Ethics and Trust in the Investment Profession

LOS 1.a: Explain Ethics

Ethical Behaviour is that which conforms to a set of rules and moral principles based on shared beliefs about what
behaviour is acceptable and what behaviour is unacceptable

- Ethics encompasses a set of moral principles and rules of conduct that provide guidance for our behaviour
- Ethics: Study of moral principles: study of good and bad behaviour/ study of making good choices as opposed to
bad ones
- Study of ethics examines role of consequences and personal character in defining what is considered good/ ethical
conduct
- Ethical Principles: Belief about whats good/ acceptable/ obligatory behaviour + whats bad/ unacceptable/ forbidden
behaviour
- Ethical Principles may refer to: beliefs about behaviour that individual expects in himself as well as shared beliefs
about standards of behaviour expected/ required by a community or societal group
- Ethical conduct: Behaviour following moral principles + balances self-interest with both (in)direct result of behaviour
on all stakeholders
- Ethical actions = actions perceived as beneficial and conform to ethical expectations of society
- Ethical principles: Honesty, fairness, justice, diligence and respect for the rights of others
- Stakeholder: Individual/ group of individuals who could be affected (in)directly by decisions made by investment
professional

LOS 1.b: Describe the role of a code of ethics in defining a profession

Professional code of ethics is a way for a profession to communicate to the public thats its members will use their
knowledge/ skills to serve clients in an honest and ethical manner and can increase public confidence and trust
members will act ethically

- Job = work to earn a living/ Occupation = Job somebody is well suited for and dedicated to/
- Profession = Specialised knowledge + Skills/Service to others/Practised by members who agree to adhere to code
of ethics
- Code of ethics: Codify beliefs about obligatory and forbidden conduct in a written set of principles (displayed in
prominent locations) Publicly communicate organisations values + expectations regarding members behaviour
guide behaviour by describing what is considered acceptable behaviour
- Standards of conduct: Benchmark for minimally acceptable behaviour of group members - can help clarify code
of ethics
1. Principal Based: Based on a set of shared principles apply to all members regardless of age/ seniority etc
2. Rules Based: Narrowly defined and apply to specific group of individuals in specific circumstances
- Violations can: Damage groups reputation to external stakeholders/ public/ group reputation internally

LOS 1.c: Identify challenges to ethical behaviour/ Conduct

Challenges to ethical behaviour include overestimating ones own ethical character, considering only near term
consequence and not longer term consequences of behaviour, and letting situational (external) influences, such as
peer pressure unduly affect odes decisions and behaviour

- Challenges making adherence to ethical conducts difficult (Reasons why individuals behave unethically)
1. People tend to believe theyre ethical people + ethical standard are > average (But everyone cant be > average)
a. Over confidence bias leads to faulty decision making not consider all variables to form best decision
b. Leads us to place too much importance on internal trait and intrinsic motivation (E.g. Im honest, I wont lie)
even though internal traits arent the main determinant of whether someone will behave ethically
2. People fail to recognise/ underestimate effect of situational influences
a. External situation/factor shapes thinking, decision making and behaviour Money, loyalty and prestige
b. Blind people to other important considerations and have a disproportionate influence on decision making
3. A shifts decision making focus long to short/immediate term
4. Adopting a compliance approach
a.May not encourage employers to consider larger picture and over simplify decision making
b.Employees may adopt tick a box approach rather than ethical decision making approach
c. What can I do? (Too focus on compliance need) Vs what should I do? (View issue from broader
perspective)

LOS 1.d: Describe the need for high ethical standards in the investment industry

Investment professional have a special responsibility to use their specialised knowledge and skills to both protect
and grow client assets. The fact that investment management is an intangible product makes high ethical standards
all the more important in the financial services profession

- Capital flows more efficiently between investor + borrower when market participants confident all parties will
behave ethically
 - Ethical behaviour builds and fosters trust people willing to take risks with people and companies who act ethically
- Investment sector and Financial Market built on trust (Trust is especially important in the investment industry for 3
reasons)
1. Nature of client relationships: Investors entrust assets to financial firms
2. Difference in knowledge: Investment sector workers have specialised knowledge + better access to info =
advantage in relationship investor trust investment professional to use knowledge/info to best serve them
3. Nature of product/ service: Investment industry products are intangible investors rely on info provided
about the investment trust info is accurate and complete
- Ethical behaviour by firms can lead to greater success and profit: clients attracted to trustworthy firms/ lower
probability of regulators enforcing costly investigations and fines for unethical practises
- A greater level of trust in financial system leads to
1. More participants in the financial markets (broad participation = more capital flow)
2. More opps for investment professionals and firms (Point above leads to greater demand for investment
professionals)

LOS 1.e: Distinguish between ethical and legal standards

Not all unethical actions are illegal, and not illegal actions are unethical. Laws are more specific than ethical
principles and often address prior unethical behaviour. Ethical behaviour requires more judgement, acts such as
civil disobedience may be considered ethical even when they are illegal

- Govs may establish law/ regulations to reflect widely shared beliefs about obligatory and forbidden conduct
- Law/regulation: Codify ethical actions that lead to better outcomes for society or specific groups of stakeholders
- Law/regulation: Rule of conduct stated by governing body identifying how individual/ entity should behave in certain
situation
- Legal v Ethical conduct: Some ethical behaviour may be illegal standards of conduct based on ethical principles
may represent higher standards of behaviour than behaviour required by law
a. Legal standards = rules based
b. Ethical standard: Go beyond law -balances self-interest with (in)direct consequences of behaviour on
others
- Ethical conduct goes beyond whats legally needed and encompasses what different societal groups consider to be
ethical
- To act ethically: One needs to use judgement to think through facts + make good choices even in absence of clear
laws/rule
- Good ethical judgement = Actively consider interests of all stakeholders/ trying to benefit multiple stakeholders
- The law and regulations are not always the best mechanisms to reduce unethical behaviour for 2 reasons:
o Laws often created to address past ethical failing (dont provide guidance for an evolving world)
o Process takes long time during which, the problematic practise could continue/ grow.
o Once law enacted it may be too narrow, vague/ conflicting in scope. New law could create another opp for
different, yet equally negative activity
o Laws are open to interpretation some may choose to interpret them in most advantageous way
- If Investment advisors with only a suitability requirements:
1. Legal to recommend suitable investment to client even if other, similar suitable investment with lower fees
available
- If Investment advisors required by law to act in clients best interests must:
1. Put clients interest ahead of their own or their employers interests
2. Understand clients financial objectives and risk tolerance, research multiple investment opportunities and
recommend the investment most suitable for the client in terms of meeting his long term financial
objectives
3. Monitor clients financial situation and investments to ensure investments recommended remain best
overall option for meeting the clients long term financial objectives

LOS 1.f: Describe + apply a framework for ethical decision making (Integrate framework into firms decision making
process)

A framework for ethical decision making is designed to lead to better decision by identifying the stakeholder
affected and the conflict of interest among them, considering alternative actions and the relevant situational
influences on decision makers, seeking out different perspectives and evaluating decision to see if they had
unintended consequences

- Ethical decision making framework helps you evaluate a decision from lots of perspectives, so you can identify
important issues, make wise decisions and limit unintended consequences
- Using an ethical decision making framework, your duty to your client will take precedence over your colleague and
employer
- Ethical decision making framework helps you
1. Effectively examine choices in the context of conflicting interest common to their professional obligations
2. Analyse + choose options in ways that allows you to meet high standards of ethical behaviour and provide
you with a tool to help them adhere to a code of ethics
3. Determine best course of action to fulfil their responsibilities in an ethical manner
 4. To see situation from multiple perspectives focuses attention to aspects which may be less evident with
short-term and self-focussed perspective
5. To justify actions to broader range of stakeholders
- General Ethical decision making framework
1. IdentifyRelevant facts/ stakeholders and duties you have to reach / ethical principles or legal
requirements that may apply/ conflicts of interest
2. Considersituational influence + personal behavioural bias that may affect decision making/ additional
guidance from mentor to help identify + evaluate alternative actions (Gain different perspectives)/
alternative actions
3. Decide and Act
4. ReflectOutcome as anticipated? Why? (Reflect on decision many times - long term impact may become
apparent)

Code of Ethics and Standards of Professional conduct

Describe the structure of CFA Institute Professional Conduct Program (PCP) and the process for the enforcement of
the code and standards

- CFA Institute PCP is covered by CFA institute bylaws and rules of procedure for proceedings related to professional
conduct
- Programs based on principles of fairness of the process to members/ candidates + maintaining confidentiality of
proceedings
- Disciplinary review committee of CFA institute Board of Governors responsible for PCP and enforcement of code +
standards
- CFA institute Professional Conduct staff conducts inquiries related to professional conduct 5 things can prompt
and enquiry:
1. Self-disclosure by members or candidates on their annual professional conduct statements of involvement
in civil litigation or a criminal investigation or that the member/ candidate is subject to a written complaint
2. Written complaints about member/ candidates professional conduct received by professional conduct staff
3. Evidence of misconduct by member/ candidate professional conduct staff attain by public source (Media
article)
4. A report by a CFA exam proctor of a possible violation during the exam
5. Analysis of exam material and monitoring of social media by CFA institute
- Once enquiry begins, professional conduct staff may request (In writing) explanation from member and may
(1) Interview member/ candidate
(2) Interview the complainant/ other 3rd party
(3) Collect documents and records relevant to investigation
- Professional Conduct Staff may decide:
(1) No disciplinary sanction required
(2) Issue cautionary letter
(3) Discipline member
- If option 3Members can reject or acceptif reject matter raised to disciplinary review panel of CFA members for
a hearing
- Sanctions include: condemnation by peers OR Suspension of candidates continued participation in the CFA
Program
(i)
(ii) (i) State the 6 components of the code of ethics and the 7 standards of professional
conduct (ii) Explain the ethical responsibilities required by the code and standards,
including the sub-sections of each standard

Code of Ethics (Apply to Members and Candidates of CFA)

1. Act with integrity, competence, diligence and respect and in an ethical manner with the public,
clients, prospective clients, employers, employees, colleagues in the investment profession and
other participants in the global capital markets
2. Place the integrity of the investments profession and the interest of clients above their own
personal interests
3. Use reasonable care and exercise independent professional judgement when conducting
investment analysis, making investment recommendations , taking investments actions and
engaging in other professional activities
4. Practise and encourage others to practise in a professional and ethical manner that will reflect
credit on themselves and the profession
5. Promote the integrity and viability of the global capital markets for the ultimate benefit of society
6. Maintain + improve their professional competence + strive to maintain and improve the
competence of other investment professionals
Standards of Professional Conduct (Apply to Members and Candidates of CFA)

1. Professionalism
a. Knowledge of the Law: Understand and comply with all laws, rules and regulations (Incl. CFA code of ethics and
standards of professional conduct) of any party governing their professional activities. In event of conflict,
members must comply with the more strict laws, rules or regulations. Members must knowingly participate or
assist in and must dissociate from any violation of such laws, rules and regulations.
b. Independence and Objectivity: Use care and judgement to achieve and maintain independence and objectivity in
their professional activities. Members must not offer, solicit, accept gift, benefit, compensation or consideration
that reasonably could be expected to compromise their own or anothers independence and objectivity
c. Misrepresentation: Must not knowingly make any misrepresentations relating to investment analysis,
recommendations, actions or other professional activities
d. Misconduct: Must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act
that reflects adversely on their professional reputation, integrity or competence
2. Integrity of Capital Markets
a. Material non-public information: Members who possess material non-public info that could affect the value of an
investment must not act or cause others to act on the info
b. Market Manipulation: Mustnt engage in practise that distort price/ artificially inflate trading volume with intent to
mislead market
3. Duties to Clients
a. Loyalty, prudence and care: Duty of loyalty to clients and must act with care and exercise prudent judgement.
Must act for the benefit of clients and place their interest before their employers or their own interests
b. Fair dealing: Must deal fairly and objectivity with all clients when providing investment analysis, making investment
recommendation, taking investment action or engaging in other professional activities

c. Suitability:
i. When in an advisory relations with a client, members must:
1. Make reasonable inquiries into a (Prospective) clients investment experience, risk and return
objectives and financial constraints before making any investment recommendation or taking
investment action. Must reassess and update this info regularly
2. Determine an investments is suitable to clients financial situation and consistent with clients
objective, mandate and constraint before making investment recommendation/ actions
3. Judge the suitability of investments in the context of the clients total portfolio
ii. When responsible for managing a portfolio to a specific mandate, strategy or style they must take only
investment recommendations/ actions that are consistent with objectives and constraints of the portfolio
d. Performance presentation: When communicate investment performance info, ensure its fair, accurate + complete
e. Preservation of confidentiality: (Prospective) Clients confidential, UNLESS: (1) Info concerns illegal activities on
part of (Prospective) client (2) Disclosure required by law (3) (Prospective) client permit disclosure of info
4. Duties to Employers
a. Loyalty: In matters related to their employment, members must act for benefit of their employer and not deprive
employer of the advantage of their skills and abilities, divulge confidential info or cause harm to their employer
b. Additional Compensation Agreements: Must not accept gifts, benefits, compensation or consideration that
competes with or might create a conflict of interest with their employers interest unless that obtain written consent
form all parties involved
c. Responsibilities of Supervisors: Make effort to ensure that anyone subject to their supervision complies with
applicable laws, rules, regulations and the code and standards
5. Investment Analysis, Recommendations and Actions
a. Diligence and reasonable basis:
i. Exercise diligence, independence and thoroughness in analysing investments, making investment
recommendations and taking investment actions
ii. Have reasonable and adequate basis, supported by appropriate research and investigation for any
investment analysis, recommendation or action
b. Communication with clients and prospective clients:
i. Disclose to (prospective) clients format + general principles of investment process they use to analyse
investments, select securities and construct portfolio + promptly disclose any changes that might
materially affect those processes.
ii. Disclose to client significant limitations and risks associated with the investment process
iii. Use judgement in identifying which factors are important to their investment analysis, recommendations,
or actions and include those factors in communications with clients
iv. Distinguish between fact and opinion in the presentation of investment analysis and recommendations
c. Record retention
i. Must develop and maintain appropriate record to support their investment analysis, recommendations,
actions and other investment related communications with clients
6. Conflicts of Interest
a. Disclosure of conflicts: Must make full and fair disclosure of all matters that could impair their independence and
objectively or interfere with respective duties to their (Prospective) clients and employer. Ensure such disclosures
are prominent, delivers in plain language, and communicate relevant info effectivity
 b. Priority of Transactions: Investment transaction for clients and employers must have priority over investment
transactions in which a member is the beneficial owner
c. Referral Fees: Must disclose to employer, client any compensation, consideration or benefit received from/ paid to
others for recommendation of product
7. Responsibilities as a CFA Institute Member of CFA Candidate
a. Conduct as Participants in CFA Institute Programs: Must not engage in any conduct that compromises the
reputation or integrity of CFA Institute or CFA designation or integrity, validity or security of CFA Institute Program
b. Reference to CFA Institute, the CFA Designation and the CFA Program: When referring to CFA Institute
membership, designation, or candidacy in the CFA program, members must not misrepresent or exaggerate the
meaning or implications of membership in CFA institute, holding CFA designation or candidacy in CFA program

Guidance for Standards I-VII

Demonstrate application of Code of Ethic/ Standard of Professional Conduct to situation relating professional integrity issue
1. Standard I (A) Knowledge of the Law
a. Members must understand applicable law + Regulation of countries/ Jurisdictions they engage in professional activities
b. Members must comply with law + Regulation that directly govern their professional activities and resulting outcomes and
that protect the interest of clients
c. Members should know firms policies + procedures to access compliance (dont need to be experts in compliance + laws)
d. At times of changing regulation, you must be vigilant/ maintain knowledge of requirements for their professional activities
e. As local, regional and global requirements are updated members/ firms must adjust procedures to remain in compliance
- If member know of violations of laws/ regulation by co-worker/client...Follow framework Applications of
Standard ( 51-53)
o Report violation to Supervisor or Compliance (If appropriate seek legal counsel) If they cant or wont
o Dissociate from the situation If cantResign from the firm (To ensure compliance with this standard)
- Members who practise in multiple jurisdictions may be subject to varied laws/regulations
o If applicable law is stricter than the Code and Standards, Members must adhere to the applicable law
o If applicable law is less strict than the Code and Standards, Members must adhere to the Code and
Standards
- Recommendations for Firms to support principles of Standard A
o Develop/ adapt Code of Ethics: Adopt and adhere to a code of ethics
o Provide info on applicable laws: Distribute to employees/ make available in central location
o Establish procedure for reporting violation: Written protocol for reporting suspected violations of law/
regulation
- Recommendations for Members to acquire and maintain understating of applicable laws, rules and regulations
o Stay Informed: Start process to stay informed about change in laws + regulations. Also external education
programs
o Review Procedures: Review written compliance, to ensure they are still current with applicable laws
o Maintain Current Files: Maintain readily accessible current reference copies of applicable laws and
regulations
o When in doubt about legality consult supervisor/compliance legal
o No requirement to report wrongdoing CFA strongly encourages it

2. Standard I (B) Independence and Objectivity

a. Members must maintain independence + Objectivity so their clients will have benefit of their work and opinions
unaffected by any potential conflict of interest or other circumstance adversely affecting their judgement
b. External factors may try and influence members with: Gifts etc. best practise for members is to reject any offer of
a gift that could expect to threaten their Independence and objectivity
c. Gifts from clients less likely compromise independence and objectivity than gifts from other parties as client has
already entered some type of compensation arrangement with the firm client gifts must be disclosed to employer
d. Able to accept gift from a CLIENT when: Not substantial and discoed to you firm following firm procedure BUT
Must monitor relationship to ensure that after gift given, employee doesnt favour gift giving client
e. Fee arrangement can impact objectivity and independence: E.g. Flat Fee + Bonus for attracting new customers
(Bonus incentivises drafting of a positive report) V a flat fee = not tied to conclusion
- Recommendations for Firms to support principles of Standard B
o Create restricted list: If firm unwilling to publish bad opinion about a client, member should encourage firm
to remove company from research universe and put it on restricted list firm can only release factual info
about the company
o Restrict investments: Develop formal policies related to employee purchases of equity or equity related
IPOs
o Independence policy: Establish formal written policy on the independence and objectivity of research
implement reporting structure and review procedures. Pressure from other divisions of your firm is wrong -
should be eliminated
- Recommendations for Members
o Protect integrity of opinion: Establish policies stating every research report reflect unbiased opinion of
analyst. Design compensation system that protects integrity of investment decision process by maintaining
independence and objectivity of analysts
 o Restrict special cost arrangements: If attending client meeting, member should pay for commercial
transport and hotel. And limit use of corporate transport when commercial is available
o Limit gifts: Members must limit acceptance of gifts. Standard B Does not prevent business related
entertainment, as long as its purpose is not to influence or reward members (Affect independence
/objectivity). Firm consider value limit of acceptable gifts

3. Standard I (C) Misrepresentation

a. Misrepresentation = Any untrue statement OR omission of a fact OR any statement that is otherwise false or misleading
b. Member must not knowingly omit or misrepresent info or give a false impression of a firm/ organisation/ security in
the members: Oral presentation/ advertising/E-mail/Written materials (Publicly disseminated or not)
i. Knowingly= Member knows/ should have known that the misrepresentation as being made OR that omitted
info could alter the investment decision making process
c. Standard prohibit member from guaranteeing client specific return on volatile investment BUT doesnt prohibit providing
client either info on product that have guarantee built into structure of product OR when bank agreed to cover any loss
d. Member mustnt mispresent qualification/ service provided by firm/ record of their firm/ characteristics of investment
e. Exercise care and diligence hen incorporating 3rd party data
f. Benchmarks used to present comparables to strategies should be appropriate and not mislead
g. When inputs from models knowingly omitted the resulting outcomes may provide misleading info ALSO outcomes
from models should not be presented as facts as they are expected results based on the inputs incorporated
h. Plagiarism = Copying or suing in substantially the same form material prepared by others without acknowledging he
source of the material or identifying the author of the material
i. Members shouldnt copy original ideas without permission and must acknowledge and identify the source of ideas
or material that is not their own
j. Standard prohibits plagiarism of material being sent to: employers, associates, clients, prospects or public.
k. Work completed for employer: Members can use research or models developed by others within the same firm
research and models developed while employed by a firm are the property of the firm (If analyst is no longer with
the firm) BUT, member cant reissue previously released report solely under his name.

- Recommended procedures for employer

o Factual presentations: Prevent unintentional misrepresentation of own/firms capabilities by understanding
the limit of the firms/ individuals capabilities
o Qualification Summary: Employee should create summary of qualifications/experience and list of activities
members is qualified to carry out
o Verify Outside Info: when providing client 3rd party info, members should verify 3rd party info
o Maintain Webpage: Monitor webpage to ensure site content up to date/site provides full discourse/ site
doesnt misrepresent info/ protect sites integrity and confidentiality (Security)
o Plagiarism Policy (3 steps)
Maintain Copies: of all research reports/articles containing research ideas/ material that were relied
on in the preparation of a research report
Attributable quotations: Attribute to their sources direct quotations, including: Projections, tables,
stats, models, prepared by persons other than recognised financial and statistical reporting service
Attributable summaries: Attribute to their sources and paraphrases or summaries of material
prepared by others.

4. Standard I (D) Misconduct

a. Address ALL conduct that reflects poorly on the professional integrity/ good reputations/ competence of candidate
b. Lying/cheating/stealing/ fraud/ other dishonest conduct = violation (If reflects badly on my professional activity)
c. Conduct that damages trustworthiness/ competence which affect candidates ability to perform his function (May not
be illegal) e.g. drinking alcohol during business hours
d. Absence of appropriate conduct/ lack of sufficient effort = violation (e.g. not doing all the Due diligence relying on
someone else in the process to do them )
- Recommended procedures for compliance
o Code of ethics: develop a code (every worker must subscribe) personal behaviour which reflects poorly
on individual. Firm = not tolerated
o List of violations: Distribute to all workers list of potential violations and the associated disciplinary sanction
o Employee references: Check references for good characters/ no prior issues with the law

5. Standard II (A) Integrity of the Capital Markets

a. This standard promotes and maintains a high level of confidence in market integrity
b. Material Information:
i. Information is material if1) Its disclosure would probably have an impact on the price of a security 2)
Investors would want to know the information before making an investment decision 3) Significantly alter the
total mix of information currently available about a security in such a way that the price would be affected
ii. The less reliable the source the less likely it will be material information educated conjecture by a subject
expert not connected to the deal unlikely to be material
 iii. The more ambiguous the effect of the info will have on price = material less likely to be considered material
iv. The passage of time that has passed may render once material information, immaterial
c. Non Public information:
i. Info = non-public until its disseminated/ available to market place generally (not a select group of investors)
ii. Disseminated = made known to the market place
d. Mosaic Theory:
i. Method of analysis used to gather info - collecting public, non-public and non-material information to
determine the value of securities and enable analyst to make recommendations to clients based on that info
ii. Financial Analysts are free to act on this collection (Mosaic) of info without risking violation
iii. Member should disclose details of the info and methodology they used to arrive at their recommendation.
e. Social Media
i. Not all information from social media is considered public (Some social media platforms require
membership) Member must verify the info available from public source also e.g. public filings
ii. Members can use social media to link with clients only if available to all client/ open to investing public
f. Using industry Experts
i. Members can provide compensation to experts for their insights member must ensure they are not
requesting/acting on confidential info received from experts
g. Investment research reports
i. If respected analyst writes report theoretically this Standard II (A) would say that it would have to be made
public as it would move the market
ii. But the analyst is not a company insider/ has no insider info using mosaic theory to conduct research
iii. Just because public would find conclusion material doesnt mean analyst is required to make work public
h. Member wouldnt be violating the standard if using the info for the purpose of conducting due diligence
i. Using the info to trade/ insight others to trade violating the standard

- Recommendations for firms

o Achieve public dissemination: if you determine info is materialmust try to achieve pubic dissemination of
info. (If not possible give to compliance AND dont act on info/ alter investment recommendation)
o Adopt compliance procedure: Members should encourage firm to adopt compliance procedures to prevent
misuse of material non public info.
o Adopt disclosure procedures: Members should encourage fir to develop disclosure policies designed to
ensure info is disseminated to market place in equitable manner (Small firm gets same info as big firm from
company/ buy side and sell side get same info/ dont black ball analysts who give bad reports)
o Issue press releases: issue press release prior to analyst meeting/conference calls / if non-public info
disclosed in meeting press release straight away
o Firewall (Info Barrier): restricts confidential material non-public info to only those who need to know the info
to perform their job effectively
o Appropriate intradepartmental communication/ Physical separation of departments
o No overlap of personal in M&A and S&T
o Reporting system: Authorised people review and approve communications between departments
compliance officer will determine whether sharing info is necessary/ how much info should be shared
o Personal trading limitations: restrict/ prohibit trading and carefully monitor trading by employees
o Record maintenance: written records of communications between departments
o Prop trading procedures:
When firm acting as market maker = prohibition of prop trading = counterproductive withdraw of
firm from market making wold be clear tip to outsider (Market makers should remain passive)
In risk arbitrage trading: suspend arbitrage activity when a security is placed on watch list
o Communication to all employees: members encourage employers to circulate written compliance policies
6. Standard II (B) Market Manipulation
a. Requires members uphold market integrity by prohibiting market manipulation.
b. Market manipulation = practises that distort security prices/ trading volume with intent deceive people/ entities that
rely on info in the market
c. Information Based Manipulation = Spreading false rumours to induce trading of others
d. Transaction Based Manipulation = Member knew/ shouldve known that his actions could affect price of a security
i. Transactions that artificially affect prices/ volume to give impression of activity/ price movement in a
financial instrument, which represent a diversion from the expectations of a fair and efficient market
ii. Securing a controlling , dominant position in a financial instrument to exploit and manipulate the price of a
related derivative and/ or underlying asset
7. Standard III (A): Loyalty, Prudence and Care
a. First step is to identify the client to whom the duty of loyalty is owed the ultimate beneficiaries (of plan or trust) OR
owe duty of care to invest in a manner consistent with the stated mandate (If no Beneficiary identifiable0
b. This standard establishes a minimum benchmark for the duties of loyalty, prejudice and care that are required
regardless of whether a legal fiduciary duty applies
 i. fiduciary duty = duties imposed by law/ regulation when an individual or institution is charged with the duty
of acting for benefit of another party e.g. managing investment assets
c. Client interest are paramount and member has a duty of care and loyalty to client AND to endeavour to avoid all
potential conflicts of interest
d. Prudence requires caution and discretion as well as members acting with: care/skills/diligence
e. Loyalty
i. Investment must be undertaken for sole benefit of client/ Given info this action is in best interest of client
e.g. execute trades in the most favourable terms that can be achieved (But must act with care)
ii. Mange client portfolio, prudence entail: Follow investment parameters set by client and balance risk + return
f. Acting with care = members should act in a prudent and judicious manner in avoiding harm to clients
g. This standard is not a substitute for members legal/regulatory obligations
h. If members has custody/ effective control of clients assets a heightened level of responsibility arises must
manage assets according with the terms of the governing document
i. Custody = access (direct or indirect) to clients funds
i. Developing client portfolio:
i. Especially important in this instance as investment manager possesses greater knowledge than client in
investment arena investment objectives risk profile of client need to be understood
ii. Investment must follow guidelines set by client (Risk/ types of securities Return)
iii. Investments must be judged in context of total portfolio rather than by individual investment within portfolio
j. Soft Dollar/ Commission: Violate duty of care when pay extra for trade without extra benefit helping client E.g.:
i. Client needs to make trade: sell security X, buy security Y You have a choice of 2 brokers
1. Broker A charges $15 per trade, and all you get is the trade.
2. Broker B charges $20 per trade, but in addition to the trade, they also give you access to their
proprietary analysis on securities (including security X and security Y).
ii. Extra $5 paid to broker B = Soft dollars: commissions paid not to execute trade but to receive extra services

k. Directed brokerage = client directs manager to use clients brokerage = no violate of duty of loyalty as benefits client
l. Best execution = trading which maximises the value of clients portfolio within clients objectives member should
disclose to client that client may not be getting best execution from direct brokerage
m. Proxy voting policies
i. Investment Manager is typically owner of record for shares from companys perspective, so manager has
the voting rights associated with the shares.
ii. Manager has responsibility to investors to vote shares to benefit of investors, but can skip routine votes that
would require too much time (cost - benefit).
iii. You must disclose the proxy voting policy to all the clients - but dont have to vote. Cost benefit analysis.
- Procedures for compliance
- Regular account information:
o Each send client itemised statement showing: funds/securities in custody AND all debits/credits/
transactions in that quarter
o Disclose to client where assets are to be maintained and where when they are moved
o Separate clients assets from any other partys assets including own assets
- Clients approval
o If member uncertain about appropriate course of action with respect to client1) what would I expect if I
were the client? 2) write to client and obtain their approval with regards to the matter
- Firm policies
o Follow all applicable laws/rules
o Establish the investment objectives of the client: Enquire about clients: Experience/risk + return objectives/
financial constraints prior to making investments
o Consider all info when taking investment actions: Suitability based on 1) clients needs/circumstances 2)
investments characteristics 3) the basic characteristics of the total portfolio
o Diversify: to reduce risk of loss unless not consistent with planned guidelines/ account objectives
o Carry out regular reviews: to ensure investments held adhere to the terms of the governing documents
o Deal fairly with all clients with respect to investment actions: must bot favour some clients
o Disclose conflicts of interest: so clients can evaluate those conflicts
o Disclose compensation arrangements: make clients aware of all forms of manger compensation
o Vote proxy: Determine whos able to vote share/ vote proxies in best interest of clients ultimate beneficiary
o Maintain confidentiality: of client information
o Seek best execution: (Unless direct by client as UBO) members must seek best execution (Refer above)
o Place client interest first
Standard III (B): Fair Dealing
- With regard to general purchase/ new issues/ Secondary offeringsmembers must trust all clients fairly when
o Disseminating investment recommendations
o Making material changes prior to investment recommendations
o Taking investment actions
- Fairly = mustnt discriminate against clients when distributing investment recommendation/ taking investment action
 - Standard states fair dealing NOT equal dealing as this is impossible and inappropriate
o Members should encourage firm to try design equitable system to prevent discriminatory disclosure AND
inform clients about what kind of communications they will receive
- Investment recommendations (Advisory/consulting/ research etc.)
o Definition = Opinion expressed with regard to purchasing selling holding investment/security
o Communication for general distribution = recommendation distributed to anyone outside the organisation
o Recommendation must be distributed so that ALL clients have fair opportunity to act on recommendation
o Duty of fair dealing more important when changing recommendations: changes because of subsequent
research should be communicated to all current clients (especially those who have acted on earlier
advice). Clients who place order as they dont know about changed recommendation (Contrary to new info)
should be advised of the changed recommendation before order is accepted
- Investment Action (Portfolio Manager) - Treat clients fairly in light of investment objectives and circumstances
o For investing in new offerings:
Distribute issue to all customers to whom it is appropriate to their objectives
If oversubscribed issue should be prorated to all subscribers (In round lot basis - Groups of 100
share) ALSO member should forgo any sales to themselves or immediate family in order to free up
more shares for clients (But if Dads accounts manged similarly to the account of clients this is ok)
Hot issue = IPO that trades at premium in secondary market, due to imbalance of demand for the
issue) with hot issues broker basically handing client automatic profit - Tempting to hand easy
profits to most important clients - providing firm with most revenue. But, standard requires IPO
distributions to make bona fide public distributions of these securities.

- Recommended procedures for compliance = Encourage firms to develop procedures to ensure clients treated
fairly/ disclose to management any violations
o Requiring orders and modifications r cancellations of orders to be documented and time stamped
o Processing and executing orders in a FIFO basis with consideration of bundling orders for efficiency
o Develop policy to address issues such as: calculating execution prices and partial fills when trades are
grouped or in a block for efficiency
o Give all clients accounts participating in block trade same execution price and charging same commission
o When full amount of block order not executed, allocating partially executed order amount participating
client account prorata on basis of order size while not going below set minimum lot size for some securities
o When allocating trades for new issues, obtaining advance indications of interest, allocating securities by
client and providing method for calculating allocations
o Disclose trade allocation procedures
Disclose to client how they select accounts to participate in an order AND how they determine
amount of securities each account will buy/sell must be fair and equitable (Disclosure of
inequitable methods DOES NOT relieve member of this obligation)
o Establish Systematic account review
Review each account regularly to ensure no client has been given preferential treatment and
investment actions are appropriate to their objectives
o Disclose levels of service
Disclose to all clients whether the organisation offers differ levels of service to clients for same or
different fees different levels of service should not be offered to clients selectively
- Members should consider the following when establishing fair dealing compliance procedures
o Limit the number of people involved who are privy to the fact that a recommendation is to be disseminated
o Shorten time frame between decision and dissemination: For long reports short summary and conclusion
should be released in advance. If firm has investment policy committee and research committee who must
both approve a recommendation do this on same day
o Publish guidelines for pre dissemination behaviour: encourage firs to develop guidelines to prohibit
personnel who have prior knowledge of an investment recommendation from discussion/ taking and action
on the pending recommendation
o Simultaneous dissemination: so that all clients treated fairly- informed at approximately the same time.
o Maintain list of clients and tier holdings: help process of notifying client of changes in recommendations / if
investment to be sold, the list will help ensure all holder treated fairly in liquidation of that investment
o Develop and document trade allocation procedures that ensure
Fairness to advisory clients 1) Priority of execution 2) allocation of price obtained in execution of
block trades
Timeliness and efficiency n the execution of orders
Accuracy of the members or candidates records as to trade orders and client account positions
Standard III (C) Suitability
- Suitability Analysis: Consider carefully the needs. Circumstances/ objectives of clients when determining
appropriateness and suitability of given investment (MUST BE BASED ON INFO PROVIDED BY CLIENT)
 - In judging suitability of an investment: review client knowledge/ experience/ financial situation
o Risk profile of investment V constraints of client
o Impact of investment on portfolio diversification
o Whether client has the means or net worth to assume the associated risk
- Gather info and undertake suitability analysis prior to making a recommendation/ taking action (Sell side executing
a trade may not have the opportunity to judge suitability of a particular investment for UBO)
- Developing an investment policy
o Gather client info at start of relationship: financial circumstances/ personal data relevant to investment
decision (Age and Job)/ attitude towards risk/ objective of investing this should then be put into written
investment policy statement (IPS) - addresses client risk tolerance/ return needs/ investment constraints
o IPS should identify roles and responsibilities of the parties to the advisory relationship and investment
process AND have a schedule for review and evaluation of the IPS
- Understanding clients risk profile
o Measuring client tolerance to risk (Pay attention to derivatives and the leverage inherent in these products)
- Updating an investment policy
o Update IPS annually (At least) AND prior to material changes to recommendations
o Client characteristics change over time: number of dependents/ tax status/ health/ liquidity needs/ risk
tolerance/ wealth/ income needs
o For institutional clients: magnitude of unfunded liabilities/ withdrawal providing for saving places/
distribution requirement for charitable funds
- Need for Diversification
o Investment with high relative risk ON ITS OWN may be suitable if 1) suitable in context of entire portfolio 2)
clients objectives contemplate speculative and risky investments

- Addressing Unsolicited Trading Requests

o Client may make request to trade that may not properly align with risk/ return objectives outlined in IPS
o Members must balance clients request V agreed on IPS
o If member has concerns you should refrain From executing trade until discussed with client educate
how investment deviates from current IPS member should follow firms procedure for such actions
o Member should update the IPS
- Managing to an Index Invest in manner consistent with stated mandate
Recommended Procedures for compliance
- Investment Policy Statement (IPS) - Put clients: Objectives/ needs/ circumstances into a written IPS
o Client identification: 1) Type of client 2) existence of separate beneficiaries 3) approximate portion of total
client assets that member is managing
o Investor objectives: 1) return objectives 2) risk tolerance
o Investor constraints: 1) liquidity needs 2) Expected CF 3) investable funds 4) time horizon 5) Tax
considerations 6) legal circumstances 7) Investor preferences 8) Proxy voting responsibilities
o Performance measurement benchmarks
- Regular Updates
o Objectives and constraints should be updated periodically to reflect any changes in clients circumstances
o Compare clients constraints V Capital markets expectations to arrive at appropriate asset allocation
- Suitability Test Policy
o Analysis of impact on diversification
o Compare investment risk with client assessed risk tolerance
o Fit of investment with required investment strategy
Standard III (D) Performance Presentation
- Guidance
o Provide full discourse of investment performance data: credible performance info to clients/ avoid
misstating performance/ misleading clients about members or firms performance
o The Standard covers any practise that: leads to misrepresentation of a members performance record,
whether the practise involve performance presentation OR performance measurement
o Prohibits misrepresentation of past performance or reasonably expected performance
o Member must give fair and complete presentation of performance info
o Member MUST NOT state or imply clients will obtain or benefit from a rate or return generated in the past
o Ensure claims are fair/ accurate/ complete
Recommended Procedures for compliance
- Apply the GIPS Standards:
o If showing performance history of assets you manage, compliance with GIPS Standards is best way to
meet obligations of this standard
- Compliance WITHOUT GIPS Standard: Members can meet obligations under the standard by
o Considering knowledge/sophistication of the audience to whom a performance presentation is addressed
o Present performance of weighted composite of similar portfolios rather than single representative account
o Include terminated accounts in performance history with indication of when accounts were terminated
o Include disclosure fully explain the performance result being reported
 o Maintaining the data and records used to calculate the performance being presented
Standard III (E) Preservation of Confidentiality
- Must preserve confidentiality of info communicated to them by Former Clients/ Current Clients/ Prospective Clients
- Applicable when: (1) Member gets info due to his ability to conduct a portion of clients business/ personal affairs (2)
Member receives info that arises from that portion of clients business that is the subject of confidential relationship
- IF disclosure of the info is: (1) required by law (2) info concerns illegal activities by client = member has obligation
to report the activities to the appropriate authorities (3) If client/former client permits disclosure
- Status of Client
o Must continue to maintain confidentiality of client records even after client relationship has ended
o IF client or former client gives permission to disclose the info member can provide the info
- Compliance with the Law
o If applicable law requires member to disclose client info MUST COMPLY with applicable law
o If applicable law requires confidentiality EVEN IF illegal activity Must not disclose info
o If in doubt ask compliance
- Electronic Info an Security
o Be careful of accidental disclosure AND encourage firm to provide periodic training to ALL
o Have thorough understanding of the policies of their employer with regards to electronically
communicating sensitive client info and storing client info on Laptops/ mobiles/ flash drives
- Professional Conduct Investigations by CFA (PCP = CFA Institute Professional Conduct Program)
o If permissible under applicable law, members encouraged to cooperate with PCP investigations into the
conduct of others
o Members not in violation of standard if confidential info is forwarded to the PCP

Recommended procedures for compliance

- Avoid disclosing info received from a client EXCEPT to authorised fellow employees who are also working for client
- If member wants to disclose info from client outside the scope of the confidential relationship (And doesnt involve
illegal activities) member should ask the following
o In what context will info be disclosed? If disclosed in discussion of work being performed for client is the
info relevant to the work?
o Is the info background material, that if disclosed will enable member to improve service to client?
- Understand firms electronic information communication and storage procedures encourage firm to have this
- Communicating with Clients: Ensure firm supported communication methods and compliance procedures follow
practises designed for preventing accidental distribution of confidential info
Standard IV (A) Loyalty
- Members must protect interest of their firm by refraining from conduct that would injure firm/ Deprive it of profit/
deprive it of the members skills
- Members must place interest of client above employer BUT should consider effects of their conduct on the
sustainability and integrity of the employer
- In matters of members employment, members must not engage in conduct that harms the interest of their employer
o Standard doesnt require member to subordinate personal and family obligations to their work
- Members must comply with employer policies and procedures established by employer that governs employer-
employee relationship (To the extent that such policies do not conflict with applicable laws/ rules/ code of conduct)
- Employer responsibilities
o Employers must recognise duty and responsibilities they owe to employee if they expect happy employees
o Members should provide employer with CFA code of conduct employer not obliged to adhere to the code
o Employer responsible for a positive working environment which includes ethical work place/ senior
management should not design compensation scheme which encourages unethical behaviour
- Independent practises
o Should abstain from independent competitive activities that could conflict with the interest of their employer
o Member can enter independent business whilst employed but must FIRST notify AND receive consent
from employer by: notifying employer and describe type of business they provide to prospective clients/
expected duration of service/ compensation of services
- Leaving an employer
o When planning to leave, you must still act in employers best interest must not engage in conflicting
activities until resignation becomes effective
o Violation = Misappropriation of trade secrets/ misuse of confidential info/ solicit employers clients/
misappropriation of client list/ self-dealing
o You can make arrangement or go into a competitive business BEFORE terminating relationship as long
as this does not breach employees duty of loyalty
o Must not take records or files to new employer without written permission from previous employer
o Once you have left, names and existence of former clients generally not confidential info unless deemed
such be an agreement or by law
o Standard does not prohibit Skills and experience gained at one employer to be used at another employer
o You can contact clients of previous firm (Using public sources) as long as the contact info doesnt come
from records of the former employer/ Violates an applicable non-compete agreement
 -Use of Social Media
o Members should adhere to firm policy with regards to communicating with clients using social media
o Members should have separate accounts for their personal and professional social media activities
- Whistle blowing
o Member interest AND employer interest are SECONDARY to integrity of capital markets and client interest
o Circumstances may arise where members must act contrary to employer interest in order to comply with
duty to markets and clientSo activity that normally violate members duty to his employer MAY be justified
o Actions ONLY permitted if intent is clearly aimed at protecting client/ market NOT personal gain.
- Nature of employment
o Independent contractor: Are hours/location/ parameters of job set?
o If independent contractor nature of relationship between member and client defined by written agreement
between the 2 member must abide by the agreement
Recommended policy: Firm must establish code of conduct/ operating procedure for employee/ Adopt following policies:
- Competition policy
o Member should understand any restrictions on offering similar services outside the firm while employed
o If employer makes you sign non-compete document, member should fully understand detail prior to signing
- Termination policy
o Members should understand termination policy
o Termination policy should: establish clear procedures regarding resignation process/ address agreement
that allow departing employees to remove specific client related info upon resignation

- Incident reporting procedures

o Members and candidates should be aware of their firms policies relate to whistleblowing
o Firms required to establish confidential/ anonymous reporting procedures that allow employees to report
potentially unethical or illegal activities in the firm
- Employee classification
o Members should understand their status within their employer firm
o Firm should adopt standardised classification practise + indicate how each policy applies to each class
Standard IV (B) Additional Compensation Agreement
- Member must obtain permission from employer before accepting compensation / other benefit from 3 rd partied for
their services rendered to the employer or for any other services that might create a conflict with employers interest
- Written consent = any communication that can be documented
- Member must obtain permission for additional compensation/ benefits - This is needed as such arrangements may
affect their loyalty/ objectivity and create potential conflicts of interest
- Disclosure allows employer to consider the outside arrangements when evaluating action/ motivations of members
- Also employer entitled to full knowledge of this so they can assess the true cost of the service member is providing
Recommended procedure for compliance
- Members should write a report immediately to their supervisor and compliance officer specifying any compensation
they propose or receive for services in addition to the compensation/ benefit received from their employer
- Details of the report should be confirmed by the party offering the additional compensation Inc. performance
incentives offered by the client Report should state terms of any agreement
- Terms = nature of compensation/ approximate amount of compensation/ duration of agreement
Standard IV (C) Responsibilities of Supervisors
- Members must promote actions by all employees under their supervision and authority to comply with applicable
laws/ rules/ regulations/ firm policies/ the code and standards
- Any person under the control of member have supervisory responsibility
- If member has a lot of people to manage supervisory duties can be delegated to subordinates Member must
advise subordinate how to comply with laws etc. (As above)
- At minimum member must make effort to prevent + detect violations (by helping to) Establish compliance system
o Code of Ethics/ compliance policies/ training programmes/ incentive structure that rewards ethical conduct/
adoption of firm wide best practise standards
- Members should implement education and training programmes regularly for people under their supervision
- System for Supervision
o Member must understand what constitutes an adequate compliance system
o Adequate procedures = procedures designed to meet industry standard/regulatory requirements/
requirements of the Code and Standards and the circumstances of the firm
o Member must ensure procedures are monitored and enforced
o To be effective, compliance procedure must be in place prior to event of a violation of law/code/standard
o Once supervisor learns employee violated law/code/standards, he must initiate an assessment to
determine the extent of the wrongdoing
o Pending the outcome of the investigation, supervisor should take steps to ensure violation wont be
repeated E.g. placing restriction in employee activities/ increase monitoring of employee
- Supervision includes Detection
o Member in supervisory role must try to detect violation of laws/rule/regulation/firm policy/ code/standard
o Can be done through establishing compliance producer and reviewing procedures periodically
 If member took steps to institute effective compliance program and doesnt detect violations occur despite
o
effortsmember not in violation of standard (This however indicates compliance procedure is inadequate)
o Member is in violation of standard if he knows or should know that the procedures are not being followed
Recommended procedure for compliance
- Code of Ethics or Compliance procedures
o Members should recommend to their employer to adopt a code of ethics Code of ethics formally stress/
reinforce client loyalty/ responsibilities of employees: protecting firms reputation and integrity
o Code of ethics V compliance procedures
Code of ethics = Fundamental, principle based ethical + judiciary concepts that are applicable to all
Compliance procedure = Assist employee in fulfilling responsibilities itemised in code of ethics and
make it likely ideals expressed in code of ethics will be adhered to in day to day operations of firm
o Separating the 2 is good as:
Code of Ethics should be unencumbered by numerous detailed procedures helps reinforce
CLEARLY ethical obligation of employees
Reduces legal terminology that can make underlying ethical principles incomprehensible

- Adequate Compliance procedures

o Supervisor complies with this standard by: Identify situations where violations of the code/standards are
likely to occur establishing and enforcing compliance procedures to prevent such violations
o Adequate compliance procedures should
Be contained in a clearly written and accessible manual that is tailored to firms operations
Drafted so procedures are easy to understand
Designate compliance officer whose authority and responsibility are clearly defined and has
necessary resources/ authority to implement firms compliance procedure
Describe the hierarchy of supervision and assign duties among supervisor
Employ a system of checks and balances
Outline the scope of procedures
Outline procedures to document the monitoring and testing of compliance procedures
Outline permissible conduct
Delineate procedures for reporting violation and sanctions
o Once in place
Disseminate programme to appropriate personnel
periodically update procedures to ensure that measure are adequate under the law
Continually educate personnel regarding compliance procedure
Issue periodic reminders of the procedures to appropriate personnel
Corporate professional conduct evaluation as part of an employees performance review
Review the action of employees to ensure compliance and identify violators
Tae the necessary steps to enforce the procedures once a violation has occurred
o Once a violation occurs (Respond promptly)
Conduct through investigation of the activities to determine the scope of the wrongdoing
Increase supervision/ place appropriate limitations on wrongdoer pending outcome of investigation
Review procedures for potential changes necessary to prevent future violations from occurring
o Implementation of Compliance Education and Training
Compliance training + Adoption of code of ethics = culture of integrity
String culture of compliance signals to clients, the firm has mission to serve its clients
o Establish Appropriate Incentive Culture
Only when compensation + incentives are tied to client interest and how outcomes are achieved,
rather than How much is generated for firm, will employees work to achieve a culture of integrity
Standard V (A) Diligence and Reasonable Basis
- Defining Diligence and Reasonable Basis
o Reasonable Basis is formed through a balance of resources (Company reports/ 3 rd party research/
Results from models) appropriate for the security/decision being made
o Exercise diligence in probing accuracy of research used as basis for a recommendation - market is filled
with good research and with bad research years of experience are needed to learn to distinguish
between the 2. Quantitative conclusions usually predicated on quality of data and size of sample, while
fundamental research will vary depending on methodology of individual writing report.
o Examples of attributes to consider while forming the basis for a recommendation (Every investment
decision is based on set of facts known at the time the decision is made These steps develop a diligent
and reasonable recommendation and should minimise unexpected downside events)
Global, regional and country macroeconomic conditions
Companys operating and financial history
 Industrys current conditions and the stage of the busing cycle
Mutual funds fee structure and management history
Output and potential limitations of quantitative models
Quality of asset include din securitisation
The appropriateness of peer group comparisons
- Using Secondary or 3rd Party Research
o Secondary research: Research conducted by someone else in the members firm
o 3rd party research: research conducted by entities outside the members fir
o If you use info from secondary/3rd party, you must make diligent effort to determine if research is sound
o Sources of info will influence level of review you must undertake (e.g. sources such as a personal blog and
social media will likely require a greater level of review than info from established research organisations)
o Criteria a member can use in forming an opinion on whether research is sound include the following:
Assumptions used
Rigor of the analysis performed
Date and timeliness of the research
Evaluation of the objectivity and independence of the recommendation
o Member can rely on other in his firm to determine whether secondary/3 rd party research is sound and use
the info in good faith unless you have reason to question its validity/processes used for the research

- Using Quantitatively Oriented Research

o Members need to have an understanding of the parameters used in models and quant research that are
incorporated in investment recommendations (the assumptions and limitations inherent in models)
o Member should validate output of model before incorporating process into their methods/models/analysis
o Ensure analysis include range of assumptions enough to capture underlying characteristics of investment
- Developing Quantitatively Oriented Research
o Members who DEVELOP quant models must
Show higher level of diligence in reviewing new product than person who uses analytical output
Understand the technical aspects of the products they provide to client
Compete thorough testing of model prior to product distribution
Consider source and time horizon of data used as inputs in the mode (info from commercially
available databases may no incorporate both positive and negative market cycles)
Test model using volatility/ performance expectations: with scenarios outside observable database
- Selecting External Advisers and Subadvisors
o Standard applies to level of review needed in picking external (Sub)adviser to manage specifically
mandated allocation
o Ensure the firm has a standardised criteria for reviewing external advisers - Criterias should include:
Reviewing the advisers established code of ethics
Understand advisers compliance and internal control procerus
Assessing the quality of the return info
Reviewing the advisers investment process and adherence to its stated strategy
- Group Research and decision Making
o When working with group to produce piece of research conclusions of report represent consensus of
group and are not necessarily he view of member. In some instances member may not agree with view of
the group But if member believes consensus opinion has reasonable basis and independent and
objective, member need not decline to be identified with report
Recommended Procedures for Compliance
- Establish policy requiring research reports/ credit rating/investment recommendations have basis that can be
verified as reasonable/ adequate (Review committee should be appointed to review prior to external circulation
- Develop detailed written guidance for analysts/ review committee/ supervisory analysis that establish due diligence
procedures for judging whether a particular recommendation has reasonable and adequate basis
- Develop measureable criteria for assessing quality of research and adequacy of the basis for recommendation and
accuracy of recommendations over time
- Developed detailed written guidance that establishes min level of scenarios testing of all computer based model
used in developing rating and evaluating financial instruments
- Develop measurable criteria for assessing outside providers including quality of info, reasonableness and
adequacy of the providers collection practises and accuracy of info over time
- Adopt standardized set of criteria for evaluating adequacy of external adviser how often and on what basis
allocation of finds to the adviser will be reviewed
Standard V (B) Communication with Clients and prospective Clients
- Informing Clients of the Investment Process
o Must adequately describe to clients manner in which they conduct investment decision making process
this should include significant risks and imitations of the investment process used and keep clients
informed of any changes to investment process
o Inform client about speciality expertise provided by external advisers used to manage portion of client AUM
 - Different Forms of Communication
o Forms of communication = Written/ in person/ telephone conversation/ Media Broadcast/ Over the internet
o When providing info using new tech (Social media) you should make effort to ensure such delivery will treat
all clients fairly and be publically disseminated some clients may not have access to this social media
- Identifying Risks and Limitations
o Must outline major risks/limitations of analysis contained in investment product or recommendation
o Must outline general market related risks associated with use of complex financial instruments
o Other risks: Counterparty Risk, country risk, sector risk, credit risk, security specific risk
o Limitations = factors that influence a clients investment decision e.g. liquidity and capacity
Liquidity: Ability to liquidate an asset on a timely basis at a reasonable cost
Capacity: Is investment amount beyond which return will be negatively affected by new investment
o Appropriateness of risk disclosure should be assessed on basis of what was known at the time investment
action was taken (Ex ante basis) You should disclose risks known at the time

- Report Presentation
o You must include those elements that are important to the analysis and conclusions of the report so reader
can follow and challenge reports reasoning
o Report writer may emphasize certain areas/ omit others less important as long as you stipulate the limits
to the scope of the report
o Investment advice based on quant research must be supported by readily available reference material/ if
changes in methodology are made they should be highlighted
- Distinctions between Fact and Opinion
o Violations = Report fails to separate past from future by not indicating earnings estimates/ changes in
outlook for dividends/ future market price info are OPINIONS subject to future circumstances
o For Quant analysis, clearly separate fact from statistical conjecture and identify known limitations of model
Recommended Procedures for Compliance
- Encourage frim to have a rigorous methodology for reviewing research that is created for publication and
dissemination to clients.
- Member should maintain record indicting nature of research and should be able to supply additional info to client
covering factors not included in report
Standard V (C) Record Retention
- Retain records (Hard/Electronic) that authenticate scope of their research and reason for their actions/ conclusions
- E.g: Notes from meeting with covered company/ press releases from covered company / models output and inputs/
risk analysis of securities impact on portfolio/ selection criteria for external advisers/ outside research reports
- New Media Records
o Non print media should be retained E.g: Emails, Text message, Blog posts, twitter posts
- Records are Property of the firm
o Members cant take copies or original forms of records if they leave the company without consent
o Member cannot use historical recommendations or research created at previous firm as supporting
documentation is unavailable
- Local Requirements
o Local regulator often impose requirements on members/ firm related to record retention must be followed
o In absence of regulatory guidance or firm policies, CFA recommends maintain records for at least 7 years
Recommended Procedures for Compliance
- Firms usually responsible to maintain record than support investment action, but
- Members should archive research notes and other documents (electronic or hard copies) that support their current
investment related communications
Standard VI (A) Disclosure of Conflict
- Disclosure of Conflicts to Employers
o When reporting conflicts to employers you must give enough info to assess impact of conflict Complying
with employer guidelines, you allow employer to avoid embarrassing/costly ethical regulatory violations
o Reportable situations include: Conflicts that would interfere with rendering unbiased investment advice/
conflicts that would cause a member to act not in the employers best interest
o Ownership of stock (analysed or recommended), input on outside boards and financial or other pressures
that could influence a decision are to be promptly reported to employer- so impact can be assessed
o You should take reasonable steps to avoid conflict if 1 inadvertently arises, notify employer immediately
- Disclosure to Clients Disclose all matters that could be reasonably expected to impair your objectivity
o Allows clients to judge motives and possible biases for themselves
o Members beneficially own investments if they have a direct or indirect financial interest in the securities/
have the power to vote or direct voting of the shares/ have the power to dispose of the investment
o Also Disclose: fee arrangements/ sub advisory agreement/ other nonstandard fee structures
 o Disclose arrangement in which the firm benefits directly from investment recommendations e.g. rebate of
portion of service fee some classes of mutual funds charges to investors
- Cross Departmental Conflicts
o Sell Side Analyst encouraged to buy corporate issuers/ write research report about particular companies.
Marketing team ask analyst to recommend stock of certain company to obtain business from that company
o Broker sponsor ltd partnership formed to invest in VC.
- Conflicts with Stock Ownership
o Conflict arises when member owns stock in companies he recommends to clients / or that client holds
o Prohibit members from owning any such securities BUT this is discriminatory so
o Sell side members should disclose any beneficial ownership interest in security member is recommending
o Buy side members should disclose procedures for reporting requirements for personal transactions
- Conflicts as a director: When member providing investment services also serves as director, they should
be isolated from those making investment decisions - using firewalls
o Conflict between duties owed to client and duties owed to shareholders
o Investment staff serving as director may get securities/ options to buy securities of company as payment
for serving on board - could raise question about trading action that may increase value of those securities
o Board service creates opportunity to receive material non-public info involving the company
Recommended Procedures for Compliance
- Disclose special compensation arrangements with employer that might conflict with client interest e.g. bonuses
based on short term performance criteria, commissions, incentive fees, performance fees and referral fees
- If members firm doesnt permit such disclosure member should document request + dissociate from activity
- You are encouraged to include info on compensation in form promotional literature
Standard VI (B) Priority of Transactions
- Avoiding Potential Conflicts
o Its not unethical to make money from personal investment as long as(1) Client not disadvantaged by
trade (2) You dont benefit from trades undertaken for client (3) you comply with regulatory requirements
- Personal Trading Secondary to Trading for Clients
o Transactions for clients and employers must have priority over transaction for which the member is UBO
o This prevent personal transactions from adversely affecting the interest of clients or employers
o Member who has same investment position/ co invested with clients doesnt always create conflict
o Personal investment position/ transaction of you/ your firm should never adversely affect client investments
- Standards for Non-Public Information
o Covers activities of members who have knowledge of pending transaction that may be made on behalf of
client/ employer who have access to nonpublic info during normal preparation of research recommendation
o Members are prohibited from conveying non-public info to anyone whose relationship to the member
makes the member a UBO of the persons securities
o Members Must not convey this info if the non-pubic info can be deemed material
- Impact on All Accounts with Beneficial Ownership
o You can undertake transactions in accounts for which they are UBO only after clients and employers have
had adequate opportunity to act on a recommendation
o Personal transactions include: Own account/ for family accounts/ accounts for which you have a direct or
indirect financial interest (E.g. trust or retirement account)
o Family account that are client account should be treated like any other firm account no special treatment
But if youre UBO of account - May be subject to preclearance or reporting requirements of employer/law
Recommended Procedures for Compliance
- Limited Participation in Equity IPOs:
o Members should preclear their participation in IPOs even in situations without any conflict of interest
o Members should not benefit from the position client occupy in the market place through preferred trading,
allocation of limited offerings or oversubscription
o Purchase of IPOs create 2 conflicts of interest
Appearance of taking away good investment opp from client for own gain: break loyalty to client
Appearance that investment opportunity is being given as an incentive to make future investment
decision for the benefit of the party providing the opportunity
- Restrictions on private Placements:
o Members should not be involved in transactions including private placements, that could be perceived as
favours or gifts that seem designed to influence future judgement or to regard past business deals
o If and when investment goes public, participants in private placements have incentive to recommend
investment to client regardless of suitability doing so increase value of participants personal portfolio
- Establish Blackout/ restricted Periods
o Members involved in investment decision making process should establish blackout period prior to trades
for clients so managers cant take advantage of their knowledge of client activity by front running client
trades (Trading for ones personal account before trading for clients accounts).
o Procedures are firm specific (Large firm blackout = total trading ban/ small firm blackout = no front running)
- Reporting requirements
 o Disclosure of holdings in which employee has a beneficial interest: Disclosure should be made
(confidentially) upon beginning of employment and annually thereafter
o Providing duplicate confirmations of transactions: you are required to direct your broker to supply firms
duplicate copies of all personal securities transactions and copies of all their personal securities accounts
Requirement send message theres independent verification, reducing chance of unethical conduct
Allows proof of accounting personal investment that cant be determined just by looking at holdings
o Preclearance procedures: You should examine all planned personal trades to identify possible conflicts
prior to execution used to identifying possible conflicts before problem arises
- Disclosure of policies
o You should fully disclose to investors, upon request, the firms policies regarding personal investing
o Disclosure should be helpful info, not boilerplate language e.g. Investment personnel are subject to
policies and procedures regarding their personal trading

Standard VI (C) Referral Fees

- Responsibility for you to inform employer, clients (prospective) of benefit received for referrals of customers + client
- Such disclosures allow clients or employers to evaluate
o (1) Any partiality shown in any recommendations of services (2) The full cost of the service
- You must disclose when you pay fee or provide compensation to others who have referred prospective client to you
- You must advise client before entry into any formal agreements for services of any benefit given or received
- You must disclose nature of the consideration or benefit (Flat fee, one time etc.), benefit in the form of cash, or non-
cash (With estimated dollar value) consideration includes all fees: cash, soft dollar or in kind.
Recommended Procedures for Compliance
- Procedures should indicate the appropriate steps for requesting approval
- Employers should have investment professionals provide to clients notification of approved referral fee programme
and provide the employer regularly (At least quarterly) updates on amount and nature of compensation received
Standard VII (A) Conduct as Participant in CFA Institute Programs
- Standard prohibit any conduct that undermines the public confidence that CFA charter represents a level of
achievement based on merit and ethical conduct Conduct covered include:
o Giving/ receiving assistance (Cheating) n nay CFA exam
o Violating the rules, regulation and testing policies of CFA program
o Providing confidential program or exam info to candidates or the public
o Disregarding or attempting to circumvent security measures established for any CFA exam
o Improperly using an associated with CFA to further personal or professional goals
o Misrepresenting info on the Professional conduct stamen or in the CFA education program
- Confidential Program Information
o CFA rule, regulation + policy forbid candidate from disclosing private material gained during exam process
o What cant be revealed: Specific detail of question on exam/ broad topical areas+ formulas tested on exam
o All parts of exam (Question/ topic/formula tested or not tested) confidential until CFA releases publically
o DOES NOT PROHIBIT you from discussing non-confidential info or curriculum material with others or in
study group in preparation for the exam
- Additional CFA Program Restrictions
o Standard violated if you violate any testing policies calculator policy, candidates pledge, belonging policy
o Candidate pledge candidates must have respect for the integrity, validity and security of the CFA exam
o E.g. of info that cant be shared if youre involved in developing, administering or grading exam include:
Questions appearing on the exam or under consideration
Deliberation related to the exam process
Info related to the scoring of the questions
- Expressing an Opinion
o Standard doesnt cover expressing an opinion regarding CFA you are free to disagree and express
disagreement with CFA. BUT youre prohibited from disclosing content specific info
Standard VII (B) Reference to CFA institute, CFA designation and the CFA program
- Standard intends to prevent promotional efforts that make promises that are ted to CFA Designation
- You should not exaggerate meaning or implication of membership in CFA
- Statements that overstate competency of individual OR imply better performance can be expected form someone
with CFA are not allowed
- Can make statements as long as it is stated as the opinion of the speaker statement which are not expressed as
opinions need to be back up using facts
- CFA Institute Membership
o To maintain CFA membership status you must:
Remit annually to CFA institute a completed Professional Conduct statement, which renew
commitment to abide by requirement of code + standard and CFA professional conduct program
 Pay applicable CF membership dues on annual basis
o If you fail to meet these two requirements you are no longer an active member you may only say that
you were a CFA member in the past (You cant use CFA Designation until renewal of membership)
- Referring to candidacy in the CFA program
o You may refer to participation in the CFA program BUT must be clear you are a CANDIDATE in the CFA
o You are candidate if you: have had application approved/ exam has been sat and you await results
o If you are a member and decline to sit an exam you are not a candidate (once person enrolled to sit
future exam, you are once again a candidate)
o If candidate passes each level of the exam in 3 years than this is okay as this is a statement of fact
- Proper usage of the CFA Marks
o Once you become a CFA charter you have the right to use CFA marks
o CFA marks MUST be used either: after name OR as adjective Never as a noun (E.g. I am a CFA is
incorrect AND I am a Chartered Financial Analyst is incorrect)
Recommended Procedures for Compliance
- You should disseminate written info about standard VII (B) to firms legal, compliance and public relations teams
- Firms should use templates that are approved by a central author E.g compliance