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CFA1: Ethics

Standards of Professional Conduct

Market > Client > Employer > Self

I. Professionalism

A. Knowledge of law

  • comply with the stricter/st of local law and the Standards
  • knowingly violating other Codes and Standards
  • dissociate from the activities if cannot be remedied
  1. seek advice
  2. dissociate
  3. report to 3rd party

B. Independence and Objectivity

  • travel expenses and compensation for research report OK if disclosed in report
  • gift OK if decision not affected and disclosed
  • recommended to pay own air and hotel expenses

C. Misrepresentation

  • mislead over/understate
  • presenting material developed by another without acknowledgment
  • factual data from recognized statistical reporting service need not be cited
  • OK to make truthful statements that investment such as treasury fund as guaranteed

D. Misconduct

  • problematic if disturbs work or performance
  • ok if not impacted work
  • misleading or vague statements/recommendations
  • prohibits general lying, cheating, stealing, or any dishonest conduct

II. Capital Markets

A. Material nonpublic information

  • price distorting practices or false rumors

B. Market manipulation

  • use of nonpublic information that can affect market price
  • Mosaic theory : no violation if material*public + nonmaterial*nonpublic information used

III. Duties to Clients

A. Loyalty, Prudence and Care

  • solely, exclusive, client first
  • fiduciary duty to those persons and interests by whom the duty is owed
  • does not require all proxy voting
  • soft dollars: use of research and investment decision-making services provided by a third party in return for commission business on client trading
    • acceptable if helps service to clients, strictly prohibited for personal usage
    • pension funds: duty of loyalty to the beneficiaries, not the manager

B. Fair dealing

  • no diversification
  • overgenerous allocation of "hot" issues
  • recommended that members maintain a list of clients and their holdings, develop written procedures for trade allocation, review accounts systematically to ensure that no client is given preferred treatment

C. Suitability

  • based on clients' risk and return objectives
  • look for overall effect on the whole portfolio, need not be applied on an issue-by-issue basis
  • detailed analysis of the investment
  • Investment Policy Statement should update client information at least annually

D. Performance presentation

  • disclosure in detail
  • supporting documents
  • best method to meet obligation is compliance with the GIPS

E. Preservation of Confidentiality

  • unless illegal, required by law, or with client permission
  • report to outside counsel first

IV. Duties to Employers

A. Loyalty

  • corporate material stays unless permission granted from previous employer
  • non-compete agreement
  • former employees not prohibited from contacting clients of previous firm, as long as the contact information does not come from the records of the previous employer
  • may reproduce model from memory without explicit permission if can be done with supporting documentation in compliance

B. Additional Compensation arrangement

  • written permission from employer required before accepting an offer of compensation

C. Responsibilities of Supervisors

  • adopt code of ethics
  • increasing suspicion, limit employees' activities, increased supervision, investigation
  • speaking to the employee to determine the extent of the violations and receiving assurances not enough
  • if compliance procedures seem inadequate, decline in writing supervisory responsibility until adequate procedures are adopted

V. Investment Analysis, Recommendations

A. Diligence & Reasonable basis

  • no copycat
  • reasonable and independent
  • analysis and recommendation
  • review assumptions used and evaluate the objectivity of externally generated research reports

B. Communication with Clients

  • disclose all supporting materials
  • should provide all available information if requested
  • future events should not be presented as certainties
  • disclosure to all clients and prospects of the firm
  • properly distinguish between facts and opinions

C. Record retention

VI. Conflicts of Interest

A. Disclosure of conflicts

  • conflicts between clients' and employers' interests
  • reveal anything that would interfere with clients' interests
  • disclose to clients of any ownership in securities recommended
  • disclosure to both clients and employer of all matters that could interfere with objective recommendations

B. Priority of transaction

  • limit activities on own account
  • personal transaction after disclosure to all clients
  • prohibited front-running: purchase or sale of securities in advance of client trades to take advantage of knowledge of client

C. Referral fees

  • OK if disclosed all possible, outside impacts
  • disclose to clients any consideration or benefit received or delivered to others for the recommendation
  • to allow clients to evaluate any partiality shown in making referrals

VII. Responsibilities of CFA member

A. Conduct as members

  • misrepresentation forbidden
  • cheating on any examination prohibited

B. Avoid misrepresentation of CFA

  • citing an expected completion date->violation

Global Investment Performance Standards

  • apply to investment management firms and serve their existing and prospective clients
  • created to reduce ambiguity of performance reporting among investment firms
  • verification process encouraged, but not required, to make a specific verification disclosure
  • firms cannot alter historical performance records of composites simply because of a reorganization of the firm
  • does not cover the professional qualifications for managing assets at a firm claiming compliance
  • 8 Major sections
  1. Fundamentals of compliance
  2. Input data - consistency
  3. Calculation methodology - uniformity
  4. Composite construction - asset-weighted, groups of portfolios that represent a similar investment strategy
  5. Disclosures
  6. Presentation & reporting - GIPS compliant
  7. Real estate
  8. Private equity
  • requirement to supply GIPS compliant history for minimum of 5 years or since inception if in existence for less than 5 years
  • firm must add annual performance upto 10 years minimum
  • include all fee-paying, but not non-fee-paying accounts in composites
  • apply on a firm-wide basis
  • document in writing the policies and procedures used for compliance
  • specifically define what constitutes the firm that is claiming compliance
  • follow local law and disclose the conflict between local law and GIPS
  • total firm assets must include all accounts