Level II of the CFA® 2025 Exam

Study Notes - Ethics

Offered by AnalystPrep

Last Updated: Oct 13, 2024

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45 - Code of Ethics and Standards of Professional Conduct 3

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 Reading 45: Code of Ethics and Standards of Professional Conduct

LOS 45a: Describe the six components of the Code of Ethics and the
seven Standards of Professional Conduct

The CFA Code of Ethics and the seven Standards of Professional Conduct serves as a broad

ethical guideline for Members and Candidates of the CFA Institute. All CFA Members and

candidates are expected to adhere to the Codes and Standards and promote these values to

other stakeholders in the investment profession.

Code of Ethics

Members of CFA Institute (including CFA charter holders) and candidates for the CFA

designation (“Members and Candidates”) must:

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.

Place the integrity of the investment profession and the interests of clients above their

own personal interests.

Use reasonable care and exercise independent professional judgment when conducting

investment analysis, making investment recommendations, taking investment actions,

and engaging in other professional activities.

Practice and encourage others to practice in a professional and ethical manner that will

reflect credit on themselves and the profession.

Promote the integrity and viability of the global capital markets for the ultimate benefit

of society.

Maintain and improve their professional competence and strive to maintain and

improve the competence of other investment professionals.

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THE STANDARDS OF PROFESSIONAL CONDUCT

1. Professionalism

2. Integrity of Capital Markets

3. Duties to Clients

4. Duties to Employers

5. Investment Analysis, Recommendations, and Actions

6. Conflicts of Interest

7. Responsibilities as a CFA Institute Member or CFA Candidate

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LOS 45b: Explain the ethical responsibilities required of CFA Institute
members and candidates in the CFA Program by the Code and Standards

The framework laid out by the Codes and Standards functions as an ethical guide, intending to

promote the highest ethical responsibilities and values for Members and Candidates. The

Standards are complete with practical ethical examples and expectations set by the CFA

Institute. By complying and implementing the Codes and Standards, Members and Candidates

are improving the integrity of capital markets and the wider investment profession.

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 Reading 46: Guidance & Application for Standards I-VII

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Brief Introduction on the Standards

Guidance Standard I(E) mandates that members and candidates must act with and maintain

appropriate knowledge, skills, and diligence while performing their professional responsibilities.

This is essential to deliver a high standard of service to clients and employers. The Code of

Ethics further demands adherence to integrity, competence, and diligence, and requires

continuous improvement in professional competence, including helping other investment

professionals enhance their skills. Given the diverse professional activities members and

candidates are involved in, the specific knowledge, skills, and abilities required will vary based

on their roles.

Guidance

Competence in a role means possessing sufficient knowledge, skills, and abilities to perform that

specific role successfully. However, the specific conduct that determines competence varies

depending on the nature of the professional duties and the circumstances applicable to each

member or candidate. It is important to note that a lack of competence cannot always be inferred

from an unsuccessful or negative outcome, as failures can occur even in the careers of

competent professionals.

Key Components of Competence:

1. Knowledge: The information applied directly to the performance of a function and its

effective application.

2. Skills: Capabilities to perform role-specific tasks and achieve professional goals.

3. Abilities: Attitudes and capabilities that support behaviors leading to observable

outcomes.

Competence goes beyond educational qualifications. For instance, a highly educated professional

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in one domain may not possess the necessary experience or skills to perform competently in

another, unfamiliar area.

Recommended Procedure

To achieve and maintain competence, members and candidates should consider engaging in the

following activities:

- Regular participation in professional development or continuing education programs.

- Pursuing additional professional certifications or designations.

- Attending industry conferences, seminars, or webinars.

- Engaging in training programs offered by their employers.

- Committing to informal continuing education or self-study through reading industry-related

articles, treatises, and publications.

- Participating in expert groups or industry organizations.

- Acquiring new skills or knowledge as necessary when professional responsibilities change or

expand.

Application of the standard.

Example 1: Maintaining Competence

Emma Rodriguez, a senior economic analyst for a global investment firm, regularly updates her

knowledge about economic policy changes and global market trends. She subscribes to leading

economic journals, attends international financial conferences, and consults with economic

experts to keep her analysis relevant and accurate.

Comment: Through continuous learning and active engagement in her field, Rodriguez meets

the requirements of Standard I(E) for maintaining competence. Her efforts ensure that her

analyses are up-to-date and valuable, providing high-quality service to her clients.

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Example 2: Improving Competence

Vijay Kumar is a portfolio manager at an asset management company. To better serve his clients,

he decides to incorporate alternative investments such as private equity and hedge funds into his

portfolio strategies. Kumar enrolls in specialized courses on alternative investments and earns a

certification in this area.

Comment: Kumar satisfies Standard I(E) by proactively improving his knowledge and skills in

alternative investments. His efforts to enhance his competence allow him to offer more diverse

and potentially profitable investment options to his clients.

Example 3: Change in Role

Sarah Lam, formerly an equities analyst, is promoted to the role of chief investment officer (CIO)

at her firm. Understanding that her new role requires a deeper grasp of asset allocation and risk

management, she undertakes an intensive training program and collaborates with experts in

these areas to build her competence.

Comment: By recognizing the need for new knowledge and actively seeking to acquire it, Lam

adheres to Standard I(E). Her actions demonstrate a commitment to fulfilling the responsibilities

of her new role effectively.

Example 4: Supervisory Responsibility

Robert Chen, head of research at a financial advisory firm, finds himself responsible for

mentoring a team of junior analysts. Knowing that effective supervision and team management

are critical, Chen completes a leadership course and attends workshops focused on mentoring

and compliance regulations.

Comment: Chen extends his competence to cover his new supervisory responsibilities, thereby

meeting Standard I(E). His efforts ensure that he can guide his team effectively while

maintaining compliance and high research standards.

Example 5: Choosing Investments

Anika Patel, a financial advisor, carefully selects a variety of mutual funds for her clients based

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on in-depth research and thorough due diligence. However, due to unforeseen market conditions

and not because of any negligence on her part, several of the funds underperform.

Comment: Given that Patel's investment decisions were based on comprehensive research and a

sound understanding of her clients' needs, the resulting underperformance does not imply

incompetence. She meets Standard I(E) by following a diligent and well-informed investment

process.

Example 6: Understanding New Investment Products

Daniel Morgan, an investment consultant, starts receiving requests from clients interested in

investing in the nascent non-fungible tokens (NFTs) market. Realizing his limited understanding

of NFTs, Morgan takes an online course, participates in webinars, and consults industry experts

to become well-versed in this emerging asset class.

Comment: Morgan adheres to Standard I(E) by not rushing into investments without a solid

understanding. His commitment to acquiring the necessary knowledge and skills ensures he can

competently advise his clients on NFTs, aligning with the standard's principle of competence.

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Questions

John Smith has been an equity analyst for a mid-sized investment firm for ten years.

Recently, he was promoted to the position of Chief Investment Officer (CIO), a role

that requires a broader understanding of asset allocation, risk management, and

investment strategy across various asset classes. Although John has extensive

experience in equity analysis, he has limited knowledge in fixed income, derivatives,

and alternative investments. To comply with Standard I(E), John decides to: What

actions should John take to maintain competence in his new role as CIO?

1. Rely solely on his existing knowledge of equity analysis and delegate other

responsibilities to his team members.

2. Enroll in advanced courses on asset allocation, risk management, and fixed

income, and regularly attend industry conferences to broaden his knowledge.

3. Focus exclusively on hiring new team members with expertise in areas where

he lacks knowledge.

Solution:

The correct answer is B.

Enrolling in advanced courses and attending industry conferences will help John

acquire the necessary knowledge and skills for his new role, ensuring he maintains

competence as required by Standard I(E).

A is incorrect. Relying solely on his existing knowledge and delegating other

responsibilities does not ensure that John is competent in his new role.

C is incorrect. While hiring experts is beneficial, it does not replace the need for

John to personally acquire the necessary knowledge and skills.

Question 2

Sarah Lee, a financial advisor, has been advising her clients on traditional investment

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products such as stocks, bonds, and mutual funds. Recently, several clients have

shown interest in sustainable and socially responsible investing (SRI). Sarah realizes

that she lacks sufficient knowledge in this area to provide competent advice. To

comply with Standard I(E), Sarah plans to. Which approach should Sarah take to

ensure she is providing competent advice on SRI to her clients?

1. Immediately start recommending SRI products to her clients based on basic

information available online.

2. Avoid discussing SRI with her clients and continue focusing on traditional

investment products.

3. Attend specialized seminars on SRI, obtain relevant certifications, and

collaborate with experts in the field.

Solution

The correct answer is C.

Attending seminars, obtaining certifications, and collaborating with experts will help

Sarah acquire the necessary knowledge and skills to competently advise her clients

on SRI, in line with Standard I(E).

A is incorrect. Recommending products based on basic information does not ensure

a competent understanding of SRI.

A is incorrect. Avoiding SRI altogether neglects the evolving interests of her clients

and does not reflect a commitment to maintaining competence.

Question 3

David Brown is a senior analyst at a financial research firm. His firm recently decided

to expand its services to include comprehensive economic analysis reports. David,

whose expertise lies primarily in company-specific financial analysis, now needs to

incorporate macroeconomic data and trends into his reports. To comply with

Standard I(E), David should. What steps should David take to ensure he meets the

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competence requirements of his expanded responsibilities?

1. Continue relying on his company-specific analysis skills and avoid integrating

macroeconomic data.

2. Enroll in economics courses, attend relevant workshops, and subscribe to

leading economic journals to enhance his understanding of macroeconomic

trends.

3. Delegate the task of economic analysis to a colleague with an economics

background and focus on his area of expertise.

Solution:

The correct answer is B.

By enrolling in courses, attending workshops, and reading economic journals, David

can develop the necessary skills and knowledge to competently integrate

macroeconomic data into his reports, as required by Standard I(E).

A is incorrect. Ignoring the need to incorporate macroeconomic data does not meet

the competence requirements for his expanded role.

C is incorrect. While delegation can be helpful, David must also personally acquire

the knowledge to fulfill his expanded responsibilities competently.

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LOS 46a: 1(A) Demonstrate a thorough knowledge of the CFA Institute
Code of Ethics and Standards of Professional Conduct by applying the
Code and Standards to specific situations

Members and Candidates must understand and comply with all applicable laws, rules, and

regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct)

of any government, regulatory organization, licensing agency, or professional association

governing their professional activities. In the event of conflict, Members and Candidates must

comply with the stricter law, rule, or regulation. Members and Candidates must not knowingly

participate or assist in and must dissociate from any violation of such laws, rules, or regulations.

It is the responsibility of Members and Candidates to understand the laws and regulations of the

countries and jurisdictions in which they practice. Members and Candidates should comply with

the laws and regulations that impact their professional conduct. When in doubt Members and

Candidates should refer to the compliance procedures offered by their firm. Additionally,

Members and Candidates should remain up to date with any changes in laws and regulations

that govern their profession.

Code and Standards & Applicable (Local) Laws

Members and Candidates may live or work in countries or jurisdictions where there are no

regulations and laws relating to a particular action or that are different from the Code and

Standards. When there is a difference between the Code and Standards and the applicable

(local) law, Members and Candidates must adhere to the stricter between the two.

Participation or Association with Violations by Others

Members are directly responsible for their unethical behavior or violations that they are willing

participants in. If a Member believes that there is unethical behavior or illegal wrongdoing,

Members and Candidates should separate themselves from this activity. In extreme cases, this

may involve leaving their employer.

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The following steps should be taken if there is suspicion of any violations:

Bringing any unethical or illegal activity to the attention of a supervisor or the

compliance department of the firm.

If this is unsuccessful, dissociate from the activity. Failure to dissociate from the

activity will be deemed as the Member or Candidate being a knowing participant by the

Institute.

Investment Products & Applicable Laws

All Members and Candidates involved in the creation and sale of investment products should be

aware of all laws and regulations of the countries in which they make their sales or origination of

purchased products. Members and Candidates should make reasonable attempts to investigate

that other firms that they engage with comply with all laws and regulations.

Compliance Recommendations – Members and Candidates

Members and Candidates should be vigilant in monitoring any changes in laws and

regulations.

Members and Candidates should encourage their employers to periodically review their

compliance procedures.

Members and Candidates should consult the compliance department if they have any

doubts or suspicions about any unethical practices.

Members and Candidates should encourage their compliance department to keep up-

to-date copies of compliance procedures.

Compliance Recommendations – Firms

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Firms are encouraged to adopt a code of ethics.

Firms should make it easily available, and disseminate compliance procedures, rules

laws, and regulations.

Firms should adopt reporting guidelines that provide Members and Candidates the

necessary information required to report any violations.

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Application 1: Following the Stricter Requirement

James Kimbo, a Level III candidate, and Ian Frank, CFA work for a multinational asset

management firm, Evolve Asset Partners. Frank is a senior portfolio manager who is

responsible for the asset allocation of the Developing & Frontier Markets portfolio.

Kimbo is a junior research analyst who works in the Ghanaian office. The rules and

regulations on insider trading in the Ghanaian market are non-existent; it is not

illegal or criminal to use insider information to make any investment actions. Kimbo

maintains close personal relationships with company insiders of several companies

that he frequently covers.

Kimbo has recently had a meeting with an executive of MetalX – a firm in which

Evolve Asset Partners holds a significant stake. In the meeting, the executive informs

Kimbo that the firm has acquired the right to explore an untapped mineral deposit.

This information is not publicly known, and Kimbo is aware that this information

could positively affect the company’s Frontier portfolio. Kimbo includes this

information in his weekly investor report. This report is strictly disseminated to

Ghanian clients.

Are any of Kimbo’s actions in violation of Standard I(A) – Knowledge of the Law?

A. No. Kimbo is permitted to share his findings on MetalX with Ghanian

investors in the absence of rules and regulations on insider trading in the

Ghanian market.

B. Yes. Kimbo has violated Standard I(A) – Knowledge of the Law.

C. No. Kimbo is permitted to use material nonpublic information in his investor

report.

Solution

The correct answer is B.

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Despite Ghana having no laws and regulations on inside trading, Kimbo violates

Standard I(A) – Knowledge of the Law. The Standard emphasizes that Members and

Candidates must “comply with the stricter rule or regulation.” In this case, the Code

and Standards are stricter than Ghanaian law. Kimbo should be aware of this and

comply with the Code and Standards set by the Institute.

Furthermore, the information that Kimbo receives from the executive is considered

material nonpublic information. Kimbo sharing this information is a violation of

Standard II(A) – Material Nonpublic Information. Kimbo is prohibited from sharing

information that may cause others to act on the information.

Application 2: Knowledge of the Law (Dissociating from Activity)

Sara Tsaiko has recently been hired as a performance analyst at Think Inc. Think Inc.

is a European hedge fund that specializes in global macro strategies. Tsaiko is tasked

with compiling a report on the fund manager’s annual performance. Previously, a

senior performance analyst – Martha Kraus, used to compile these reports. Tsaiko

goes through previous reports and notices that the annual returns over the last

several years have been materially overstated. Tsaiko is hesitant to inform her

immediate supervisor of her findings and decides to address this with Kraus initially.

Kraus informs Tsaiko that there are no anomalies in her performance measurement

calculations. Kraus insists that Tsaiko should replicate the calculation methods used

in her previous reports. Tsaiko follows through with Kraus’ request.

Why is Tsaiko in violation of Standard I(A) – Knowledge of the Law?

A. She performed analysis on previous performance reports without informing

Kraus.

B. She failed to immediately dissociate from the activity – she should have

declined to complete the report after she discovered the deliberate

overstatement.

C. She fails to disclose her findings to her supervisor or compliance department.

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Solution

The correct answer is C.

Tsaiko has violated Standard I(A) – Knowledge of the Law. Tsaiko had reason to

believe that Kraus deliberately overstated returns over several reporting periods. At

this point, Tsaiko is not in violation of Standard I(A).

Tsaiko addresses her concerns to Kraus and follows through with her

recommendation. To comply with Standard I(A) - Knowledge of the Law, Tsaiko should

have reported her concerns to her supervisor (in this case, Kraus is not her

supervisor) or with the compliance department if she had suspicions of any

wrongdoing. By continuing to apply methods – that overstate returns – Tsaiko is now

in violation of Standard I(A). If the compliance department or supervisor finds that

there is no issue in the performance calculations, Tsaiko needs to dissociate from this

activity. This could involve asking for another assignment or in extreme cases leaving

her job at Think Inc.

Application 3: Following the Stricter Requirement

Charles Findlay is the CFO of Excel Financial – a corporate finance firm

headquartered in New York. Findlay is leading the IPO underwriting process for a

major client. New York regulation forbids managers from participating in IPO’s for

their accounts. The underwriting process is split between Excel Financial and FJ

Capital – which is headquartered in Ankara, Turkey. Turkey has no rules or

regulations on executives participating in IPO’s for their investment accounts.

Findlay goes on to allocate a percentage of the IPO issuance to himself and other

managers of FJ Capital.

Has Findlay violated Standard I(A) – Knowledge of the Law?

A. No, because the Standard does not forbid managers from participating in

IPO’s.

B. Yes, because Findlay does not follow the stricter rule of no participation in

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 IPO’s.

C. No, because the underwriting process is shared between FJ Capital and Excel

Financial, Findlay is free to choose between what laws and regulations to

follow.

Solution

The correct answer is B.

Standard I(A) – Knowledge of the Law does not forbid investment managers from

participating in IPO’s. Findlay has violated Standard I(A) – Knowledge of the law

because he did not comply with the stricter rule. Findlay should always comply with

more strict laws or regulations.

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LOS 46a: 1(B) Demonstrate a thorough knowledge of the CFA Institute
Code of Ethics and Standards of Professional Conduct by applying the
Code and Standards to specific situations

Members and Candidates must use reasonable care and judgment to achieve and maintain

independence and objectivity in their professional activities. Members and Candidates must not

offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be

expected to compromise their own or another’s independence and objectivity.

Members and Candidates should maintain independence and objectivity for the benefit of their

clients. External stakeholders should bear no influence on the investment recommendation or

advice that Members and Candidates give. Members and Candidates should avoid any actions or

scenarios that may appear to facilitate the loss of independence. Members and Candidates

should disclose any gift received to their employers before receiving it (if possible) or

immediately thereafter.

Members and Candidates may be pressured into issuing favorable research reports by their

employers, especially if there is an existing investment banking relationship. Members and

Candidates are responsible for maintaining their independence and objectivity, and any

recommendations must be a true reflection of the Members’ and Candidates’ views on the

company.

Guidance: Independence and Objectivity

Gifts

Members and Candidates are permitted to accept modest gifts. It is the responsibility of the

candidate to distinguish between a modest gift, e.g., company merchandise, and what may be a

gift intended to influence the outcome of a research report, e.g., a fully paid luxury trips to

conduct a field visit. When in doubt, disclosure is best.

Buy-Side Clients & Public Companies

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Buy-side clients – often finance professionals that purchase large blocks of securities for fund

managers – are a major source of business for sell-side research firms. Sell-side research

analysts may be pressured into altering their recommendations or tone down views that differ

from (buy-side) portfolio managers. Negative reports may have adverse effects on the stock price

(of the company in question) and may dampen portfolio manager performance. Portfolio

managers should refrain from putting undue pressure on sell-side research analysts.

Fund Managers & Custodial Relationships

Members and Candidates who are tasked with the selection of hiring third-party custodians or

external managers should not accept gifts as this may appear to impact their independence

Performance Measurement & Attribution

Members and Candidates who work within the Performance Measurement department must

maintain their independence and objectivity. Members and Candidates may come under pressure

from managers – who may be seeking to improve their performance. They must fully execute

their assessment of performance and attribution without consideration of external influences.

Manager Selection & Procurement Process

Members and Candidates that are involved in the management selection process should not

accept gifts, contributions, or any other compensation when hiring investment managers.

Accepting any solicitations or gifts that do not directly benefit the Member or Candidate is still

considered in conflict with Standard I(B) – Independence and Objectivity.

A potential hire may offer to donate to the Member or Candidate’s favorite charity. Although the

Member does not receive any payment, acceptance of this donation may be perceived as

impairing the independence and objectivity of the hiring manager. Additionally, Members and

Candidates that are looking to find new investment allocations should not offer gifts, donations,

or any other forms of compensation to influence the decision of the hiring manager.

Issuer Paid Research

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There has been a general decrease in sell-side research coverage. As a result, firms that are not

widely followed may seek to hire independent research analysts to produce reports that are

intended to be disseminated to potential and current investors. Issuer paid research may present

significant conflicts of interest.

If a Member or Candidate is hired as an independent analyst, he must perform thorough,

unbiased analysis and must also disclose the nature of his compensation. Members and

Candidates should strictly limit their compensation to a flat fee. Any compensation that is tied to

the result of the analysis, e.g., stock warrants, company equity, may influence the Member to

write a favorable recommendation.

Travel Funding

It is recommended that analysts refuse paid travel by the companies they cover. Accepting paid

travel, e.g., privately chartered flights and lavish accommodations, may appear to influence their

objectivity. To avoid any appearance of compromised independence, Members and Candidates or

their firms should cover all necessary travel expenses. If there is no commercial transport

available to get to a location, Members and Candidates are permitted to accept modest

transportation offered.

Compliance Recommendations

Protect the integrity of opinion: Members and Candidates should only give

investment recommendations and advice that reflects their unbiased views. Firms

should set up compensation structures that promote the integrity of the investment

decision/recommendation process.

Creation of a restricted list: If the firm is hesitant to publish an adverse/negative

report of a corporate client, Members and Candidates should encourage firms to

remove the company from the research universe and place the company on a restricted

list. The firm should only disseminate reports that contain factual information about the

companies they follow.

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Restrict Special Cost Arrangements: Members and Candidates or their firms should

pay for all expenses related to commercial transport and accommodation. Members

and Candidates should encourage issuers – the companies they follow – to limit the use

of corporate transport and events/meetings that are difficult to travel to by commercial

means. Additionally, Members and Candidates should attempt to have a balance in the

frequency between hosting issuers and attending meetings at their corporate offices.

Limit gifts: Members and Candidates should limit the acceptance of gifts to only token

items. Firms should consider implementing a cap on the monetary value of token items

that can be accepted over a given year.

Restrict Investments: Members and Candidates should encourage firms to set up

policies related to employee purchases of securities and IPO’s. Firms should require

Members and Candidates to seek permission before participation in an IPO and

disclosures on investment actions after the IPO.

Review procedures: Members and Candidates should encourage firms to set up

supervisory and review procedures to ensure that analysts comply when it comes to

their investment actions.

Independence policy: Firms’ Members and Candidates should institute a formal

policy on independence and objectivity of research and put in place review policies to

ensure that research analysts remain independent and objective while they are

conducting their analysis.

Appointed officer: Firms should have a senior official tasked with overseeing that the

company complies with the firm’s code of ethics and laws and regulations.

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Application 1: Research Independence

Susan Watts is a research analyst that specializes in technology stocks and has

quickly become a valued member of her firm. Her boss holds a positive outlook on

Space Technologies – a stock that he owns. He has made it very clear that under no

circumstance should Susan change the firm’s “Strong Buy” recommendation. Susan

goes on to do a thorough independent analysis and concludes that Space

Technologies is a “Strong Buy.” She goes on to publish the report.

Has Susan violated Standard I(B) – Independence and Objectivity?

A. No, because she conducted her independent analysis and happened to come to

the same conclusion as her boss.

B. Yes, because she reached the same “Strong Buy” recommendation as her boss.

C. Yes, because she was compromised by the opinions of her boss.

Solution

The correct answer is A.

Standard I(B) – Independence & Objectivity emphasizes that Members and

Candidates should always perform analysis and disseminate investment reports that

are a reflection of their independent opinions. If Watts believed that her

independence has been compromised, she should have discontinued her coverage of

Space Technologies. In this case, Watts carried out her independent analysis and

reached the same recommendation as her boss. Therefore, she has not violated

Standard I(B).

Application 2: Gift from a Client

A fund manager receives a generous all-expenses-paid trip from a client for his

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superior performance over the year because he managed to significantly beat the

agreed-upon benchmark. The manager accepts this gift and goes on the trip a few

months later.

Is the fund manager in violation of Standard I(B) – Independence & Objectivity?

A. Yes, because the fund manager accepted a generous gift from the client.

B. Yes, because accepting this gift may affect the effort and consideration that the

manager gives to all his clients in the future.

C. Yes, because the manager fails to disclose this gift to his supervisor.

Solution

The correct answer is C.

The manager violates Standard I(B) – Independence and Objectivity because he failed

to disclose the trip to his employer. If the manager had disclosed the gift, he would be

compliant.

The nature and value of the gift are not material in this case because the gift was

offered based on the manager’s historic performance. If the gift was centered around

future performance, the manager would have to receive permission from his

employer. This disclosure is required to ensure that the manager gives equal effort

and consideration to all his clients.

Application 3: Paid Issuer Research

David James, CFA is a well-respected securities analyst. Recently, Magic Productions

had contracted James to write a research report. Magic Productions has not been

widely researched, and the management believes that a research report could bring

about new interest to the company and revive interest in current shareholders.

James and Magic Productions have agreed on a flat fee, plus a percentage bonus if

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there is substantial interest by new investors.

Are James and Magic Productions in violation of Standard I(B) – Independence and

Objectivity?

A. Yes, both James and Magic Productions are in violation.

B. Only James is in violation.

C. Neither James nor Magic Productions are in violation.

Solution

The correct answer is B.

James violates Standard I(B) – Independence and Objectivity. James’ compensation is

directly tied to the conclusions of his report. The structure of the compensation may

bias his conclusions – a favorable report may attract more interest. To avoid violating

Standard I(B) – Independence and Objectivity, James should agree to be compensated

on a flat-fee. Magic Productions is not held to the Codes and Standards; therefore,

they cannot violate Standard I(B) – Independence and Objectivity.

Application 4: Research Independence

Stephen Olibai, CFA is a junior equity analyst who is researching HealthU Corp. After

performing extensive research, he finds that HealthU is overvalued at its current

market price. Just before he issues his “Sell” recommendation, he receives an email

from his colleague in the investment banking division. His colleague informs him that

the firm is competing to secure the underwriting process of HealthU’s substantial

debt offering. Olibai is conflicted about publishing his report, in fear that it could lead

to his firm losing potential business. Olibai goes on to publish his report.

Is Olibai in violation of any Standards?

A. No, because he maintains his “Sell” recommendation.

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 B. Yes, because his communication with the investment banking division may have

compromised his independence.

C. No, because his analysis leads him to a “Sell” recommendation.

Solution

The correct answer is A.

Olibai should not feel pressured to change his recommendations based on any

influence from the investment banking division in his firm. Because Olibai does not

change his investment recommendation, he does not violate Standard I(B) –

Independence and Objectivity.

To avoid compromising his objectivity, the firm should have placed HealthU on a

restricted list. Olibai should base his recommendations on fundamental information,

external stakeholders should not influence the outcome of his recommendation.

Application 5: Influencing Manager Selection

Todd Martinez, CFA receives a tip from a friend – XFM Pension fund is in search of a

new external fund manager. His friend tells him that the selection manager is an avid

golf player and frequently visits his local golf course. Martinez’s friend introduces

him to the selection manager, Michael Yang, CFA. Martinez intends to establish a

close rapport with Yang. In his attempt to gain XFM Pension Fund’s business,

Martinez gifts Yang with expensive golf clubs and pays for several lunches at the golf

club.

Which of the following individuals has violated Standard I(B) – Independence and

Objectivity?

A. Martinez

B. Yang

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 C. Both Martinez and Yang

Solution

The correct answer is C.

Both Martinez and Yang are both in violation of Standard I(B) – Independence and

Objectivity. Martinez is knowingly trying to influence Yang’s selection decision.

Additionally, as a selection manager, Yang should not accept and gifts because it may

impair his independence and objectivity.

Application 6: Research Independence

Rick Martin, CFA, is a corporate finance analyst at Spector Finance Group (SPG).

Martin is in the middle of the presentation with a potential client. At the end of the

presentation, Martin proposes that an added benefit of contracting her firm will be

research coverage on SPG.

Is there a violation of Standard I(B) – Independence and Objectivity?

A. Yes, because Martin is offering free research coverage of SPG in exchange for

new business.

B. No, because she has not guaranteed positive research coverage of SPG.

C. No, because Martin is allowed to use any means to bring in new business.

Solution

The correct answer is B.

This is not in violation of Standard I(B) – Independence and Objectivity. Martin is

allowed to offer coverage of SPG but cannot promise that the firm will produce

research with a positive/buy recommendation. Any investment recommendation or

reporting must be based on the analysts’ independent and objective analysis of SPG.

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LOS 46a: 1(C) Demonstrate a thorough knowledge of the CFA Institute
Code of Ethics and Standards of Professional Conduct by applying the
Code and Standards to specific situations

Members and Candidates must not knowingly make any misrepresentations relating

to investment analysis, recommendations, actions, or other professional activities.

Trust is paramount in the investment profession. Misrepresentation is broadly defined as making

any false statements or deliberate omission of facts. Members and Candidates should not omit,

misrepresent, or give false information on a firm or security in oral or digital communications

and written materials – whether publicly disseminated or not.

Standard I(C) – Misrepresentation prohibits Members and Candidates from guaranteeing clients’

returns on investments or implying a guarantee of capital preservation. Many investments are

characterized by some element of risk. Members and Candidates should avoid making

statements such as “You can never lose money investing in this product” or “I can guarantee you

a minimum 10% return on your investment over the year.” These statements can be misleading

to investors.

Plagiarism

Standard I(C) – Misrepresentation prohibits plagiarism. Members and Candidates should always

acknowledge the materials and ideas that are not their own.

Examples of plagiarism include, but are not limited to:

Taking credit for a research report that has been written by another analyst or firm.

Copying excerpts from a report or article without acknowledging the author.

Using graphs or charts without acknowledging the source.

Copying proprietary models or spreadsheets without seeking permission from the firm

or creators.

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 Weak attribution when citing a particular text. For example, the following quote is

attributed to “a leading expert,” “a financial guru.” Members and Candidates should

acknowledge the authors directly.

Investment Practice

Members and Candidates should not misrepresent their academic qualifications, personal or firm

performance history, credentials, or services offered by their firm. Members should exercise care

when using third-party information; they will bear the ultimate responsibility for any

misrepresentations resulting from the use of third-party information.

Performance Reporting

Members and Candidates should ensure that they select a benchmark that is comparable to the

strategies used by the fund or for a particular client. Transparent reporting of the approved

benchmark is crucial in providing clients useful information when making investment decisions.

Social Media

Members and Candidates should ensure that they distribute the same information to clients and

potential clients through “social media” and traditional communication methods. Members and

Candidates should make sure that all communications disseminated through social media comply

with the Codes and Standards.

Omissions

Members and Candidates have become increasingly reliant on financial modeling techniques and

technical analysis to find new investment opportunities and to reach investment

recommendations. As a result, Members and Candidates should avoid knowingly omitting any

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inputs that could mislead those making investment decisions from these models. Additionally,

conclusions from these models cannot be presented as fact because the results of the models

are dependent on the inputs and techniques applied.

Members and Candidates should encourage firms to create policies that guide composite

construction. There should be a clear understanding of how and what is included in reporting

performance. This is to avoid a situation in which Members and Candidates pick and choose

what accounts to are representative of the firm or individual performance. A well-defined

composite should aid in mitigating any misrepresentation of performance.

Work Completed for Employer

Members and Candidates are permitted to use research or models created by other employees at

the firm. All work, product, research, and models developed at the firm are the property of the

firm. The firm is allowed to use the work completed by an analyst after they have left the firm.

However, a member or candidate cannot re-publish reports or analyses after leaving the firm

without express permission from his/her former employer.

Compliance Recommendations

Factual Presentation

Firms can assist employees who communicate to clients and potential clients by

providing an extensive list of the services offered and qualifications.

Firms can designate specific employees to speak on behalf of the firm.

Members and Candidates should understand the services and qualifications offered by

the firm.

Qualification Summary

Members and Candidates should create a summary of his or her qualifications,

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 experiences, and services that are capable of providing.

Firms should aid Members and Candidates by implementing reviews on employee

correspondence and documentation that relate to the firm or individual’s qualifications.

Verify Outside Information

Members and Candidates share the responsibility for the accuracy of third-party material that

they provide to clients. Members and Candidates should encourage their employers to set up

procedures for verifying third-party information.

Maintain Webpages

Members and Candidates who are responsible for publishing material on web pages should

ensure that the site contains current information. Members and Candidates should make

reasonable attempts to protect the site’s integrity, confidentiality, and to ensure there are full

disclosures and no misrepresentations.

Plagiarism Policy

To avoid plagiarism, Members and Candidates should take the following steps

Maintain copies: Keep copies of all the information and sources used when preparing

a research report.

Attribute quotations: Attribute to their sources all data that is not prepared by

persons other than financial and statistical reporting services.

Attribute summaries: Attribute to their sources any summaries or paraphrases.

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Application 1: Correcting Unintentional Errors

Peter Abasolo is responsible for maintaining ZXY Partners webpage and promotional

material. Abasolo is updating the firm’s webpage and states that ZXY’s Money Market

Fund has £10 billion in assets. Abasolo made a typographical error; the fund has £10

billion in assets. Abasolo goes on to publish “£10 billion in assets” on the company

website and brochures without identifying his error.

Has Abasolo violated Standard I(C) – Misrepresentation?

A. Yes, because he disseminated information that misstated the assets under

management in the money market fund.

B. No, because he did not knowingly misrepresent the assets under management in

the money market fund.

C. Yes, because any misrepresentation is in direct conflict with Standard I(C) –

Misrepresentation.

Solution

The correct answer is B.

Abasolo has not violated Standard I(C) – Misrepresentation because he did not

knowingly make the error. Once Abasolo finds his mistake, he should take steps to

stop the distribution of any material that contains the error and inform those who

have received the inaccurate information.

Application 2: Noncorrection of Errors

Salma Farak is the CFO of a multinational insurance firm. The new promotional

material created by the marketing department states that she is a CFA Charterholder.

She just sat the Level III CFA Exam and is awaiting her result. Farak is aware of the

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misstatement and does not inform the marketing department of the error. The

marketing department goes on to distribute the material to current and prospective

clients over the next financial year.

Has Farak violated Standard I(C) – Misrepresentation?

A. No.

B. Yes, because she does not make the error known to the marketing department.

C. Yes, because she is responsible for making sure her qualifications are

understood by the marketing department.

Solution

The correct answer is B.

Although Farak is not directly responsible for the misrepresentation of the

qualifications, she allowed this material to be disseminated over some time.

Application 3: Plagiarism

Jessica Klein is preparing an investor briefing for her clients. She would like to

include some brief explanations of various financial concepts, such as price-to-sales

(P/S) and real returns. She finds these descriptions on a popular finance website and

copies these explanations (verbatim) without acknowledging the authors.

Has Klein violated Standard I(C) – Misrepresentation?

A. No, because these concepts are popular finance jargon – all the explanations

are identical regardless of the source.

B. Yes, because she failed to reference the original authors.

C. No, because she does not need to acknowledge the original authors.

Solution

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The correct answer is B.

Klein has violated Standard I(C) – Misrepresentation. For Klein to be compliant, she

should always acknowledge the original author of any reference material.

Application 4: Misrepresentation of Information

Michael Kato and Blake Thomas run a small investment advisory firm. They subscribe

to a service offered by a large research company that provides detailed financial

reports and macro research. The large research firm allows subscribers of the

premium subscription to repackage the reports. Kato and Blake share these reports

with their clients as their work.

Have Kato and Blake violated Standard I(C) – Misrepresentation?

A. No, because they have permission from the research company to repackage the

research.

B. Yes, because they still need to acknowledge the original authors of the

research – even if they have permission to repackage the information.

C. No, because they paid for the research and retain the right to use it at their

discretion.

Solution

The correct answer is B.

Kato and Blake are allowed to use third-party research but cannot claim the material

as their own. By doing so, Kato and Blake may misrepresent their capabilities to

current and future clients.

Application 5: Issuer Paid Research

Amy Field is an issuer-paid securities analyst. She is hired by companies to create

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research reports and publish her recommendations on her popular website. Field

completes her independent analysis on PayTech and publishes her “Strong Buy”

recommendation on her website. Field fails to disclose the relationship with PayTech

on her website and internet forums.

Is Field in violation of Standard I(C) – Misrepresentation?

A. No, because she arrived at her “Strong Buy” recommendation after

conducting her independent analysis.

B. Yes, because she is not allowed to be compensated for research coverage

that is disseminated to the public.

C. Yes, because she fails to disclose the relationship between PayTech and

herself.

Solution

The correct answer is C.

Field has violated Standard I(C) – Misrepresentation. Although Fields conducted her

research independently, her lack of disclosure may mislead potential investors. Field

is allowed to be compensated for issuer paid research but has to disclose the

agreement and nature of compensation on her website and internet forums.

Application 6: Plagiarism

Jorley Khan is a senior quantitative analyst at Quant Touch. He recently attended the

annual Quantitative Forum – which brings together the top quantitative specialists in

the world. Khan, inspired by the event, builds upon the thorough notes he compiled

on a breakthrough stock selection algorithm that was presented by the keynote

speaker. Khan works to refine the algorithm and adds his inputs and achieves

superior results.

How has Khan violated Standard I(C) – Misrepresentation?

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 A. Khan failed to attribute the algorithm to the keynote speaker.

B. Khan cannot draw inspiration from others; all his work should be original.

C. Khan’s modifications to the algorithm are not material enough to make the

work his own.

Solution

The correct answer is A.

Although he can make changes to the algorithm, Khan must acknowledge the speaker

for his initial work. Khan is allowed to build on the ideas or concepts of others but

must acknowledge their contribution.

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LOS 46a: 1(D) Demonstrate a thorough knowledge of the CFA Institute
Code of Ethics and Standards of Professional Conduct by applying the
Code and Standards to specific situations

Members and Candidates 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.

Guidance

Standard I(D) – Misconduct addresses all conduct that reflects poorly on a Member or

Candidate’s reputation, competence, and professional integrity. Any actions that involve

dishonest conduct, lying, cheating, stealing, or any unethical behavior that negatively affects the

Member or Candidate's professional activities would be considered a violation of the Standard.

Actions that damage the trustworthiness, competence, and inability to carry out his or her

professional activities would conflict with Standard I(D).

Violations of Standard I(D) – Misconduct include, but are not limited to:

A member or candidate consuming alcohol during working hours.

Personal bankruptcy arising out of fraud or deceitful action.

Failure to perform adequate due diligence or delegating research responsibilities.

Compliance Recommendations

Code of Ethics: Firms should develop a Code of Ethics that employees are required to

follow. Firms should ensure that employees are aware that any misconduct will not be

tolerated.

List of violations: Firms should disseminate a list of potential violations and relevant

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disciplinary actions to all employees.

Employee references: Employers should screen potential employees to ensure that

they are of good character.

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Application 1: Professionalism and Competence

Ewart Lucas is a portfolio manager at Brisk Insurance. He has frequent meetings

with his team at a bistro next to the company’s headquarters. After a stressful

management meeting, he takes his team out for lunch and orders a bottle of wine.

The other members of his team decline to consume the wine. He states that he is

“more relaxed and able to produce better results” after he has consumed a few

glasses of wine.

Has Lucas violated Standard I(D) – Misconduct?

A. Yes, because consuming alcohol during working hours could impair his

judgment and his ability to carry out his responsibilities.

B. No, because Lucas is out of the office – he is allowed to do whatever he likes

during his lunch break.

C. No, because his claim of superior performance after a few drinks is beneficial

for his clients and the firm.

Solution

The correct answer is A.

Lucas has violated Standard I(D) – Misconduct. His actions have raised questions

about his competence and professionalism.

Application 2: Fraud and Deceit

An equity analyst includes a receipt that is not part of his expenses for a company

trip. He previously missed out on a legitimate expense of the same value the month

before. He is looking to be reimbursed for the previous month’s expense.

Is the analyst in conflict with Standard I(D) – Misconduct?

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 A. No, because the reimbursement he is seeking is of the same monetary value as

his legitimate expense.

B. Yes, because his conduct is deceitful.

C. Yes, because he is not allowed to claim any expenses.

Solution

The correct answer is B.

The analyst has violated Standard I(D) – Misconduct because his actions were

deceitful. His actions have adversely damaged his integrity.

Application 3: Personal Actions and Integrity

Jane Ferro is the Head of Trading at Nix Brokerage. In her spare time, she is an avid

woman’s rights activist. She was recently arrested at a peaceful protest over the

weekend. She is accused of creating public disruption.

Are Ferro’s actions considered to violate Standard I(D) – Misconduct?

A. Yes, Ferro’s arrest questions her professionalism.

B. No, the crime Ferro is accused of is not serious enough to damage her

reputation.

C. No, her actions do not reflect poorly on her professional reputation and

integrity.

Solution

The correct answer is C.

Standard I(D) – Misconduct is meant to cover conduct that reflects poorly on a

Member’s or Candidate’s professional reputation, integrity, or competence. Ferro is

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allowed to participate in causes that she aligns with.

Application 4: Personal Actions

Jeff Sioux, a financial advisor, tells his client that he can get her the best deal

refinancing her 30-year home mortgage. He gets her a deal that maximizes his

commission but leaves his client with worse payment terms.

Has Sioux violated Standard I(D) – Misconduct?

A. No, because the client chose to take up Sioux’s offer.

B. Yes, because he received a commission for his referral.

C. Yes, because Sioux’s actions were dishonest – he intended to maximize his

commission.

Solution

The correct answer is C.

Sioux violated Standard I(D) – Misconduct. He was dishonest and misrepresented the

offer to his client. Sioux may offer to help his clients but must be honest about the

offer and present the client with all the facts.

Application 5: Personal Actions

Janice Long is a financial advisor that is going through personal bankruptcy. She has

made poor speculative investments over the years and has accumulated vast amounts

of personal debt. Her firm’s compliance department is made aware of her financial

distress through Long’s mortgage provider. The firm is investigating any potential

misconduct.

Will the compliance department conclude that Long has violated Standard I(D) –

Misconduct?

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 A. No, her actions do not raise questions on her professionalism and competence.

B. Yes, her financial distress is indicative of her competence and abilities.

C. Yes, because she does not disclose her financial distress to her employer.

Solution

The correct answer is A.

Long has not violated Standard I(D) – Misconduct. Long’s financial distress does not

reflect poorly on her professional conduct or integrity. Her actions may lead her firm

to question her investment actions and suitability in her role as a financial advisor.

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LOS 46a: 2(A) Demonstrate a thorough knowledge of the CFA Institute
Code of Ethics and Standards of Professional Conduct by applying the
Code and Standards to specific situations

Members and Candidates who possess material nonpublic information that could affect the value

of an investment must not act or cause others to act on the information.

Guidance

Trading or causing others to trade on material nonpublic information impairs market

participants’ confidence in the integrity of capital markets. If investors believe that those with

inside information have greater access to information, they will avoid capital markets altogether.

When investors avoid participating in capital markets, the efficiency of markets and capital

allocation is diminished. Any trading action informed by insider information is a violation of

Standard II(A) – Material Nonpublic Information.

Material Information

Information is considered material if its disclosure would impact the investment decisions taken

by a reasonable investor or if the information would have an impact on the price of a security.

Material information may include but is not limited to(1) information on:

Earnings.

Mergers, acquisitions, tender offers, or joint ventures.

Changes in assets or asset quality.

Innovative products, processes, or discoveries (e.g., new product trials or research

efforts).

New licenses, patents, registered trademarks, or regulatory approval/rejection of a

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 product.

Developments regarding customers or suppliers (e.g., the acquisition or loss of a

contract).

Changes in management.

Change in auditor notification or the fact that the issuer may no longer rely on an

auditor’s report or qualified opinion.

Events regarding the issuer’s securities (e.g., defaults on senior securities, calls of

securities for redemption, repurchase plans, stock splits, changes in dividends, changes

to the rights of security holders, and public or private sales of additional securities).

Bankruptcies.

Significant legal disputes.

Government reports of economic trends (employment, housing starts, currency

information, etc.)

Orders for large trades before they are executed.

New or changing equity or debt ratings issued by a third party (e.g., sell-side

recommendations and credit ratings).

(1) The list is taken verbatim from the CFA curriculum.

The reliability and source may determine the materiality of the information. The more reliable

the source, the more likely the information is considered material. For example, an executive of a

TheroPharma sharing information about a successful drug trial is likely to be material, whereas

rumors shared by TheroPharma’s competitors about TheroPharma’s drug trial would be

considered less reliable and, therefore, not material.

The more unclear the impact of the information has on the price of a security, the less material

the information is considered. Additionally, as time elapses, the materiality of the information

may diminish.

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Nonpublic Information

Information is considered nonpublic until it has been disseminated to the general public. For

example, a company sharing its earnings reports through a press release or website has

disseminated the information adequately – the information is considered public. However, there

may be instances that Members may receive disclosures by companies before the public.

Members and Candidates should handle nonpublic information with care since any disclosure

could lead to potential insider trading activities.

Members and Candidates are allowed to use nonpublic information provided by a company to

perform due diligence for activities including mergers, loan underwriting, credit ratings, etc.

However, the use of this inside information to trade or to cause others to trade conflicts with

Standard II(A) – Material Nonpublic Information.

Mosaic Theory

Analysts are permitted to use a combination of public and nonmaterial nonpublic information

to arrive at their investment recommendations and decisions. The use of the combination of

public and nonmaterial nonpublic information may lead to an analyst making conclusions that

would be considered material. However, this would not be considered a violation of Standard

II(A) – Material Nonpublic Information.

Social Media

Members and Candidates should verify that material information obtained from private groups

and tiered membership subscription services can also be found on public sources before using

this information.

Additionally, Members and Candidates are permitted to communicate with clients and potential

investors through social media platforms without violating the Standard. However, they must

ensure that the information disseminated through social media platforms is comparable with

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traditional forms of communication, e. g., email, telephone calls, press releases, etc.

Using Industry Experts

There has been an increasing demand for industry expertise and knowledge as investors and

firms seek to get deeper insights into specific industry’s or sectors.

Members and Candidates are allowed to compensate industry experts for their specialized

knowledge. However, they must ensure that they do not request or act on confidential

information provided. If an expert provides material nonpublic information, members would not

be allowed to take any investment action until the information was in public knowledge.

Investment Research Reports

Well-known securities analysts may have the ability to affect the stock price when they change

their investment recommendations. According to Standard II(A) – Material Nonpublic

Information, this would be considered material. To comply with Standard II(A), the analyst would

need to make his research report publicly available.

However, the analyst may use a combination of public and nonmaterial nonpublic information

to arrive at their investment recommendations (Mosaic theory) to arrive at his conclusions.

Under Standard II(A) – Material Nonpublic Information, analysts do not need to make their

research reports public despite the perceived materiality by the investing public.

Compliance Recommendations

Achieve Public Dissemination: Members or Candidates should make reasonable efforts to

disseminate material information. Members should encourage issuing companies to share

material information to the public. If the information cannot be shared publicly, members or

candidates should only share the information with approved supervisors and compliance staff

within the firm. Members and Candidates should not knowingly participate in conduct that

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causes a firm’s employees to disclose material information privately.

Adopt Compliance Procedures: Members and Candidates should encourage their firms to

develop compliance procedures regarding the use of material nonpublic information.

Additionally, members are encouraged to report any suspected use of material information to the

supervisory or compliance department of their firm.

Adopt Disclosure Procedures: Members and Candidates should encourage firms to adopt

disclosure procedures to ensure that information is disseminated fairly. For example, small firms

should receive the same information as larger firms, sell-side analysts should obtain the same

information as buy-side analysts. In addition, Members and Candidates should encourage firms

to develop procedures for sharing new and updated recommendations. Changes in

recommendations may be material; therefore, this information must be shared equitably among

clients.

Issue Press Releases: Firms are encouraged to issue press releases before conference calls and

analyst meetings. If material information is released during a call or meeting, the firm should

issue a press release immediately after the meeting.

Firewalls: Firms should restrict the flow of material nonpublic information to only those who

need to know the information to carry out their jobs.

The elements of a firewall include but are not limited to:

Periodic review of employee trading through the maintenance of “restricted” lists.

Stringent reviews of trading practices of the firm while in the knowledge of nonpublic

material information.

Implementing controls over interdepartmental communications.

Interdepartmental Communication: Firms should implement procedures concerning

interdepartmental communications, trading reviews, and how to address possible violations.

Physical Separation of Departments: Firms should attempt to physically separate

departments that may have conflicting investment actions or recommendations when in

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possession of material nonpublic information. For example, the corporate finance department

should be separated from the research department of a firm.

Prevention of Personnel Overlap: Firms may have employees that work between several

departments. Implementing firewalls is encouraged to limit the flow of information between

departments. Firms should ensure that there is no overlap of personnel between corporate

finance departments and research departments. For a firewall to be successful, an employee

should only be on one side of the firewall at any given time.

Reporting Systems: An effective firewall should have a reporting system in which authorized

personnel conducts reviews and approves interdepartmental communication. A designated

compliance officer should be responsible for approving shared information between

departments, materiality, public nature of the information, and ensuring any shared information

is used appropriately.

Personal Trading Limitations: Firms should consider implementing restrictions on personal

and proprietary trading by employees. Securities should be placed on a restricted list when a

firm has material nonpublic information. The dissemination of a restricted list may induce

individuals to take investment actions. As a result, a watch list should be shared among a limited

number of compliance department employees to monitor the transactions of restricted stocks.

Record Maintenance: Firms that offer multiple services should keep records of all

interdepartmental communications.

Proprietary Trading Procedures: Prohibition on all proprietary trading while a firm possesses

material nonpublic information may not always be appropriate. For example, if a firm is a market

maker of a particular stock, prohibiting trading activity may adversely affect market liquidity or

confidentiality. The prohibitive measures put in place will vary depending on the type of

proprietary trading the firm engages in.

Communication to All Employees: Members and Candidates should encourage their

employers to distribute the firm’s written compliance policies. Firms should implement training

programs in combination with compliance policies to assist employees in identifying material

nonpublic information.

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Application 1: Disclosure of Material Information

Anne Feinstein is an equity analyst based in Sydney and covers the Korean

manufacturing sector. She is on a conference call with five leading analysts and the

CFO of a major fashion retail company. In the call, the CFO discloses that the

majority of the firm’s workforce is set to go on strike indefinitely. This would cripple

production and productivity, so the CFO informs the analyst that the firm is expected

to miss its expected earnings expectations for the next two quarters. Feinstein goes

on to update her recommendation to a “Sell.”

Has Feinstein violated Standard II(A) – Material Nonpublic Information?

A. Yes, she is not allowed to take any investment actions on nonpublic information.

B. No, the information is considered public because the conference call included

several other analysts – therefore, the information is public.

C. Yes, Feinstein is not permitted to talk to management. She is not allowed to get

insider information.

Solution

The correct answer is A.

She has violated Standard II(A) – Material Nonpublic Information because she

changed her investment recommendation. Feinstein needs to determine whether the

material information she received is publicly known. The information would be

considered nonpublic – it has not been disseminated to the broader public. As a

result, Feinstein is not allowed to act on the information.

Application 2: Using Expert Networks

Jamal Saadiq is a portfolio manager at Sanford Asset Managers. She specializes in

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technology stocks and is looking to get deeper insights into the sector. Saadiq hires

and industry expert and compensates him for his time. Saadiq leaves their session

better informed and able to enhance her research reports and conclusions.

Would Saadiq’s actions violate Standard II(A) – Material Nonpublic Information?

A. Yes, because she is using the knowledge of the expert to enhance her

research.

B. No, because she is allowed to hire industry experts to enhance her knowledge.

C. Yes, because she compensated the industry expert for insider information.

Solution

The correct answer is B.

Saadiq has not violated Standard II(A) – Material Nonpublic Information. She has not

received any information that could be considered material and nonpublic. Saadiq is

permitted to seek advice from industry experts to enhance her research.

Application 3: Mosaic Theory

Alison Kaitu is an equity analyst that covers the Chinese consumer discretionary

sector. She is working on a research report on Zang Corporation. Zang Corporation is

listed on the NYSE and has quickly become a “hot” stock. In a very competitive

Chinese manufacturing industry, Zang continues to beat analyst earnings

expectations over three successive quarters. Kaitu, however, is suspicious of Zang’s

extraordinary growth and performance published in its filings. She decides to visit

Zang’s manufacturing plants in China and observes that many of the factories have

been closed or have limited production activity. Kaitu issues a “sell” recommendation

based on the combination of her fundamental analysis and the observations she

gained on her visit.

Has Kaitu violated Standard II(A) – Material Nonpublic Information?

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 A. Yes, she used material information to arrive at her recommendation.

B. No, she is allowed to use a combination of public information and nonmaterial

nonpublic information to arrive at her conclusions.

C. Yes, her knowledge of Zang’s manufacturing activities would be considered

insider information.

Solution

The correct answer is B.

Kaitu is permitted to use a combination of public information (Zang’s fillings) and

nonmaterial nonpublic information (her observations in China). Before issuing her

recommendation, she needed to determine the materiality of her observations in

China. In this case, her observations were taken independently. Additionally, any

other investor or analyst could potentially make the same observations if they went

deeper into their investigations of Zang. Her observations alone would not be

considered material. Under the mosaic theory, Kaitu has not violated Standard II(A) –

Material Nonpublic Information.

Application 4: Determining Materiality

Edwin McVey, a level II candidate, recently had a conversation with his personal

trainer about Albright Telco. His trainer, an avid investor, tells him that he believes

Albright will be acquired by a bigger telecommunications company. McVey

aggressively purchases Albright Telco stock.

Would McVey’s purchase of Albright stock be a violation of Standard II(A) – Material

Nonpublic Information?

A. Yes, because knowledge of the acquisition is not public.

B. Yes, because McVey does not personally perform any analysis on Albright Telco

and goes on to purchase the stock.

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 C. No, because the trainer has no inside information on Albright Telco.

Solution

The correct answer is C.

McVey has not violated Standard II(A) – Material Nonpublic Information. He has no

reason to believe that his trainer has inside information on Albright Telco. McVey is

allowed to make investment action based on conjecture or speculation.

Application 5: Acting on Nonpublic Information

Sara Thogori and Wendy Fisher have significant personal holdings in banking stocks.

Thogori is a branch manager at Equity Bank and Fisher is a corporate finance analyst

at Family Ventures. Over their discussions, Thogori mentions to Fisher that Equity is

about to announce their best quarterly results in two years. Fisher is aware that

disclosing such information would be against the law. However, she goes on to triple

her position in Equity Bank. Equity proceeds to post fantastic results but discloses

that it will substantially increase its loan loss provision over the next few quarters

due to an expected increase in non-performing loans. The market reacts negatively to

this news and the stock price falls by almost fifty percent.

Has there been a violation of Standard II(A) – Material Nonpublic Information?

A. No, because she did not share the material information disclosed by Thogori.

B. No, because Fisher’s purchase was negatively affected by the earnings results

and disclosures.

C. Yes, because she made investment decisions based on material nonpublic

information.

Solution

The correct answer is C.

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Despite Fisher’s portfolio being negatively affected by the earnings results and

disclosures, she has still violated Standard II(A) – Material Nonpublic Information.

Fisher is not allowed to act on material nonpublic information. Although she never

disclosed the material information shared by Thogori her actions alone conflict with

Standard II(A).

Application 6: Analyst Recommendations and Material

Mia Englewood is a well-known utility sector analyst. She is about to take part in an

interview on Finance Speak – a popular finance podcast. Before the interview, she

discloses to Finance Speak that she is due to change her investment recommendation

on KenPower Lighting to a “sell” and shares a summary of her conclusions.

Englewood and Finance Speak have both signed a confidentiality agreement. The

interviewer, Joseph Peterson, CFA, informs his father-in-law of the upcoming change

in recommendation. His father-in-law sells a small percentage of his holdings in

KenPower Lighting.

Have Englewood and Peterson violated Standard II(A) – Material Nonpublic

Information?

A. Only Peterson.

B. Both Englewood and Peterson.

C. Neither Englewood or Peterson.

Solution

The correct answer is A.

Peterson has violated Standard II(A) – Material Nonpublic Information because he

shared material nonpublic information to his father-in-law.

On the other hand, Englewood has not violated Standard II(A) – Material Nonpublic

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Information because she did not knowingly share material information to cause

others to take investment actions. She made a reasonable attempt - through the

confidentiality agreement, to discourage the dissemination of her recommendation.

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LOS 46a: 2(B) Demonstrate a thorough knowledge of the CFA Institute
Code of Ethics and Standards of Professional Conduct by applying the
Code and Standards to specific situations

Members and Candidates must not engage in practices that distort prices or artificially inflate

trading volume with the intent to mislead market participants.

Guidance

Members are required to comply with Standard II(B) – Market Manipulation to promote the

integrity of capital markets. Market manipulation comprises actions that alter trading volumes or

stock prices. Market manipulation may lead to a decrease in market participation (due to a loss

in investor confidence), inefficient allocation, and a decline in the economic growth of a country.

Information-Based Manipulation

Members and Candidates should desist from sharing information with the intention of artificially

“pumping” up the price of an investment to then later “dump” (sell) it at a higher price.

Transaction-Based Manipulation

Transaction manipulation occurs in cases where a member or candidate knows or should have

known that their actions could potentially affect the price of an investment.

Transaction manipulation includes, but is not limited(1) to:

Transactions that artificially affect prices or volume to give the impression of activity or

price movement in a financial instrument, which represent a diversion from the

expectations of a fair and efficient market.

Securing a controlling, dominant position in a financial instrument to exploit and

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 manipulate the price of a related derivative and/or the underlying asset.

(1) The list is taken verbatim from the CFA Program curriculum.

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Application 1: Pump and Dump Strategy

Jacob Stevens has significant equity holdings in Axoline Corporation. He posts false

rumors about Axoline’s acquisition of a competing firm on various online forums, in

an attempt to pump up the price of the stock. Steven’s attempt to pump up Axoline’s

stock price is unsuccessful, and the stock price stays within its trading range.

Would Steven’s unsuccessful attempt at pumping up Axoline’s stock price violate

Standard II(B) – Market Manipulation?

A. No, because he failed to affect the stock price.

B. Yes, regardless of the outcome on the price, he intended to mislead market

participants.

C. No, Steven is allowed to give his opinion on Axoline’s future corporate actions.

Solution

The correct answer is B.

Stevens has violated Standard II(B) – Market Manipulation. The outcome of Steven’s

attempt at pumping up the stock is irrelevant. According to Standard II(B) – Market

Manipulation, the intent of his actions would be the only consideration.

Application 2: Manipulation of Model Inputs

Andy Knoxville is the head of structured products at Kings Investment Bank. As the

leader of the structured products team, he is responsible for the creation of new and

creative products that could attract potential investors. He notices that there is

substantial interest in low volatility products. Consequently, Knoxville creates “low-

vol” products that contain inputs that are intended to suppress the negative impact of

higher volatility in the market. A part of Steven’s compensation is directly linked to

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the number of clients that purchase these “low-vol” products. In periods of low

volatility, clients that bought these products were extremely successful. Since the

beginning of the coronavirus epidemic, high levels of volatility have led to numerous

defaults.

Has Knoxville violated Standard II(B) – Market Manipulation?

A. No, clients should be aware of the complexity of the “low-vol” structured

product.

B. No, he did not artificially manipulate the price, volume, or volatility of any

stock.

C. Yes, intentionally manipulated the inputs of the model to conceal the effects of

higher volatility on the returns of the product.

Solution

The correct answer is C.

Steven violated Standard II(B) – Market Manipulation. Intentionally manipulating

model inputs is considered a form of information-based manipulation. Steven’s

manipulation was intended to attract more business and increase his compensation.

His actions would cause investors to lose trust in capital markets and reflects poorly

on the investment profession.

Application 3: Pump-Primping Strategy

John Reynolds, CFA and CEO of Naxis Future Exchange (NFE), is introducing a new

equity index futures contract into the market. In an attempt to attract individuals and

major brokers to trade on its exchange, Naxis offers significant discounts on its

trading fees. To be eligible for the reduction in trading fees, firms must agree to a

minimum trading volume of the new contract over the next six months. Naxis hopes

that the demonstration of consistently large liquidity will attract new brokerages and

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retail traders to its exchange.

Are Reynolds’s actions in conflict with Standard II(B) – Market Manipulation?

A. No, Reynolds is allowed to offer discounts on trading fees.

B. No, the firms or retail traders who engage with Reynolds’ exchange on this

offer are in violation.

C. Yes, because Reynolds is attempting to mislead investors about the liquidity of

the contract.

Solution

The correct answer is C.

Investors may be misled by the artificial liquidity generated by Naxis through the

discounts offered. The expiry of the discount after six months could potentially

reduce the liquidity of the contract. Because Reynolds failed to disclose this

agreement with all its clients and potential clients, he has violated Standard II(B) –

Market Manipulation. Disclosure of the arrangement to all investors would comply

with Standard II(B) – Market Manipulation.

Application 4: Information Manipulation

Jeremiah Kane is a performance analyst at Vision Investment Managers. He recently

had a confrontation with a senior portfolio manager at the firm. The manager has a

strict long-only large-cap investment mandate. In last year’s performance report,

Kane notices a style drift and only presents results attributable to the investment

mandate.

The manager was frustrated by Kane’s report understating his performance. Kane is

frequently harassed by the manager. In frustration, Kane posts false negative

information of several “big name” stocks - held in the fund - on popular investor

groups. The prices of these stocks fall dramatically.

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Has Kane violated Standard II(B) – Market Manipulation?

A. No, because he does not personally benefit from the manipulation.

B. Yes, because his actions lead to significant price action.

C. No, because he is not responsible for the investment actions taken by the

investors and subsequent price change.

Solution

The correct answer is B.

Kane does not have to personally benefit from the market manipulation to violate

Standard II(B) – Market Manipulation. In sharing false information, he intended to

harm the manager’s performance, but his actions misled investors. As a result, he has

violated Standard II(B) – Market Manipulation.

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LOS 46a: 3(A) Demonstrate a thorough knowledge of the CFA Institute
Code of Ethics and Standards of Professional Conduct by applying the
Code and Standards to specific situations

Members and Candidates have a duty of loyalty to their clients and must act with reasonable

care and exercise prudent judgment. Members and Candidates must act for the benefit of their

clients and place their clients’ interests before their employer’s or their own interests.

Client interests are the ultimate priority. Investment actions must be taken for the benefit of the

client, given the Member or Candidate’s knowledge of the facts and circumstance of their client.

Standard III(A) – Loyalty, Prudence, and Care is not a substitute for a member or candidate’s

legal obligations. Members and Candidates must always comply with the strictest rule as

highlighted in Standard I(A) – Knowledge of the Law. Members and Candidates must manage

funds in accordance with the terms set by governing documents (such as investment

agreements, investor policy statements), which identify the investment manager’s duties and

power.

Guidance

Understanding the Application of Loyalty, Prudence, and Care

Standard III(A) sets a minimum benchmark for the duties of loyalty, prudence, and care required

by all Members and Candidates. The standard does not impose a fiduciary duty on Members

and Candidates. However, Standard III(A) requires that Members and Candidates work in the

best interest of clients at all times.

A Note on Fiduciary Duties

A fiduciary duty is a legal requirement for an individual to act in the best interest of a client or

entity. As such, an individual or entity found in breach of their fiduciary duties or responsibilities

can face legal recourse.

A fiduciary relationship exists when one party has the discretion and responsibility to act on

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behalf of another.

Examples of a fiduciary relationship may include:

The relationship between a financial advisor and his or her clients.

A trustee and the beneficiaries of the trust.

Corporate board members and shareholders.

Standard III(A) does not legally require members or candidates to act in the best interest of a

client or entity. However, it strongly promotes putting a client's interests first.

Identifying the Actual Investment Client

Members and Candidates should determine the identity of the “client” that the duty of loyalty

extends to. When an investment manager is managing the assets of an individual, the client is

easily identified. When the manager is managing a pool of assets of a pension plan or trust, the

client would be the beneficiaries of the trust or pension and not the hiring personnel.

Developing the Client’s Portfolio

Typically, an investment manager has greater knowledge about the investment universe. This

asymmetry reinforces the importance of the duty of loyalty, care, and prudence owed to clients.

Investment managers should ensure that:

Client expectations and objectives are realistic and suitable to their risk profile and

circumstance.

Recommendation of investment strategies that take into account the long-term

objectives of the client.

Any potential conflicts of interest are disclosed explicitly.

There is strict adherence to guidelines and agreements set by their clients.

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 Investment actions are taken in the context of the total portfolio.

Soft Commission Policies

“Soft Dollars” or “Soft Commissions” can be defined as the exchange of brokerage business

(through client commissions) for research services or any other brokerage offerings. Investment

managers direct transactions to their choice of broker, and in return, the brokerage may offer

research services. Brokerage commissions are an asset of the client and consequently, any soft

dollars obtained should directly benefit the client.

Clients are allowed to direct their managers to a particular brokerage, a practice referred to as

‘directed brokerage’ without violating Standard III(A) – Loyalty, Prudence, and Care. Members

and Candidates are required to seek the “best price” and “best execution” for any goods and

services purchased from a brokerage. “Best execution” is defined as trading practices that aim to

maximize the value of a client’s portfolio subject to the client’s objectives and constraints.

Additionally, managers should disclose any benefits they receive through client brokerage.

Proxy Voting Policies

Members and Candidates are required to vote on proxies responsibly. A member or candidate’s

failure to vote or cast votes with little consideration or in line with management would be a

violation of Standard III(A). Voting proxies may not always be beneficial for a client. Members

and Candidates must always disclose their proxy voting policies.

Compliance Recommendations

Regular Account Information

Members and Candidates should:

Share with each client the securities in custody or held by the member or candidate as

well as all transactions that occurred over the period at least quarterly.

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 Disclose where the assets are maintained or moved.

Separate the client assets’ from every other party’s assets, including the member or

candidates.

Client Approval

If a Member or Candidate is unsure about any investment actions, they should disclose the

concern in writing to the client and receive approval.

Firm Policies

Members and candidates should:

Follow all applicable rules and laws: Comply with all legal requirements and applicable parts

of the Code and Standards.

Establish the investment objectives of the client: Inquire into a client’s investment

experience, risk and return objectives, and constraints before making investment

recommendations or taking investment actions.

Consider all the information when taking actions: Consider the appropriateness and

suitability of the investment relative to:

A client’s requirements and circumstances.

The investment’s characteristics.

The characteristics of the entire portfolio.

Diversify: Diversify investments to minimize portfolio risk and loss – unless stated otherwise.

Carry out regular reviews: Establish frequent reviews to ensure that investment actions

comply with the terms stated in the governing documents.

Deal fairly with all clients concerning investment actions: Avoid any favoritism of clients

and create policies on trade allocation and the dissemination of recommendations.

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Disclose conflicts of interest: Disclose all potential and actual conflicts of interest.

Disclose compensation arrangements: Disclose all forms of compensation.

Vote proxies: Determine who is permitted to vote shares and always vote proxies in the best

interest of clients or ultimate beneficiaries.

Maintain confidentiality: Preserve the confidentiality of client information.

Seek best execution: Unless directed otherwise (by the ultimate beneficiary), always seek best

execution.

Place client interests first: Serve in the best interests of clients.

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Application 1: Soft Dollars

Grace Morris is the CEO of a financial advisory firm – Morris Advisors. Morris

routinely uses the same broker for all her client-account trades. The broker offers

average prices and below-average execution and research. In exchange, the broker

pays Morris Advisors’ employees’ travel expenses and the firm’s rent. All research

obtained is used to inform her investment recommendations and advice for her

clients.

Is Morris in conflict with Standard III(A) – Loyalty, Prudence, and Care?

A. No, because it is to her discretion which broker, she selects.

B. Yes, because she fails to get the best execution and price for her clients.

C. No, because the research received is a benefit to all her clients.

Solution

The correct answer is B.

Morris has violated Standard III(A) – Loyalty, Prudence, and Care. She uses her

client’s brokerage for services that do not directly benefit her clients. Additionally,

she fails to get the best execution and price for her clients.

Application 2: Identifying the Client

Isaac Freeman is a mutual fund portfolio manager. The fund has a strong small-cap

value bias. Recently, a large family office expressed interest in allocating a

substantial part of their assets in the fund. The only condition put across by the

family office was that Freeman needed to include the five best performing growth

stocks in the S&P 500. Freeman takes the family office as a client but has yet to

include the growth stocks into the fund

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Would Freeman’s inclusion of the growth stocks violate Standard III(A) – Loyalty,

Prudence, and Care?

A. Yes, because he is bound to a duty of loyalty to all the beneficiaries of the fund.

B. No, the family office is a big client; they are allowed to make suggestions about

asset allocation.

C. No, because the inclusion of the best performing growth stocks would benefit

all the beneficiaries of the fund.

Solution

The correct answer is A.

Freeman’s duty of loyalty extends to all the beneficiaries of the fund. Freeman is

required to take investment actions based on the objectives and rules found in the

fund’s investment policy statement. The size of the family office’s investment is

irrelevant.

Application 3: Client Approval

Hadassah Zachary, CFA, manages Kate Chege’s investment portfolio. Chege has a

heavily concentrated position in SunBeam Technologies. She received the majority of

her shares after her father – the ex-CEO of Sunbeam – passed away. Zachary has

expressed the need for and benefits of diversifying her portfolio. Chege has refused to

diversify her holdings and has prohibited the sale of Sunbeam stock in her investment

policy statement. News has just broken about SunBeam Technology filing for

bankruptcy. Zachary is quick to act and attempts to get in touch with Chege, with no

success. The stock price is falling dramatically, and Zachary proceeds to sell the

shares and reinvest the proceeds into safer yielding assets.

Has Zachary violated Standard III(A) – Loyalty, Prudence, and Care?

A. No, because she acted in Chege’s best interest.

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 B. Yes, because she failed to diversify Chege’s portfolio.

C. Yes, because she did not follow instructions found on the investment policy

statement.

Solution

The correct answer is C.

Zachary was trying to act in Chege’s best interest. However, Chege’s investment

policy statement prohibits the sale of Sunbeam stock. While it may appear that

Zachary did the right thing for Chege’s portfolio, she has violated Standard III(A) –

Duties to Client. To comply with Standard III(A), Zachary must disclose any

investment action and wait for Chege’s approval.

Application 4: Excessive Trading

Samuel Taylor is a wealth manager at Schuster Partners. A percentage of her

management fees is derived from trading commissions. Taylor trades excessively in

each of his client trading accounts, but the trades are appropriate and in line with his

client’s asset allocations. However, the trading activity exceeds what is required to

implement her client’s objectives.

Do Taylor’s actions violate Standard III(A) – Loyalty, Prudence, and Care?

A. Yes, because he is using his client’s assets to benefit himself.

B. No, because the trading activity is within his client’s allocations.

C. No, because Taylor is allowed to direct trading activity and frequency.

Solution

The correct answer is A.

Taylor has violated Standard III(A) –Loyalty, Prudence, and Care. Her actions are in

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her interest. Regardless of whether the trades were appropriate, Taylor put his needs

before his clients.

Application 5: Client Loyalty

Betty Davis is responsible for performing periodic reviews on her firm’s trading

activity and allocation practices. In her analysis, she finds that her firm failed to place

a large sell order for one of its major clients, Gratus Asset Managers. Correcting this

omission will result in a substantial loss for Gratus. Davis is worried that her

disclosure of this omission will lead Gratus to terminate its brokerage business with

her firm.

What actions should Davis take to best comply with Standard III(A) – Loyalty,

Prudence, and Care?

A. She should take no action. Her correction would lead to her firm losing Gratus’s

business.

B. She should inform Gratus and her firm of the omission.

C. She should ask the traders in her firm to follow through with the sell order.

Solution

The correct answer is B.

Even though disclosing the omission may lead to Gratus Asset Managers terminating

its business with her firm, withholding this information would not be in the best

interest of the client. Davis’ duty of loyalty, prudence, and care is owed to the client

before her employer.

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LOS 46a: 3(B) Demonstrate a thorough knowledge of the CFA Institute
Code of Ethics and Standards of Professional Conduct by applying the
Code and Standards to specific situations

Members and Candidates must deal fairly and objectively with all clients when providing

investment analysis, making investment recommendations, taking investment action, or

engaging in other professional activities.

Members and Candidates are required to treat all clients fairly when sharing investment

recommendations, taking investment actions, or making material changes to older research

recommendations.

In this context, “fairly” means that Members and Candidates must not discriminate against any

of their clients. Discrimination may take on various forms – dissemination of investment

recommendations to some clients, prioritizing investment actions for some clients, and not the

rest. Members and Candidates must take note that “fairly” and “equally” cannot be interpreted

as the same thing.

Members and Candidates cannot ensure that dissemination of any information would reach

clients at the same time and provide them all with equal opportunity to take action. Additionally,

there may be some investment opportunities that are suitable for one client and not another.

Members and Candidates are permitted to provide specialized services and charge higher

management or brokerage fees. Members or Candidates who offer differentiated services must

disclose this to all potential and current clients. All clients should be able to access

differentiated service levels.

Investment Recommendations

This conduct relates to members or candidates who work on preparing investment

recommendations that are disseminated to the public or shared internally to inform investment

decisions.

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Each member and candidate should:

Ensure that information is disseminated in such a way that all clients have a fair

opportunity to take investment action.

Encourage their firms to implement dissemination structures and policies that allow for

fair disclosures among all clients.

Standard III(B) – Fair Dealing may be even more important when it relates to material changes in

initial recommendations. Members and Candidates should inform all clients of changes in

recommendations, with greater consideration to those who acted upon earlier information.

Members should inform clients who may be unaware of a change in recommendation before

accepting and placing any orders on their behalf.

Investment Action

This conduct relates to Members and Candidates who take investment actions based on

recommendations prepared internally or received from external sources.

Each member and candidate should:

Treat all clients fairly relative to their investment objectives and circumstances.

Distribute all new issues/secondary financings – to all clients for whom this may be

suitable – in a manner consistent with their firm’s allocation policies.

Forgo any personal and family allocations if an issue is oversubscribed.

Treat family-member accounts that are managed similarly to client accounts equally. In

this case, family members can still participate in purchasing shares in oversubscribed

issues.

Disclose to prospective and current clients the firm’s documented allocation policies.

Compliance Recommendations

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Develop Firm Policies

Members and Candidates should encourage their firms to develop compliance policies that

require Members and Candidates to disseminate investment recommendations fairly.

Members and Candidates should consider the following when creating fair dealing compliance

procedures:

Limit the number of people involved: Limit the number of people aware of an

upcoming change in recommendation.

Shorten the time frame: Limit the time between the decision of a change or initial

investment recommendation and dissemination or publishing.

Guidelines for pre-dissemination actions: Encourage firms to develop policies that

forbid employees with knowledge of investment recommendation changes from taking

action or discussing the recommendation.

Simultaneous dissemination: Create procedures that ensure that the timing of the

dissemination of all recommendations happens approximately at the same time for all

clients.

List of client holdings: Maintain a list of all clients and their holdings of securities

and other investments to enable easy communications of any changes in investment

recommendations.

Develop and document trade allocation policies: Develop a set of policies that

ensure:

1. Fairness to all clients;

2. Timeliness and efficiency in execution of orders; and

3. Accurate client records.

Disclose Trade Allocation Procedures

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Trade allocation procedures should be fair and equitable. Members and Candidates should

disclose to all prospective and current clients their firm’s allocation practices.

Establish Systematic Account Reviews

Members and Candidates should encourage their firms to establish review procedures to ensure

or to identify that there has been no favoritism in trading practices and allocation.

Disclose Levels of Service

Members and Candidates should disclose to all clients if their firm offers differentiated services

at different fees. Different service levels should be available to all clients.

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Application 1: Selective Disclosure

Mari Dudek is a widely followed automobile analyst. She frequently has lunch

meetings with clients who have subscribed to the firm’s “Platinum” service tier. In a

lunch meeting, she discloses that she is about to issue a change in her investment

recommendation on T-Electric to a “sell” – pending approval from her boss and the

firm’s internal fact-checkers. She receives approval three days after the meeting and

goes on to disseminate her recommendation to her other clients.

Which of Dudek’s actions are most likely in conflict with Standard III(B) – Fair

Dealing?

A. No actions conflict with Standard III(B) – Fair Dealing.

B. Her frequent lunch meeting with “Platinum” tier clients can be interpreted as

favoritism.

C. Her disclosure of the change in her recommendation of T-Electric.

Solution

The correct answer is C.

Dudek is permitted to offer differentiated service levels provided that she discloses

this to her current and prospective clients. In this instance, her lunch meeting with

“Platinum” tier clients would not be a violation of Standard III(B) – Fair Dealing. She

has violated Standard III(B) – Fair Dealing, because she disclosed her change in the

recommendation to some clients before others.

Application 2: IPO Distribution

Adam McNarry is the CFO of Astra Capital Advisors (ACA). ACA specializes in

corporate advisory and capital raising activities. His client, GreenFarm Ltd., is

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looking to go public. ACA receives an overwhelming amount of expression of interest

from both retail and institutional investors. The new issue is twice oversubscribed.

McNarry proceeds to remove all shares allocated to fee-paying family-member

accounts. The shares are then prorated among all the clients.

Has McNarry violated Standard III(B) – Fair Dealing?

A. No, because his exclusion of family-member accounts would increase the

allocation to his other clients.

B. Yes, because fee-paying family accounts should be treated the same way as all

his other clients.

C. No, because he was prioritizing his client’s accounts over his family member

accounts.

Solution

The correct answer is B.

McNarry has violated Standard III(B) – Fair Dealing. McNarry should treat all his fee-

paying clients equally. In this case, McNarry should not have removed his family

members’ allocation in GreenFarm Ltd.

Application 3: Additional Services for Select Clients

Josephine Clark sends an email to all her clients to inform them about a change in her

investment recommendation of Nix Technologies. She then calls her two biggest

clients to go over her conclusions and respond to any queries.

Would Clark’s actions violate Standard III(B) – Fair Dealing?

A. Yes, because she is giving greater consideration to her two biggest clients.

B. No, because she informed all her clients about the change in her

recommendation.

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 C. Yes, because she has discriminated against some clients and favored others.

Solution

The correct answer is B.

Clark has not violated Standard III(B) – Fair Dealing. Clark disseminated her change

in the recommendation to all her clients. Clark is allowed to offer personal services to

clients that may have a significant amount of assets in the firm. Clark would be in

violation if she failed to disseminate her recommendation to all her clients but a

select few.

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LOS 46a: 3(C) Demonstrate a thorough knowledge of the CFA Institute
Code of Ethics and Standards of Professional Conduct by applying the
Code and Standards to specific situations

1. When Members and Candidates are in an advisory relationship with a client, they must:

Make a reasonable inquiry into a client’s or prospective client’s investment experience,

risk and return objectives, and financial constraints prior to making any investment

recommendation or taking investment action and must reassess and update this

information regularly.

Determine that an investment is suitable to the client’s financial situation and

consistent with the client’s written objectives, mandates, and constraints before

making an investment recommendation or taking investment action.

Judge the suitability of investments in the context of the client’s total portfolio.

2. When Members and Candidates are responsible for managing a portfolio to a specific

mandate, strategy, or style, they must make only investment recommendations or take only

investment actions that are consistent with the stated objectives and constraints of the portfolio.

Members and Candidates in an investment advisory relationship with clients must consider the

needs, circumstances, and objectives of clients when determining the suitability of investment

action.

In assessing suitability, members should consider:

The risk profile of an investment relative to the clients’.

The impact of investment on the portfolio’s diversification.

The net worth of the client relative to the risk of the investment.

Standard III(C) – Suitability is directed at Members and Candidates who have an advisory

relationship with clients. Members responsible for the execution of orders or sell-side analysts

may not be in a position to judge the suitability of a specific client for the final client.

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Developing an Investment Policy

Members and Candidates in an investment advisory role are required to gather information

about a client at the start of their relationship.

The information required includes but is not limited to:

The financial circumstance of the client.

Personal data relevant to investment decisions, e.g., age, occupation.

Risk attitudes.

Risk tolerance.

Return objectives.

Investment constraints.

The information received should form the basis of the client’s investment policy statements (IPS).

The IPS should outline the roles and responsibilities of the parties, the investment relationship,

and the review/evaluation procedures of the IPS. Members and Candidates can then proceed to

create an appropriate strategic asset allocation for the client in combination with long-term

capital market expectations.

Understanding the Client’s Risk Profile

One of the most relevant considerations in determining the suitability of a potential investment is

a client’s risk tolerance. Members and Candidates should consider the risk associated with each

security in isolation and the impact of the addition on the total portfolio risk.

Updating and Investment Policy

A client’s IPS should be updated at least annually and before any material changes to investment

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actions or recommendations. The needs and objectives of a client may evolve over some time. A

review of the client’s investments and their suitability are more effective when a client fully

discloses their financial portfolio and investment history.

Diversification

The combination of assets with different risk characteristics may provide a more acceptable risk

exposure than having a portfolio invested in one single investment. Members and Candidates are

encouraged to maintain a reasonable amount of diversification when managing individual and

institutional portfolios.

Addressing Unsolicited Trade Requests

A Member or Candidate may receive a trade request from a client that is not in line with the

investment policy statement. In this circumstance, the member must refrain from making the

transaction before addressing his/her concerns with their client first.

If an unsolicited trade is not expected to have a minimal impact on the whole portfolio, the

Member or Candidate should inform the investor about how this particular investment action

deviates from the IPS. Following the conversation, the Member or Candidate may follow their

firm’s policies on unsuitable trade requests.

On the other hand, clients may request trades that may have a material impact on the entire

portfolio. In this case, the Member or Candidate should update the client’s IPS. Members or

Candidates may have clients who refuse to make changes to their IPS. The Member or Candidate

may follow firm policy, which permits the trade to be made in a client-directed account. If no

other possibilities exist, the Member or Candidate may have to terminate the relationship with

the client.

Managing to an Index or Mandate

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Members and Candidates responsible for managing a fund in line with a mandate or index must

invest in a manner consistent with the mandate or index.

Compliance Recommendations

Investment Policy Statement

Members and Candidates should put the needs and circumstances of their clients in a written

investment policy statement.

Regular Updates

Members and Candidates should perform a periodic review of a client’s IPS, to reflect any

changes in their objectives, constraints, or circumstances. An annual review of the IPS is

recommended.

Suitability Tests

Members and Candidates should encourage their firms to develop and implement suitability tests

that investigate further than the potential return of the investment.

Suitability tests should include:

Analysis and impact of diversification.

Comparison of the investment risk and the client’s risk tolerance.

The fit of the investment in relation to the client’s investment strategy.

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Application 1: IPS Update

Joseph Layfield has a financial portfolio worth USD 100,000. His father passed away

and left him with a USD 5 Million inheritance. Over two years, Umar Farheed, his

investment adviser, has not made any changes to his IPS. Farheed continues to

manage Layfield’s portfolio with the same objectives and constraints listed in his

initial in his IPS.

Has Farheed violated Standard III(C) – Suitability?

A. No, he is managing Layfield’s portfolio in line with his IPS.

B. Yes, he has failed to update Layfield’s portfolio to incorporate Layfield’s change

in circumstance.

C. No, Layfield’s inheritance does not materially change his objectives and needs.

Solution

The correct answer is B.

Layfield receiving his inheritance would be considered a material change in his

circumstances. Layfield can assume more risk and can broaden his investment

holdings. Farheed has violated Standard III(C) - Suitability by failing to update

Layfield’s IPS to reflect his significant change in circumstance.

Application 2: Following an Investment Mandate

Travis Green is a portfolio manager responsible for InvesTank’s high growth fund. He

purchases high-income (low-growth) stocks of several utility firms. He believes that

these stocks are significantly undervalued and would provide a sizable positive return

for the fund.

Would Green’s purchase of high-income stocks violate Standard III(C) – Suitability?

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 A. Yes, because he is not following the investment mandate of the fund.

B. No, because he has the discretion of the stock selection of the fund.

C. No, because the potential upside to the fund from his selection would benefit

the beneficiaries of the fund.

Solution

The correct answer is A.

Green has violated Standard III(C) – Suitability. The purchase of the high-income

stocks does not fit the investment mandate (high-growth fund) that Green manages.

Green must manage the fund according to the investment mandate of the fund.

Application 3: Investment Suitability – Risk Profile

Astrid Coates specializes in managing public and private university endowments. In

an attempt to motivate its employees, Brighter Asset Managers has introduced a

bonus compensation scheme that ties its manager’s bonus’ to their performance

relative to their peers and certain benchmarks. Thomas College Fund – an

endowment fund that Coates manages – has an extremely conservative outlook on its

IPS and has the main objective of capital preservation. Coates changes her

investment strategy and shifts the initial strategic asset allocation (S.A.A) of Thames

College portfolio from:

80% bonds, 15% equity, 5% alternative investments

To a new allocation of:

40% bonds, 50% equity, 10% alternative investments

She does not inform Thomas College of the change in allocation. Her strategy pays

off, and she beats her benchmark and is one of the top managers in her firm.

Additionally, Thomas College is impressed with her strategy and encourages her to

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keep up with the good work.

Has Coates violated Standard III(C) – Suitability?

A. No, because she delivered good results for Thomas College.

B. No, because her chosen strategy was in the best interest of Thomas College.

C. Yes, because her strategy is contrary to the risk profile and objectives of

Thomas College.

Solution

The correct answer is C.

Coates has violated Standard III(C) – Suitability by changing the asset allocation of

Thomas College’s endowment. Her inclusion of more risky assets (equity and

alternative investments) is a departure from the conservative portfolio laid out by the

IPS. The performance of the strategy is irrelevant in this case; Coates should always

follow the IPS of a client or the mandate of a fund.

Application 4: Investment Suitability – Entire Portfolio

Jared Cameron is a financial advisor to several high-net-worth clients in New York.

One of his clients, Sebastian Mattel, is looking for a strategy that would increase the

investment income in his portfolio. Cameron suggests that Mattel sell puts at

appropriate strike prices on Galaxy Technologies. Mattel has no holdings of Galaxy

Technologies in his portfolio at the moment but would be willing to re-allocate some

of his assets to purchase Galaxy stock at the right price. Cameron educates Mattel on

the possible outcomes of selling puts, the risks involved, the impact of adding puts to

his entire portfolio, and the implications of the put options being exercised. In his IPS

there is a strict prohibition of the sale or purchase of derivatives. Mattel is happy for

Cameron to update his IPS to include the permission of the sale and purchase of

derivative instruments.

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Is Cameron in compliance with Standard III(C) – Suitability?

A. No, because derivatives are complicated instruments and are often high risk.

B. Yes, because Cameron explained the risks and updated Mattel’s IPS

accordingly.

C. No, because the inclusion of derivatives may not be suitable for Mattel’s

portfolio.

Solution

The correct answer is B.

Cameron complies with Standard III(C) – Suitability. He has explained the impact of

the inclusion of derivative instruments and in the context of the entire portfolio.

Additionally, he has updated Mattel’s IPS to include the permission of derivative

instruments in his portfolio.

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LOS 46a: 3(D) Demonstrate a thorough knowledge of the CFA Institute
Code of Ethics and Standards of Professional Conduct by applying the
Code and Standards to specific situation

When communicating investment performance information, Members and Candidates must make

reasonable efforts to ensure that it is fair, accurate, and complete.Guidance

Members and Candidates must not misrepresent or mislead investors about their performance

record – past or present. Members and Candidates should present a fair and accurate

presentation of their performance information. In the case of a brief presentation, Members or

Candidates should make available detailed information supporting their presentation on request.

Compliance Recommendations

Apply the Global Performance Investment Standards (GIPS)

Compliance with the GIPS standards will ensure that Members and Candidates meet the

requirements under Standard III(D) – Performance Presentation. Members and Candidates

should encourage their firms to adopt and comply with the GIPS standards.

Compliance without adopting GIPS

Members and Candidates can meet the requirements under Standard III(D) by:

Considering the knowledge and sophistication of the audience to whom the

presentation is directed.

Presenting the performance of a weighted composite rather than a single account.

Including terminated accounts in their performance history and include the dates of

termination.

Include disclosures that help explain the performance information given.

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Application 1: Performance Presentation and Former Employer

Tina Jensen is a well-respected global macro fund manager. Icon Partners is

impressed by Jensen’s performance; she has managed to consistently outperform her

peers in the global macro strategy space. Icon Partners successfully poaches her from

her previous employer and sends out marketing material created by Jensen, stating

her performance history as well as uploading her performance information on the

company’s website. In her biography for the company website, she discloses that her

performance history occurred at her previous firm. Still, she fails to disclose the

years in which she underperformed the stated benchmark.

Has Jensen violated Standard III(D) – Performance Presentation?

A. No, because she does not need to disclose her years of underperformance.

B. No, because she disclosed that her performance history occurred at her

previous employer.

C. Yes, because she is selective about what results to disclose.

Solution

The correct answer is C.

Jensen is required to give a fair and complete representation of her performance

history. As a result, Jensen has violated Standard III(D) – Performance Presentation.

Stating that her performance was achieved at her previous firm is a required

disclosure. Her omissions of her years of her underperformance conflicts with

Standard III(D) – Performance Presentation.

Application 2: Performance Presentation and Simulated Results

Andrew Mason is a quantitative research analyst at QuantFirst. He has been

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developing a stock screening algorithm that identifies stocks that exhibit long-term

momentum. In his research, he finds that his algorithm is successful in selecting

stock found in the S&P 500 with the desired qualities between 2010-2020. His

manager is satisfied that the algorithm works. While preparing the marketing

material of this new algorithm, he is careful to disclose that the results are simulated

from historic data (2010-2020) and that the future success of the algorithm cannot be

guaranteed. However, he fails to disclose that the simulation only yielded successful

results for the S&P 500.

Do any of Mason’s actions violate Standard III(D) – Performance Presentation?

A. No, because he informs potential clients that the future success of the

algorithm cannot be guaranteed.

B. Yes, because the success of his algorithm is time-dependent. He is selective

about the period chosen.

C. Yes, because he omits that the algorithm has only produced successful results

for stocks found in the S&P 500.

Solution

The correct answer is C.

Mason has violated Standard III(D) – Performance Presentation by failing to

accurately and fairly disclose the circumstances in which the algorithm produced

successful results. The use of historical data and the time-period selected is

permitted provided that he makes complete disclosures.

Application 3: GIPS Compliance

Sasha Harrison is working on a performance report on the returns of InvestorCore’s

money market mutual fund. In her report, she states that the firm claims compliance

with the GIPS standards. However, her return calculations differ from the appropriate

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return methodologies presented in the GIPS standards. She disseminates the report

to all clients of the fund.

Has there been a violation of Standard III(D) – Performance Presentation?

A. No, the firm is allowed to claim ‘partial’ GIPS compliance even with a different

return calculation.

B. No, because her performance presentation does not misuse or omit data.

C. Yes, the difference in methodology would invalidate the firm’s claim of GIPS

compliance.

Solution

The correct answer is C.

Harrison has violated Standard III(D) – Performance Presentation. When claiming

GIPS compliance, firms must meet all the requirements and disclosures that are

relevant to the firm. There is no ‘partial’ claim of compliance; a firm must either meet

the requirements or present reports that do not claim compliance.

Application 4: Performance Calculation

June Prentice, of Knight Securities, has created a promotional brochure that is shared

with the firm’s potential clients. In the brochure, Prentice states that “the average

growth rate in the value of assets across Knight’s investment funds is 12% over the

year.” Only one fund has an average growth rate of 12% over the year. The fund has

never had an average rate of growth of 12% across all its investment funds. She ends

the brochure with “with Knight Securities you have a 12% guaranteed return!.”

How has Prentice violated Standard III(D) – Performance Presentation?

A. She has not violated Standard III(D) – Performance Presentation.

B. She does not take into account all of Knight’s investment funds. She should

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average the returns across all the investment funds.

C. By making the statement “with Knight Securities you have a 12% guaranteed

return!”.

Solution

The correct answer is B.

Prentice has violated Standard III(D) – Performance Presentation by failing to

average returns across all of Knight Securities investment funds. Her statement

guaranteeing a 12% return is not a violation of Standard III(D) – Performance

Presentation but rather a violation of Standard I(C) – Misrepresentation.

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LOS 46a: 4(A) Demonstrate a thorough knowledge of the CFA Institute
Code of Ethics and Standards of Professional Conduct by applying the
Code and Standards to specific situations

In matters related to their employment, Members and Candidates must act for the benefit of

their employer and not deprive their employer of the advantage of their skills and abilities,

divulge confidential information, or otherwise cause harm to their employer.

Members and Candidates must not engage in any activity that would injure the firm, deprive it of

profit, or deny it of a Member or Candidate’s skills and abilities. Members and Candidates must

always put the interests of their clients before their employers.

However, Standard IV(A) does not require Members or Candidates to put their employer’s

interests before their own in all instances. Members and Candidates should enter discussions

with their employer about balancing personal and work responsibilities, especially if there is a

noticeable conflict.

Employer Responsibilities

Employers owe various duties and responsibilities to their employees. Members and Candidates

are encouraged to share a copy of the Code and Standards to their employers. This information

will educate employers about the responsibilities and ethical practices followed by a Member or

Candidate. Additionally, the Code and Standards serve as a reference for questioning employer

policies and practices.

Independent Practice

Members and Candidates are prohibited from engaging in independent activity that competes

with their employer’s business. Members and Candidates are permitted to start or enter a

business while employed.

Members and Candidates who plan to engage in independent practice for compensation must

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notify their employer of the:

Types of services they plan to offer;

Duration of the services; and

Compensation.

Members and Candidates should not render any services until they receive consent from their

employer.

Leaving an Employer

Members and Candidates must serve in the best interest of their employer even if they are due

to leave the firm. Members and Candidates must refrain from engaging in activities that would

conflict with the duty of loyalty to their current employers.

Actions permitted by a former or departing employee include:

Making arrangements to enter a competitive business or firm before terminating their

contract.

Using the skills and experience gained at their previous firm.

Contacting clients of their previous firm after leaving his or her employer if there is no

“non-compete” in place.

Using public information to contact former clients.

Actions prohibited by a former or departing employee include:

Soliciting existing or potential clients before leaving his or her employer.

The use or removal of work (in electronic or physical) performed for the employer.

Violating an enforceable non-compete.

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Use of Social Media

Members and Candidates should understand and comply with their firm’s policies regarding

acceptable social media communication with current and prospective clients. This is particularly

relevant when the communication concerns leaving their current employer. The best practice is

for Members and Candidates to have separate accounts for their personal and professional

activities.

Whistleblowing

Protecting the integrity of capital markets and the interests of each client is paramount. There

may be instances in which a Member or Candidate may need to violate the duty to employers in

order to act in the best interest of capital markets and their clients. Actions that violate a

Member or Candidate’s duty of loyalty are only permitted if the intent is to protect clients or the

integrity of capital markets.

Nature of Employment

Standard IV(A) – Loyalty applies to all employees. Members and Candidates should determine

whether they are employees or independent contractors to determine the applicability of the

standard. The nature of employment will be largely determined by the degree of control that the

employer has over the employee. The duties of a Member or Candidate, in an independent

contractor role, will be dictated by the written or oral agreement set by their employer.

Compliance Recommendations

Competition Policy

Members and Candidates should be aware of any prohibitions set by their employers on

engaging in similar services outside the firm. Members and Candidates should ensure that

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details of a non-compete agreement are fully understood.

Termination Policy

Members and Candidates should understand the termination policies of their employers.

Termination policies should include procedures on resignation, communication to clients and

staff regarding termination, and practices for transferring current work responsibilities.

Incident-reporting Procedures

Members and Candidates should be aware of their firm’s whistleblowing procedures and

encourage their firms to adopt industry best practices.

Employee Classification

Members and Candidates should understand their position in the firm. Firms are encouraged to

develop employee classification hierarchies.

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Application 1: Soliciting Former Clients

Judy Francis is an investment manager for several high-net-worth individuals. She is

frustrated by the working environment at EY Partners. Francis has notified her

employer of her intentions to leave the firm. Before her termination comes into effect,

Francis asks two of her biggest clients to move to her new employer Lynx Capital.

Her clients decline and maintain their relationship with her former employer.

After joining Lynx Capital, she contacts prospective clients that EY Partners was

soliciting, and she manages to get these clients to sign with Lynx. Additionally, she

gets in touch with current EY Partners clients using publicly available information.

Francis had not signed a non-compete agreement when she was employed at EY

Partners.

Which of Francis’ actions most likely violate Standard IV(A) – Loyalty?

A. Soliciting clients at EY Partners before her termination was in effect.

B. Signing EY Partners’ prospective clients after joining her new firm.

C. Contacting EY Partners’ current clients using publicly available information.

Solution

The correct answer is A.

Francis has violated Standard IV – Loyalty by soliciting clients before leaving her

former employer. Her actions are not in the best interest of her employer. Francis is

allowed to contact her former clients and her former employer’s prospective clients,

provided she did not sign a non-compete.

Application 2: Ownership of Completed Prior Work

Zachariah Davis has recently completed an unpaid internship at Zane Brokers.

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During his internship, he worked on automating trading reporting procedures. His

work involved developing and improving existing code. Davis has been hired as a

trading assistant at a different brokerage firm. His primary task is to establish

reporting procedures, similar to the work he did at Zane Brokers.

Which of Davis’ potential actions would least likely violate Standard IV(A) – Loyalty?

A. Copying the code he used at Zane without permission.

B. Using his experiences and knowledge at Zane to recreate the code at his new

employer with minor tweaks to fit his new employer's needs.

C. None of the above.

Solution

The correct answer is B.

Davis is permitted to use the experience and knowledge gained during his internship

at his new employer.

However, any work produced during his internship belongs to his employer. Using a

copy of the code without permission from his former employer would be a violation.

Note: The internship being unpaid is not relevant; Davis presumably used company

resources to develop the work product.

Application 3: Starting a New Firm

Craig Fisher currently works at Generous Finance – an impact investing fund. He is

planning to start a firm with his business partner. They have recently made an

application to secure a brokerage license to the relevant regulatory authorities.

Fisher has not notified his employer about his intentions of starting his own firm.

Neither Fisher nor his partner has solicited any clients at their current employers.

Has Fisher violated Standard IV(A) – Loyalty?

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 A. No.

B. Yes, because he has not notified his current employer about starting his firm.

C. Yes, because he is not allowed to take steps in setting up his firm before leaving

his employer.

Solution

The correct answer is A.

Fisher has not violated Standard IV(A) – Loyalty. His preparations in setting up his

firm do not conflict with his current obligations at his current employer. Fisher could

potentially violate Standard IV(A) if he made the preparations during office hours or

at his employer’s expense.

Application 4: Soliciting Former Clients

Gary Clark has recently joined Axe Corporation. Clark did not sign a non-compete at

his previous firm. He retrieves a copy of a client list on his personal laptop and

contacts several of his former clients.

Are any of Clark’s actions in conflict with Standard IV(A) – Loyalty?

A. Yes, he is not allowed to solicit clients at his former employer.

B. Yes, contacting clients from a client list obtained from his previous employer is

prohibited.

C. No.

Solution

The correct answer is B.

Clark has violated Standard IV – Loyalty by soliciting former clients through the use

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of a client list. Standard IV(A) does not prohibit former employees from contacting

clients at their previous firm. A Member or Candidate is not allowed to contact clients

through the use of a client list or any other material obtained from a previous

employer.

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LOS 46a: 4(B) Demonstrate a thorough knowledge of the CFA Institute
Code of Ethics and Standards of Professional Conduct by applying the
Code and Standards to specific situations

Members and Candidates must not accept gifts, benefits, compensation, or consideration that

competes with or might reasonably be expected to create a conflict of interest with their

employer’s interest unless they obtain written consent from all parties involved.

Members and Candidates are required to receive consent from their employer before accepting

compensation or benefits for services performed on behalf of their employer or services that

conflict with their employer’s interest. Written communication includes all communication that

can be documented.

Gifts and Additional Compensation

A Member or Candidate who receives a gift from his client for his past performance is required

to be disclosed to his employer to comply with Standard I(B) – Independence & Objectivity.

Note here that we’re referring to a standard seen previously.

A Member or Candidate who is due to receive additional compensation or benefits for his future

performance is required to receive consent from his employer to comply with Standard IV(B)

– Additional Compensation Agreements.

Compliance Recommendations

Members and Candidates should make a written report for their supervisor or compliance

department outlining any compensation or benefits received for services rendered. The details of

the report should be confirmed by the offering party.

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Application 1: Notification of Client Bonus Compensation

Samuel White is a senior portfolio manager at Ascot Capital. He manages the

investment portfolios of several high-net-worth individuals. His client, Susan Jenkins,

has proposed the following bonus:

“A fully paid luxury trip to Greece for your family that is contingent on beating the

return on the FTSE 100 over the following year.”

He receives written permission from his employer after making detailed disclosures

to his firm’s compliance department.

Another client of his, Davis Elliot, recently gifted White a set of golf clubs for his

superior performance over the year. White does not disclose this gift to his supervisor

or compliance department at his firm.

Has White violated Standard IV(B) – Additional Compensation Arrangements?

A. No, because he received written consent from his employer regarding the

bonus.

B. Yes, because he is not permitted to receive any form of additional

compensation.

C. Yes, because he fails to disclose the gift he received from Elliot.

Solution

The correct answer is A.

In this case, White has not violated Standard IV(B) – Additional Compensation

Arrangements. White received consent from his employer – the additional

compensation has been permitted.

However, White has violated Standard I(B) – Independence and Objectivity by failing

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to disclose the gift received from Elliot. For White to comply with Standard I(B), he

must disclose any gifts received for past performance.

Note: Candidates need to distinguish between a gift and additional compensation

agreements and the necessary disclosures required in both circumstances.

Application 2: Notification of Outside Compensation

Troy Mavis is a board member of Peak Animations. Davis does not receive any

monetary compensation for the duties performed in his role. However, he receives

complimentary access to Peak movie premieres and Peak Amusement Parks. Mavis

purchases Peak Animations stock for suitable client accounts. Mavis does not disclose

this arrangement to his employer. Mavis believes he does not need to disclose this

because he does not receive monetary compensation.

Has Mavis violated Standard IV(B) – Additional Compensation Agreements?

A. No, because he does not receive monetary compensation for his service on the

board.

B. Yes, because he fails to disclose the non-monetary benefits received for his

service on the board.

C. No, because his service as a board member does not conflict with his work

arrangements.

Solution

The correct answer is B.

Mavis is required to disclose any benefits (monetary or non-monetary) to his

employer for services rendered as a board member. The disclosure is required

because his service as a board member may present a conflict of interest, especially

because he handles client accounts that hold Peak Animations stock.

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LOS 46a: 4(C) Demonstrate a thorough knowledge of the CFA Institute
Code of Ethics and Standards of Professional Conduct by applying the
Code and Standards to specific situations

Members and Candidates must make reasonable efforts to ensure that anyone subject to their

supervision or authority complies with applicable laws, rules, regulations, and the Code and

Standards.

Members and Candidates with supervisory responsibilities must make reasonable efforts to

prevent and detect any violations of laws, rules, and regulations.

Any Member or Candidate that has a degree of control or influence over employees must

exercise supervisory responsibility. Members and Candidates are expected to understand the

Code and Standards and implement this knowledge in their supervisory responsibilities.

Members and Candidates in a supervisory role should inform the firm’s management of an

ineffective compliance system and recommend corrective measures. If a Member or Candidate is

unable to discharge their supervisory responsibilities due to the absence or inadequacy of the

firm’s compliance system, they should decline (in writing) any supervisory duties.

Compliance Recommendations

Recommendation for Members and Candidates

Members and Candidates are encouraged to recommend that their employer adopt a code of

ethics.

Once a code of ethics has been developed, Members or Candidates in a supervisory role should:

Distribute the contents of the code of ethics to the relevant employees.

Have continuous training programs regarding compliance policies.

Issue frequent reminders of the firm’s compliance procedures.

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 Set up a professional conduct evaluation for all employees.

Review employee actions to identify any compliance violations.

Take action to enforce compliance procedures once a violation has taken place.

If a violation is discovered, a supervisor should:

Respond promptly.

Investigate the scope of the violation.

Increase supervision or place limitations on the employee’s actions pending the

outcome of the investigation.

Periodically review and update compliance procedures to prevent future violations.

Recommendation for Firms

Restrict the activities of an employee under investigation.

Implement a code of ethics that consists of principle-based ethical concepts that are

applicable on a firm-wide basis (all employees). The code of ethics should be

complemented by compliance procedures and policies that are relevant to the firm.

Adequate compliance procedures should:

Be clearly written and tailored to the firm’s operations.

Be easy to understand.

Assign a compliance officer to implement the firm’s compliance procedures.

Detail the supervisory hierarchy and assign duties among supervisors.

Have a system of checks and balances.

Outline the scope of procedures.

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Outline permitted conduct.

Outline procedures for reporting violations and sanctions.

Implement incentives to promote ethical behavior.

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Application 1: Supervising Research Activities

Joy Silverstone, CFA is the head of research at KK Securities. She recently had a

meeting with her team of equity analysts regarding a change in her recommendation

of SenSen Motors. She is about to issue a report that downgrades SenSen Motors

from a buy to sell. KK Securities has no formal procedures on the dissemination of a

change in investment recommendations – there is an unwritten “trust” policy among

the group of analysts.

An analyst in her team, Ferdinand Glassman, proceeds to inform one of the firm’s

largest institutional investors about the change in the recommendation – before it has

been widely disseminated. The institutional investor proceeds to sell a portion of their

holdings in SenSen Motors.

Has Silverstone violated Standard IV(C) – Responsibility of Supervisors and Standard

III(B) – Fair Dealing?

A. She has violated both standards.

B. She has violated Standard IV(C) – Responsibility of Supervisors only.

C. She has violated Standard III(B) – Fair Dealing only.

Solution

The correct answer is B.

Silverstone has violated Standard IV(C) – Responsibility of Supervisors by failing to

implement procedures to prevent the premature dissemination of changes in

investment recommendations. As the head of research, she should ensure that KK

Securities has adequate procedures on the dissemination of investment

recommendations.

In this case, Glassman (not Silverstone) has violated Standard III(B) – Fair Dealing by

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giving one client preferential treatment. Standard III(B) – Fair Dealing requires that

Members and Candidates give all clients an equal opportunity to take investment

actions.

Application 2: Supervising Trading Activities

Fabien Edwards is a junior trader at Stevenson Brokerage. Edwards is primarily

responsible for executing large trades on behalf of Stevenson’s largest retail clients.

Francesca Duplass is the compliance officer responsible for monitoring the firm’s

trading activity. Both Duplass’ and Edwards’ bonus compensations are linked to the

trading volume generated over a financial year.

Duplass has noticed increased trading in the client accounts that Edwards handles.

She observes that block orders that could have been completed in one trading session

have been split over several trades. Duplass fails to investigate the increased trading

activity and does not bring this to the attention of the head of compliance.

Has Duplass violated Standard IV(C) – Responsibility of Supervisors?

A. No, because she is not directly responsible for the increased trading activity.

B. No, because she does not know the circumstances surrounding the increased

trading activity; therefore she does not need to investigate further.

C. Yes, because she fails to adequately review and investigate Edwards’ trading

activity.

Solution

The correct answer is C.

Duplass’s failure to investigate the ‘suspicious’ trading activity, especially when there

is an incentive to “over-trade” violates Standard IV(C) – Responsibility of Supervisors.

Duplass should be conscious of actual and potential conflicts of interest that may

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arise between his self-interest and discharging supervisory duties. In this case, it

appears that Duplass would benefit from failing to act appropriately in her

supervisory role.

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LOS 46a: 5(A) Demonstrate a thorough knowledge of the CFA Institute
Code of Ethics and Standards of Professional Conduct by applying the
Code and Standards to specific situations

Members and Candidates must:

1. Exercise diligence, independence, and thoroughness in analyzing investments, making

investment recommendations, and taking investment actions.

2. Have a reasonable and adequate basis, supported by appropriate research and

investigation, for any investment analysis, recommendation, or action.

The application of this Standard depends on the investment philosophy that the Member,

Candidate, or firm follows, the role the Member or Candidate plays in the investment

recommendation or decision process, and the resources and support offered by the Member or

Candidates’ employer. The factors highlighted will determine the rigor of research and the depth

of due diligence required.

Members and Candidates must make reasonable efforts to consider all relevant information

when arriving at investment recommendations. Members and Candidates may enhance

transparency by providing supplementary information that supports their investment

recommendations.

Defining Diligence and Reasonable Basis

Clients rely on the expertise and knowledge of Members and Candidates to inform their

investment decisions. Consequently, clients require assurance that Members and Candidates

make the required effort to support any investment recommendations. Members and Candidates

can provide greater transparency to their clients by communicating the breadth of information

used and the considerations taken to arrive at investment recommendations.

Some factors to consider while forming the basis of a recommendation include:

Global and national macroeconomic conditions.

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 The company’s historic operating and financial results.

Industry and sector conditions and stage of the business cycle of the firm.

Output and limitations of quantitative models.

Secondary and Third-Party Research

Members and Candidates are required to make a reasonable and diligent effort to determine

the quality and soundness of external research.

Secondary research is defined as research conducted by someone who works at the same firm as

the Member or Candidate. Third-party research is defined as research conducted by entities

outside the firm, e.g., investment banks, brokerages.

Factors to consider while evaluating the basis of external research includes:

Assumptions used.

The rigor of analysis performed.

Timeliness of data used.

Independence and objectivity of the author.

Members and Candidates should encourage the development and adoption of review policies of

external research providers to ensure that the quality of the research is maintained at a high

standard.

Quantitatively Oriented Research

There has been an increase in the use of quantitative models to arrive at investment

recommendations, stock selection, stock screening, and portfolio construction techniques.

Members and Candidates are required to know the parameters, assumptions, and limitations of

the models they use. In addition, Members and Candidates should incorporate a broad range of

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assumptions that capture the volatile nature of investments. The omission of negative outcomes

or tail events may misrepresent the potential range of values that an investment can take.

Developing Quantitatively Oriented Techniques

Members and Candidates involved in the development or oversight of quantitative models must

demonstrate a greater level of diligence than those who use the final model.

Members and Candidates involved in the creation of quantitative models must:

Understand the technical aspects of products and services.

Consider the time horizon of the data inputs used.

Fully understand the assumptions of the model.

Ensure the model captures a wide range of inputs (including negative market events).

Selecting External Advisers and Sub-advisers

Standard V(A) – Diligence and Reasonable Basis applies to the rigor of evaluation required when

selecting an external manager or subadviser to manage a particular investment mandate.

Members and Candidates directly responsible for hiring or working with external managers

should ensure that their firm has standardized criteria for reviewing external advisers.

Such criteria would include but are not limited to:

Reviewing the adviser’s code of ethics.

Understanding the adviser’s compliance procedures.

Reviewing the adviser’s investment philosophy and how strictly they comply with the

stated mandate.

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Group Research and Decision Making

Members and Candidates will often be part of a team that is tasked with producing a research

report or investment recommendation. The conclusions of a report may not reflect the sole

opinion of a Member or Candidate, but their names would be included in the report.

If the Member or Candidate has a differing opinion from the consensus view but believes that the

conclusions are based on a reasonable and adequate basis, the member does not need to

dissociate from the report. If, however, the Member or Candidate believes that the conclusions

are not founded on a reasonable basis, he or she should decline to have their name identified

with the report.

Compliance Recommendations

Recommendation for Members and Candidates

Conduct a periodic review of the quality of third-party research.

Review all assumptions.

Investigate the rigor of the analysis performed.

Evaluate the independence of independence and objectivity of recommendations.

Recommendation for Firms

Members and Candidates should encourage their firms to:

Have policies that require investment reports and recommendations have a basis that

can be supported as adequate and reasonable.

Develop guidelines for analysts that establish due diligence procedures to determine

whether a recommendation has a reasonable and adequate basis.

Develop measurable criteria for evaluating the quality of research.

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Develop guideline procedures that establish minimum levels of scenario testing for all

computer-based models.

Develop measurable criteria to assess external research providers.

Implement a standardized set of criteria for evaluating external advisers.

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Application 1: Group Research Opinions

Calvin Samuelson is a junior fixed-income analyst at FreeHouse Securities. He is

tasked with writing a report on the Fed interest rate expectations over the next two

quarters. Samuelson completes his report and submits it to the investment review

committee – as mandated by the firm’s procedures.

An excerpt from the reports states:

“With the economic slowdown caused by the COVID-19 pandemic, we expect that the

Fed will hold the Fed Funds rate steady at 0.25% over the next two quarters.”

The majority of the investment committee does not agree with Samuelson’s

conclusions. The committee overwhelmingly believes that there will be a strong

bounce back in economic activity and share concerns about unanticipated inflation.

They believe the Fed will react by increasing the benchmark rate by 25bps over the

next two quarters.

Samuelson does not agree with the consensus conclusion and believes that there is

no reasonable and adequate basis for the committee’s conclusions but proceeds to

leave his name on the report.

Has Samuelson violated Standard V(A) – Diligence and Reasonable Basis?

A. Yes, because his report is supposed to reflect his views and conclusions.

B. No, because the firm’s internal policies require a consensus opinion.

C. Yes, because he fails to dissociate from the report when he believes that there is

no reasonable basis for the conclusions of the report.

Solution

The correct answer is C.

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Samuelson has violated Standard V(A) – Diligence and Reasonable Basis by failing to

dissociate from the report. The conclusions of any research report or investment

recommendation are inherently subjective.

In this case, the investment committee may have valid reasons for conclusions that

differ from Samuelson’s. The firm is permitted to publish a report that substantially

different from Samuelson’s findings, provided that there is a reasonable and

adequate basis for its conclusions. If Samelson believes there is no reasonable basis

for the conclusions, he should dissociate from the report – by declining to have his

name on the published report.

Application 2: Reliance on Third-Party Research

Phillip Russo is the CEO of a mid-sized asset management firm. His firm relies heavily

on external research to inform the firm’s investment recommendations and actions.

Russo’s firm subscribes to a service from a reputable boutique research firm. The

research firm has recently been awarded a prize for its stellar research coverage of

the North American durable goods sector. Russo is confident in the rigor and quality

of the research published by the firm and does not perform any independent due

diligence to determine the quality and accuracy of data received. Russo always

attributes the source of the research and explains this to his clients.

Which of Russo’s actions are most likely a violation of the CFA Institute’s Standards?

A. None of his actions violate any standards.

B. His use of external research to inform the firm’s investment actions.

C. His failure to perform due diligence on external research.

Solution

The correct answer is C.

Russo has violated Standard V(A) – Diligence and Reasonable Basis by failing to

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perform due diligence on external research. Russo is permitted to use external

research, provided that he attributes the research to its original author or publishing

entity.

Application 3: Quantitative Model Diligence

Davidson Matthews is the head quantitative researcher at Core Technology Hedge

Fund. Matthews is under increasing pressure to improve the firm’s proprietary

trading algorithms. The existing models have produced impressive results in a bull

market but below average results in the current bear market.

Matthews reads several notable quantitative research blogs and publications. In one

piece of literature, he identifies missing factors that would improve the firm’s stock

screening algorithm. He immediately incorporates the missing variables into the

stock screening algorithm. Matthews shares the new algorithm with the firm’s

traders.

Has Matthews violated Standard V(A) – Diligence and Reasonable Basis?

A. Yes, because he failed to diligently research the impact of introducing new

factors into the model.

B. No.

C. Yes, because he is not allowed to draw inspiration from blog posts research

publications.

Solution

The correct answer is A.

Matthews has violated Standard V(A) – Diligence and Reasonable Basis by failing to

diligently assess the impact of the addition of new variables into the existing model.

Matthews is allowed to draw inspiration from blogs and research publications, but he

needs to perform the necessary research to determine the effect of these changes on

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the stock screening algorithm.

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LOS 46a: 5(B) Demonstrate a thorough knowledge of the CFA Institute
Code of Ethics and Standards of Professional Conduct by applying the
Code and Standards to specific situations46

Under Standard V(B), members and candidates are required to communicate comprehensively

and clearly with clients and prospective clients about various aspects of their services. These

disclosures include the nature and cost of services, the investment processes, and any risks or

limitations involved.

Members and Candidates must:

1. Disclose the Nature of Services and Costs: Clearly outline the services provided and

associated costs to clients and prospective clients.

2. Explain the Investment Process: Provide detailed information on the methodology used

for analyzing investments, selecting securities, and building portfolios, including any

significant changes to these processes.

3. Identify Risks and Limitations: Inform clients about any significant risks and limitations

associated with the investment process.

4. Use Reasonable Judgment: Highlight important factors in investment analyses,

recommendations, or actions, and communicate these factors to clients.

5. Distinguish Between Fact and Opinion: Clearly separate factual information from opinion

in investment analyses and recommendations.

Standard V(B) addresses the appropriate conduct required by a Member or Candidate when

communicating with clients and prospective clients. Clear and effective communication with

clients is essential in providing high-quality financial services. Frequent and timely information

assists clients in making well-informed investment decisions.

Members and Candidates should communicate the significant factors that inform an investment

recommendation. Additionally, Members and Candidates should clearly distinguish between

opinions and facts in the presentation of all recommendations.

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Disclosing Nature of Services and Information about Costs to
Clients and Prospective Clients

The CFA Institute Code and Standards aim to protect client interests by ensuring full disclosure

of services and costs, enabling informed decision-making. Standard V(B) requires members and

candidates to clearly outline the nature and costs of their services, fostering trust. Disclosures

must be accurate, timely, and updated if changes occur, covering all associated costs, including

those from third parties. Best practices include written disclosures and ongoing updates. Client-

facing professionals bear this responsibility, and must ensure firm policies meet these standards,

supplementing if necessary. Non-client-facing professionals are generally exempt from this duty.

Informing Clients of the Investment Process

Clients should understand the basic characteristics of any investment asset or product. This

knowledge will help a client judge the suitability of an investment (in isolation) and the impact of

the investment on the entire portfolio.

Members and Candidates should:

Wholly describe how the firm conducts its investment decision process.

Disclose the risks and limitations of the investment process.

Disclose any changes to the investment process (especially newly identified risks and

limitations).

Inform clients of expertise provided by external advisers.

Different Forms of Communication

All types of client communication, in all mediums (not only written reports or written

communications), are covered by this standard. Members and Candidates should ensure that

information is disseminated fairly regardless of the method of communication used.

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Identifying Risks and Limitations

To comply with this standard, Members and Candidates must:

Highlight the risks and limitations of any investment action or recommendation.

Adequately disclose market risks and risks involved when using complex financial

instruments.

Describe the limitations of the investment decision process e.g. liquidity and capacity

Members and Candidates are only responsible for informing clients about risks that are known

at the time of disclosure. Members and Candidates are not responsible for disclosing risks they

were unaware of at the time when a recommendation or investment action was taken.

Report Presentation

A Member or Candidate responsible for the preparation of a research report must include factors

that are important to the analysis and conclusions of the report. Investment recommendations

that are quantitatively driven must be supported by readily available source materials, e.g., data,

assumptions. Any changes in the applied methodology should be acknowledged and

disseminated.

Distinction between Facts and Opinions

Members and Candidates must ensure that they separate opinions from facts. In the case of

quantitatively driven analysis, members should distinguish between statistical “talk” and outline

any limitations of their analysis.

Members and Candidates should discuss the limitations and assumptions of any financial models

and processes that facilitate their analysis. Additionally, Members and Candidates should be

cautious when discussing the accuracy of the output generated by models or processes. The

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output of quantitative models are estimates of future outcomes and not concrete results.

Compliance Recommendations

The selection of disclosures of important factors in a research report is subjective. As such,

Members and Candidates should maintain records of their research and analysis and make

readily available reference material and supplementary information on request.

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Application 1: Opinion as Fact

Emmanuel Oluwo works as an oil and gas analyst at GeoField Consultancy Group. He

has been working on a report that attempts to assess the crude oil production

capacity of Naija Oil Corporation. His assessment will form part of his updated

investment recommendation.

Naija Oil Corporation has recently tapped a significant oil resource on the northwest

coast of Nigeria. Oluwo’s report includes his estimate (through a series of

calculations) of the expanded production capacity of the newly tapped oil field.

In his conclusion, Oluwo states:

“Based on the increase in the production capacity of 500,000 barrels per day, I

recommend that Naija Oil Corp is a strong BUY.”

Has Oluwo violated Standard V(B) – Communication with Clients and Prospective

Clients?

A. Yes, because he presents his estimate of the increase in capacity of 500,000

barrels per day as a fact and not opinion.

B. No, because he is permitted to include any relevant information in his

research report.

C. Yes, because he does not provide a detailed explanation about the

methodology applied in his estimate of the production capacity of the new oil field.

Solution

The correct answer is A.

Oluwo has violated Standard V(B) – Communication with Clients and Prospective

Clients. Oluwo’s calculation of the increase in production is a quantitative estimate

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(an opinion) and not fact. Opinions must clearly be distinguished from facts in

research reports. Oluwo should have details about his estimation methodology

prepared and available on request.

Application 2: Notification of Fund Mandate Change

Regis Partners is a fund manager that specializes in large-cap European stocks. One

of the key screening criteria is selecting stocks that have a minimum market

capitalization of EUR 5 Billion. The Eurozone’s economic outlook and growth

prospects have diminished over the past five years, and Regis has altered the growth

rate estimates for several of the firms found in its ‘Euro large-cap growth’ fund.

In an attempt to broaden the investment universe of the fund, Regis’s CFO changes

the permitted market capitalization to EUR 2.5 Billion. Regis CFO ensures that the

firm’s marketing and promotional material include the change in the market

capitalization criteria and informs all prospective clients about the updated

investment process.

Are any of Regis’s CFO actions in conflict with Standard V(B) – Communication with

Clients and Prospective Clients?

A. None of his actions conflict with Standard V(B).

B. Yes, his failure to inform the firm’s existing clients of the change in the

market capitalization.

C. Yes, he is not permitted to change the screening criteria of the fund without

notifying the firm’s existing clients.

Solution

The correct answer is B.

To comply with Standard V(B) – Communication with Clients and Prospective Clients,

Regis’s CFO must inform all potential and existing clients about the change in the

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investment process.

Regis’s CFO took appropriate but incomplete measures in communicating the change

in the fund’s investment mandate. Communicating the change in the mandate is a

necessary step in providing clients the information required to judge the suitability of

their investment in Regis’s Euro large-cap growth fund.

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LOS 46a: 5(C) Demonstrate a thorough knowledge of the CFA Institute
Code of Ethics and Standards of Professional Conduct by applying the
Code and Standards to specific situations

Members and Candidates must develop and maintain appropriate records to support their

investment analyses, recommendations, actions, and other investment-related communications

with clients and prospective clients.

Members and Candidates must retain records that support their recommendations, investment

actions, or conclusions.

Examples of supporting documents that assist in meeting the Standard(1) include, but are not

limited to:

Personal notes from meetings with the covered company.

Press releases or presentations issued by the covered company.

Computer-based model outputs and analyses.

Computer-based model input parameters.

Risk analyses of securities’ impacts on a portfolio.

Selection criteria for external advisers.

Notes from clients from meetings to review investment policy statements.

Outside research reports.

(1) The list is taken verbatim from the CFA curriculum.

The format and type of information communicated does not absolve a Member or Candidate from

maintaining records of the information used in his or her analysis. Both traditional and new

media (social media) are covered by this Standard.

New media formats include:

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 Blogs.

Texts.

Communication through Twitter and Facebook.

Emails.

All records created by a Member or Candidate are property of the firm. If a Member or

Candidate leaves his employer, he is prohibited from making copies of any supporting

documentation or work product without the express permission of their employer.

Members and Candidates should follow all local regulations related to record retention.

Compliance with regulatory or firm requirements on record retention satisfies Standard V(C). In

the absence of any regulatory or firm policies, the CFA Institute recommends maintaining

records for at least seven years.

Compliance Recommendations

With no regulation or firm policies on record retention, firms should maintain records for at least

seven years.

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