action; do not favor some clients over others.

Standard III(C): Suitability — what must a member do?

Answer: Determine client's investment objectives, risk tolerance, time horizon, and constraints (via an IPS); only recommend/take investment actions suitable to the client's profile; for managers given specific mandates, ensure actions are consistent with the stated mandate.

Standard III(D): Performance Presentation — requirement?

Answer: Make reasonable efforts to ensure that performance information communicated is fair, accurate, and complete.

Standard III(E): Preservation of Confidentiality — rule and exceptions?

Answer: Keep client information confidential unless: (1) disclosure is required by law, (2) the information concerns illegal activity by the client, or (3) the client permits disclosure.

Standard IV(A): Loyalty (to Employer) — what is required?

Answer: Act for the benefit of the employer; do not deprive the employer of the advantage of the member's skills/abilities, misappropriate confidential information, or otherwise cause harm to the employer.

Standard IV(B): Additional Compensation Arrangements

Answer: Must not accept gifts, benefits, compensation, or other consideration that competes with, or might create a conflict of interest with, the employer's interest — unless written consent is obtained from all parties involved.

Standard IV(C): Responsibilities of Supervisors

Answer: Supervisors must make reasonable efforts to detect and prevent violations of applicable laws, rules, regulations, and the Code/Standards by anyone under their supervision or authority; must establish/enforce adequate compliance procedures.

Standard V(A): Diligence and Reasonable Basis

Answer: Exercise diligence, independence, and thoroughness in analyzing investments and making recommendations; have a reasonable and adequate basis, supported by appropriate research, for any investment analysis, recommendation, or action.

Standard V(B): Communication with Clients and Prospective Clients

Answer: Disclose the basic format and general principles of the investment process; use reasonable judgment in identifying relevant factors; distinguish between fact and opinion; promptly disclose significant changes affecting the investment process.

Standard V(C): Record Retention

Answer: Develop and maintain records that support investment analyses, recommendations, actions, and other investment-related communications with clients and prospective clients.

Standard VI(A): Disclosure of Conflicts

Answer: Make full and fair disclosure of all matters that could reasonably be expected to impair independence/objectivity or interfere with duties to clients, prospective clients, and employers; disclosures must be prominent, in plain language, and communicate the relevant information effectively.

Standard VI(B): Priority of Transactions

Answer: Investment transactions for clients and employers must have priority over personal transactions (or those benefiting the member's family); personal trading must not disadvantage clients.

Standard VI(C): Referral Fees

Answer: Disclose to employers, clients, and prospective clients any compensation, consideration, or benefit received from, or paid to, others for the recommendation of products or services.

Standard VII(A): Conduct as Members/Candidates in the CFA Program

Answer: Must not engage in conduct that compromises the reputation or integrity of CFA Institute or the CFA designation/program, e.g., cheating on the exam, violating testing policies, or revealing confidential exam content/procedures.

Standard VII(B): Reference to CFA Institute, the CFA Designation, and the CFA Program

Answer: Must not misrepresent or exaggerate the meaning or implications of membership, the CFA designation, or candidacy in the CFA Program.

What are GIPS (Global Investment Performance Standards)?

Answer: A set of voluntary, ethical standards developed by CFA Institute for calculating and presenting investment performance, based on the principles of fair representation and full disclosure.

Who can claim GIPS compliance — individuals or firms?

Answer: Only firms (investment management firms as a whole) can claim compliance with GIPS, not individuals.

What must a GIPS-compliant firm include in a composite?

Answer: All actual, fee-paying, discretionary portfolios managed according to a similar investment mandate, objective, or strategy.

Why were GIPS created?

Answer: To ensure accurate, consistent investment performance data; to allow fair, apples-to-apples comparison of performance across firms; and to enhance the professionalism and credibility of the investment industry.

Vignette: An analyst overhears a CFO's confidential, material earnings discussion at a private dinner and trades on it before public release. Violation?

Answer: Yes — Standard II(A), Material Nonpublic Information.

Vignette: A portfolio manager allocates the best-performing new IPO shares only to the firm's largest, most profitable clients. Violation?

Answer: Yes — Standard III(B), Fair Dealing.

Vignette: An analyst's marketing materials include performance results achieved at a prior employer, implied as her own current firm's results, without verification. Violation?

Answer: Yes — Standard I(C), Misrepresentation.

Vignette: A supervisor knows a junior analyst accepts lavish gifts from a broker but takes no action. Violation?

Answer: Yes — Standard IV(C), Responsibilities of Supervisors (failure to detect/prevent), and the analyst separately violates Standard I(B) Independence and Objectivity.

Vignette: A CFA candidate copies another candidate's answers during the Level I exam. Violation?

Answer: Yes — Standard VII(A), Conduct as Members and Candidates in the CFA Program.

Vignette: A charterholder's advertisement states that CFA charterholders achieve higher investment returns than non-charterholders. Violation?

Answer: Yes — Standard VII(B), Reference to CFA Institute, the CFA Designation, and the CFA Program.

Vignette: Before disseminating a stock downgrade to clients, an analyst sells the stock from her personal account first. Violation?

Answer: Yes — Standard VI(B), Priority of Transactions (and also Standard III(B), Fair Dealing, since clients should receive the recommendation change before/at the same time as personal trading).

Vignette: An analyst builds an investment thesis by combining publicly available financial statements with nonmaterial, nonpublic insights gained from industry contacts. Violation?

Answer: No violation — this is the mosaic theory, permitted under Standard II(A).