2020 L1 Ethics

February 27, 2020
Ethics and Trust in the Investment Profession
a. explain ethics;
b. describe the role of a code of ethics in defining a profession;
c. describe professions and how they establish trust;
d. describe the need for high ethical standards in investment management;
e. explain professionalism in investment management;
f. identify challenges to ethical behavior;
g. distinguish between ethical and legal standards;
h. describe a framework for ethical decision making.
Prepared exclusively for Matthew Maselle ,matthewmaselle@gmail.com

Transaction: 0066205454,
February 27, 2020
Ethics
LOS a
→ Encompass a set of moral principles and rules of conduct that -explain
provide guidance for our behaviors Pg-1
- Moral/ethical principles: beliefs regarding what is good, acceptable or

obligatory behavior and what is bad, unacceptable or forbidden behavior
- May be individual as well as shared beliefs regarding standards of behavior

expected or required
- ethical conduct: - behavior that follows moral principles

- balances self-interest with direct/indirect consequences
of behavior on others
e.g./ honesty, fairness or justice, diligence, respect for the rights of others
LOS a
→ Code of ethics/ a codified guide that communicates an
-explain
organization’s/profession’s expectations regarding member behavior Pg-2
→ Standards of conduct - established benchmarks that clarify or
enhance a group’s code of ethics (minimally acceptable behavior)
→ Violations/ - can harm the community’s reputation both externally
& internally
- to protect innocent members (limit potential harm) violations are
investigated - repair any damage
- discipline the violator
- revoke membership

February 27, 2020
Ethics & Professionalism
- a profession is/ based on specialized knowledge and skills LOS b

-describe
based on service to others
Pg-3
practiced by members who share and agree
to adhere to a common code of ethics
- in any given profession, a code of ethics communicates the shared
principles and expected behaviors of its members
- provides guidance to members
members of profession
- generates confidence among
clients/general public
- standards of conduct enhance and clarify the code of ethics

- rules based - more narrowly defined
principles-based - usually applied to specifics
(apply to all members at all times) (individuals, circumstances)
Professionalism in Investment Mgmt.

LOS c
⇒ Profession → an occupational group that has specific education,
-describe
expert knowledge and a framework of practice and behavior Pg-4
that underpins community trust, respect and recognition
→ Driving forces
Individuals - see and advantage in
Governments
working as a professional
& Regulators Profession
- encourage the formation Clients - a desire to work with
of an ethical relationship between professionals
professionals and society at large
clients
→ Primary goal → establish trust among
society
benevolence competence

February 27, 2020
LOS c
1/ Professions normalize practitioner behavior - codes and
-describe
standards of behavior Pg-5
2/ Professions provide a service to society - support economic activity

by encouraging trust in the industries they serve
- professionals advocate for higher educational and ethical standards in
the industry
3/ Professions are client focused - place the integrity of the profession and
the interests of the clients above their own personal interests
4/ Professions have high entry standards - thus membership is a signal to the

market
5/ Profession possesses a body of expert knowledge
6/ Professions encourage and facilitate continuing education

- continuing professional development
LOS c
7/ Professions monitor professional conduct - monitoring & imposition
-describe
of sanctions on members Pg-6
8/ Professions are collegial
9/ Professions are recognized overseeing bodies - not-for-profit organizations

emphasizing excellence, integrity and public service
10. Professions encourage the engagement of members - through volunteer

efforts to advance the profession and engage with peers
→ investment management is a relatively young profession LOS e

• Public understanding, recognition by employers and regulators -explain
is still developing
- investment management profession meets most, but currently not all
of the expectations of a profession
⇒ CFA Institute as an Investment Management Professional Body

February 27, 2020
⇒ Expectations: honesty, integrity, altruism, continuous improvement, LOS e

excellence, loyalty, and respect for colleagues, employers -describe
Pg-7
and clients
- uphold the reputation of their profession
- be responsible, accountable, reliable
- duty to be honest and open in dealings
- acknowledge mistakes promptly, learn from them, correct them
- ethical dilemmas → should not avoid responsibility for taking action
Investment Industry & Ethics
- enhances allocational efficiency LOS d

-describe
- investors and society benefit when capital flaws to
Pg-8
borrowers that can create the most value
- capital flows more efficiently when financial market participants
are confident that all parties will behave ethically (builds &
fosters trust)
- investors/borrowers more willing to take risks
- higher trust lowers the cost of capital for borrowers
- financial markets/investment industry are built on trust
- investors entrust their assets to financial firm
- nature of product/service
- indirect & intangible
- reputation effect - clients are attracted to firms with trustworthy
reputations

February 27, 2020
Challenges to Ethical Conduct

LOS f
1. Overweighting our own ethical disposition
-identify
- it is not so much what we believe about ourselves, Pg-9
it is what others believe about us
- I am honest vs. do others see me as honest?
2. Underweighting the situational influences
external factors that shape our

thinking, decision making & behavior
- money & prestige
- loyalty - organization, peers
3. Limitations to organizational compliance

- creates rule followers – check the boxes
- insufficient for ensuring ethical decision making
Ethical vs. Legal Standards
LOS g
-distinguish
goes beyond what is legally required Pg-10
Legal both Ethical (encompasses correct behaviour)
laws and regulations - vary across countries/jurisdictions

- usually insufficient to ensure ethical behavior

February 27, 2020
Ethical Decision-Making Frameworks

LOS h
- frameworks are designed to facilitate the decision-making process
-describe
- see a problem from multiple perspectives -apply
- identify issues that may not have been considered Pg-11
otherwise
- increase the ability (and motivations) to act ethically
e.g./ Identify - relevant facts, stakeholders and duties owed,

ethical principles, conflicts of interest
Consider - situational influences, additional guidance, alternative
actions
Decide and Act
Reflect - was the outcome as anticipated? Why/Why not?

February 27, 2020
Code of Ethics and Standards of Professional Conduct
a. describe the structure of the CFA Institute Professional Conduct Program

and the process for the enforcement of the Code and Standards;
b. state the six components of the Code of Ethics and the seven Standards of
Professional Conduct;
c. explain the ethical responsibilities required by the Code and Standards,

including the sub-sections of each Standard.

February 27, 2020
Professional Conduct Program
- all members + candidates (M/C) are required to comply with LOS a

-describe
the Code & Standards
CFA
Board of Governors volunteers
oversight (CFA charterholders)
Professional Conduct Disciplinary Review
Program Committee
(PCP) (DRC)
responsible for the enforcement of

the ‘Code’ and ‘Standards’
Conduct inquires may originate from: LOS a

-describe
1) M/C self-disclosure on the annual
Professional Conduct Statement
Disclose: civil litigation
criminal investigations
subject of a written complaint
2) written complaints received by the Professional Conduct staff
3) CFA staff through media, regulatory notices
4) exam proctors
5) post-exam behavior (online disclosure of confidential exam material)

February 27, 2020
LOS a
- inquiry initiated/
-describe
- request for a written explanation from the M/C
- interviews with M/C, complaining party, other relevant 3rd parties
- collecting documents/records
- may result in/

· no action
· issue a cautionary letter
· continue to disciplinary action
if the M/C rejects the result, goes to the DRC

LOS a
Sanctions/ · public censure -describe
· suspension of membership and use of the CFA designation
· revocation of the CFA Charter
· candidates ⇒ suspension/prohibition from further participation
Adoption of the Code and Standards/

- apply to M/C
- firms are encouraged to adopt (also non-members)
“So-and-so claims compliance with the CFA Institute Code of Ethics and
Standards of Professional Conduct. This claim has not been verified by
CFA Institute”

February 27, 2020
Code & Standards ⇒ individual investment professionals LOS a

-describe
Asset Manager Code of Professional Conduct ⇒ drafted
especially for firms
Why Ethics Matters/
a set of moral principles or rules of conduct
that provide guidance for our behavior when it affects others
Self Interest vs. Direct/Indirect

Consequences to Others
members
- protects integrity of
firms
profession
markets
Six + Seven
LOS b
Code of Ethics/
-state
➀ act with integrity, competence, diligence, and respect and
in an ethical manner with:
the public
clients (current & prospective)
employers
employees
colleagues
➁ Place the integrity of the investment profession and the interest
of clients above their own personal interests

February 27, 2020
LOS b
Code of Ethics/
-state
➂ Use reasonable care and exercise independent professional
judgement when conducting investment analysis, making
investment recommendations, taking investment actions
➃ Practice, and encourage others to practice, in a professional and

ethical manner that will reflect credit on themselves and the
profession
Code of Ethics/ LOS b

➄ Promote the integrity and viability of the global capital -state
markets for the ultimate benefit of society
➅ Maintain and improve professional competence and strive to maintain

and improve the competence of other investment professionals
Standards of Professional Conduct/ LOS b, c

-state
1. Professionalism
-explain
A. knowledge of the Law
B. Independence and Objectivity
C. Misrepresentation
D. Misconduct
2. Integrity of Capital Markets

A. Material Non-public Information
B. Market Manipulation

February 27, 2020
LOS b
Standards of Professional Conduct/
-state
3. Duties to Clients
A. Loyalty, Prudence and Care
B. Fair Dealing
C. Suitability
D. Performance Presentation
E. Preservation of Confidentiality
4. Duties to Employers
A. Loyalty
B. Additional Compensation Arrangements
C. Responsibilities of Supervisors
Standards of Professional Conduct/ LOS b

-state
5. Investment Analysis, Recommendations & Actions
A. Diligence and Reasonable Basis
B. Communication with Clients and Prospective Clients
C. Record Retention
6. Conflicts of Interest
A. Disclosure of Conflicts
B. Priority of Transactions
C. Referral Fees
7. Responsibilities as a CFA M/C

A. Conduct as M/C in the CFA program
B. Reference to CFA Institute/Designation/Program

February 27, 2020
Guidance for Standards I-VII
a. Demonstrate a thorough knowledge of the CFA Institute Code of Ethics and

Standards of Professional Conduct by interpreting the Code of Standards in
various situations involving issues of professional integrity;
b. Recommend practices and procedures designed to prevent violations of the

Code and Standards.

February 27, 2020
Professionalism
A. Knowledge of the Law/

- Comply with all applicable laws, rules, and regulations of
any government, regulatory organization, licensing agency or
professional association governing their professional activities
- in the event of conflict, comply with the more strict
law or regulation
- must not knowingly participate or assist in and must
dissociate from any violation of such laws, rules or regulations
A. Knowledge of the Law/ Guidance

• m/c must understand the applicable laws/regulations of the
countries/jurisdictions where they engage
• m/c must comply with laws/regulations that directly govern their
profession/activities
• m/c should know their firm’s policies/procedures for assessing compliance
guidance
• stay up to date ⇒ regulations change

C/S vs. Applicable Laws/
- when they require different conduct, must follow the stricter
e.g. NS – no laws LS – less strict MS – more strict

1) live in NS, do business in LS C/S Regardless
2) live in NS, do business in MS MS of situation,
3) live in LS, do business in NS C/S choose C/S
4) live in MS, do business in NS or LS MS unless law
5) live in LS, do business in MS MS is MS

February 27, 2020

Participation in or Association with Violations by Others/
• m/c are responsible for violations they knowingly participate
in or assist
• if m/c believes (reasonable grounds) violations are or will occur,
must dissociate (or separate) from the activity (may involve resignation)
• report to employer/compliance
• step away
• report to CFA

Investment Products & Applicable Laws/
• m/c involved in creation of products/services should:
understand laws/regs. of country of origination & of expected
sale and ensure their distributors also abide by applicable laws/regs.
Compliance – m/c
1. Stay informed
2. Review procedures (compliance)
3. Maintain current files (laws, statutes, regulations)

Compliance
- seek the advice of legal/compliance
- dissociate
• Firms/
• Develop/adopt a code of ethics
• Provide information on applicable laws
• Establish procedures for reporting violations

• m/c must use reasonable care and judgment to achieve and
maintain independence and objectivity in their professional activities
• m/c 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

February 27, 2020
B. Independence and Objectivity/ Guidance

• m/c should avoid real/perceived situations that could cause
a loss of independence or objectivity in recommending investments
or taking investment action (extends to social situations)
• modest gifts/entertainment acceptable
• if from a client, should disclose to employer
- considered supplementary compensation
• m/c personally responsible for maintaining
independence/objectivity (research, recomm., actions)
- true opinions free from bias

⇒ Investment Banking Relationships
• Pressure to issue favourable research reports on current/prospective
inv. banking clients
• Analyst should not be coerced/enticed into issuing research that
does not reflect their true opinions
• ‘firewalls’ must be managed
(between inv. banking & research)
- Separate reporting structures
- Compensation that rewards objectivity and accuracy

⇒ Public Companies
• Pressure to issue favourable reports by the companies they follow
• Negative views may make it difficult to get access
(mgmt., conference calls)
⇒ Buy-side clients
• Port. mgrs. may not want negative opinions released
(or at least a warning)
• Port. mgrs. (may also be CFA holders) must not interfere with
research objectivity (directly/indirectly)

February 27, 2020

⇒ Fund Mgr. & Custodial Relationships
• m/c who are responsible for selecting PMs & custodians
must appear independent
⇒ Credit Rating Agency Opinions
• m/c at rating agencies must report without undue influence
from the client co.
• m/c should understand this conflict if consumers of research
⇒ Issuer-paid research
• m/c must disclose potential conflicts of interest including nature
of the compensation (flat fee or options/warrants)

⇒ Travel Funding – introduces conflict, also must consider the effect
of context on objectivity
- Analysts should use commercial travel at their/firm
expense (avoid the appearance)
- if available
⇒ Performance Measurement & Attribution
• For those working within a firm’s investment performance
measurement department reporting on company run fund
performance

⇒ Influence during the Manager Selection/Procurement Process
• m/c must not solicit gifts, favours, donations from the target
hires (if in a position to do so)
• should also refuse gifts
• if on the other end (being considered) must not use gifts or favours
⇒ Don’t be influenced & don’t influence
(both covered by Standard IB)

February 27, 2020

Recommended Procedures for Compliance/
➀ Protect the integrity of opinions
- every research report reflects the unbiased opinion
of the writer
➁ Create a restricted list
- no coverage if adverse opinion is not welcomed
➂ Restrict special cost arrangement
- no payment/reimbursement by any corporate issuer
➃ Limit gifts – token items only
- business-related entertainment

Recommended Procedures for Compliance/
➄ Restrict Investments
- such as in IPSs/private placements
➅ Review procedures – supervisory/review procedures
related to personal investments
➆ Independence Policy – written policy about the independence
& objectivity of research
- research analysts not supervised by potential
influencing department
C. Misrepresentation
• m/c must not knowingly make misrepresentations relating to
investment analysis, recommendations, actions or other
professional activities
Guidance/
• Any written untrue statement or omission of fact
• Any false/misleading statement
(oral, written, electronic)
• m/c should not guarantee investment performance
(unless part of the product)

February 27, 2020
C. Misrepresentation/ Guidance/
⇒ Impact on Investment Practice
m/c
• must not misrepresent any aspect of their practice, credentials,
qualifications, performance record
• exercise care/diligence when using 3rd party information
• disclose intended use of external managers and must not claim their
performance as their own
⇒ Performance Reporting
m/c
• should not misrep. the success of their performance record
(using noncomparable benchmarks)
• Should use appropriate benchmarks
1C. does not
for performance and fee calculation actually require
• Should provide accurate and reliable a benchmark to
• security pricing to clients be provided
⇒ Omissions
- any data point – model input
- composite development
⇒ Social Media
m/c
• same information as allowed to distribute to clients
(current/potential)
• all communication through SM adhere to the C/S
• anonymity is no release from obligations

⇒ Plagiarism
• Practice of copying, using in substantially the same form,
materials prepared by others without acknowledging the source
- claiming research as your own
- using excerpts verbatim (or slight changes)

February 27, 2020
⇒ Plagiarism
- Citing quotations as from ‘leading analyst’ without
specific reference
- Presenting statistical estimates/forecasts prepared by
others with citation but without statements of limitations
that may have been used
- using charts/graphs without stating source
- copying proprietary computerized spreadsheets/algorithms
without cooperation or authorization of creators
⇒ Plagiarism
- ok to distribute 3rd party reports, even to precis those reports
- extends to oral communication, use of audio/video media,
electronic media
⇒ Work completed for Employer
- may use previous internal research
(property of the firm)
- may not simply reissue a previously released report solely
under their own name
C. Misrepresentation/
Recommended Procedures for Compliance
• Factual presentations
- firms can provide guidance for written/oral communication
- designating who can speak on behalf of the firm
• Qualification Summary – provided as part of the presentation
• Verify outside information
• Maintain webpages – monitor materials posted
C. Misrepresentation/
• Plagiarism Policy
• Maintain copies of source material (every reference)
• Attribute quotations (projections, tables, statistics)
• Attribute summaries (paraphrases or summaries)

February 27, 2020
D. Misconduct
• m/c must not engage in any professional conduct involving
dishonestly, fraud, or deceit or commit any act that reflects
adversely on their professional reputation, integrity, or competence
⇒ Guidance
• Different from 1A. – legal/regulatory
• 1D. – all conduct that reflects poorly on the integrity/reputation
of the m/c
• Conduct that damages trustworthiness or competence
- abusing alcohol/drugs during business hours, personal
bankruptcy brought about by fraudulent/deceitful business
conduct
D. Misconduct
⇒ Guidance – even the absence of appropriate conduct or the
lack of sufficient effort (relying on someone else)
⇒ Recommended Procedures for Compliance
• Code of Ethics
- develop/adopt, to which every employee must subscribe
• List of Violations
- plus associated disciplinary actions
• Employee references
- check those given, plus others
Integrity of Capital Markets

• m/c who possesses material non-public information that could
affect the value of an investment must not act or cause others
to act on the information
Material ⇒ if its disclosure would likely have an impact on the price
of the security
• If reasonable investors would want to know the information
before making an investment decision
i.e./ earnings, M&A, change in assets, innovations, discoveries,
customer/supplier changes, mgmt. changes, changes in auditor opinion,
defaults, bankruptcy, legal disputes, large block orders

February 27, 2020

• Test – consider the source and likely effect
Less reliable, less likely more ambiguous, less likely
- if the price effect is unclear, may not be considered material

Non-public ⇒ information is non-public until it has been made available
to the public
- selectively disclosed by a corporation to a small group
of investors or analysts
its ok to get it, but not to act on it

⇒ Mosaic Theory • Analysis of public May lead to
information a conclusion
• Save and
+ that may be
document all
• Analysis of nonmaterial material
research
non-public info non-public
⇒ Social Media
• m/c should verify that info from here is publicly available
from another source
• if you distribute info with SM, make sure any regulatory filings
have been made

⇒ Using Industry Experts
• m/c may pay for expert insight, but not for confidential
information the expert may be privy to
⇒ Investment Research Reports
⇒ Analyst effect ⇒ report may move markets
• Since analyst is not a company insider and did not use material,
non-public info, report does not have to be made public
before sharing

February 27, 2020

1. Achieve public dissemination
- encourage the issuer to make the information public
2. Adopt compliance procedures
- review of employee and proprietary trading
3. Adopt disclosure procedures
- designed to ensure that information is disseminated equitably

4. Issue press releases
5. ‘Firewall’ elements – within firms
Information barrier
- interdepartmental communication
- review of employee trading
(watch, restricted, rumor lists)
6. Appropriate interdepartmental communication
- formalized
7. Physical separation of departments
- and files

8. Prevention of personnel overlap
- inv. banking vs. corp. fin.
- sales vs. research
9. Report system – have an information barrier in place
10. Personal trading limitations
- by employees, reports of trading activity and for those
made for the benefit of family members
- use of restricted list

February 27, 2020

11. Record Maintenance
- written records of communications among departments
12. Proprietary trading procedures
- restrictions will depend on the nature of the trading
13. Communication to all employees
- compliance policies and guidelines
- proper training
• m/c must not engage in practices that distort prices or artificially
inflate trading volume with the intent to mislead market participants
- disrupts information content of prices, lowers investor confidence
- includes 1) dissemination of false/misleading information
2) transactions that deceive or would be likely to mislead
market participants by distorting the price-setting mechanism
of financial instruments
⇒ Information-based manipulation
e.g./ spreading false rumors to induce trading by others
(pump and dump)
⇒ Transaction-based manipulation
• Actions that affect the pricing of a security
e.g./
• giving the impression of activity ⇒ wash trades
• securing a dominant/controlling position in a financial asset to
exploit and manipulate the price of a related derivatives ⇒ cornering
• Standard 2B excludes legitimate trading strategies
The key is intent
e.g. I own 2 million shares of ABC. I am going to sell them. I am going to
move the price. I begin to buy puts on ABC before I sell. On expiration day,
I sell hard into the close all that I can
Manipulation? material non-public Info? Deceitful? Dishonest?

February 27, 2020
Duties to Clients
A. Loyalty, Prudence, Care

• m/c has a duty of loyalty to their clients and must act with
reasonable care and exercise prudent judgment
• m/c must act for the benefit of their clients and place their
clients’ interests before their employer’s or their own
- in some jurisdictions, duty of care may be fiduciary (i.e. legal req)
⇒ 3A is not a substitute for any legal obligation
As per 1A ⇒ more strict obligation applies

- if m/c has custody (direct/indirect access to funds) of client assets,
heightened level of responsibility
⇒ Identifying the Actual Investment Client
- in short ⇒ the beneficiary
e.g. pension plans & trusts, client is not the person who hires
the PM, clients are the beneficiaries of the fund
- may be no beneficiary (i.e. index fund)
- decisions do not have to be based on beneficiary
requirements, only to the mandate

⇒ Developing the Client’s Portfolio
- suitability
- disclose all potential conflicts of interest to the client
- client guidelines are followed
- decisions are judged in the context of the total portfolio
(∴ duty is satisfied w.r.t. a particular investment)
⇒ Soft Commission Policies
- payment of higher brokerage commissions to purchase
goods/services that don’t benefit the client (disclosure)

February 27, 2020

⇒ Soft Commission Policies
• Directed brokerage ⇒ client directs manager to purchase
goods/services for the client (not a violation of 3A)
• Still must get best execution/best price
⇒ Proxy Voting Policies
- discloser of when/how proxies are voted
⇒ Recommended Procedures for Guidance
• Regular Account Info
- quarterly reporting (funds, securities, transactions)
- custody disclosures
- client asset segregation/separation

- Client Approval – when in doubt about course of action
- Firm Policies
• Follow all applicable laws/rules
• Establish the investment objectives of the client
• Consider all info when taking actions (suitability – client, security,
portfolio)
• Diversify
• Regular reviews (investments ~ objectives)
• Deal fairly with all clients w.r.t. investment actions
(e.g. allocating trades)

- Firm Policies
• Disclose conflicts of interest
• Disclose compensation arrangements
• Vote proxies
• Maintain confidentiality
• Seek best execution
• Place client interests first

February 27, 2020
B. Fair Dealing
• m/c must deal fairly and objectively with all clients when providing
investment analysis, making investment recommendations, taking
investment action, or engaging in other professional activities
Fairly ≠ equally; fairly means equitably
Fairly ⇒ m/c must not discriminate against any clients
(disseminating recommendations, taking actions)
- clients may be at different levels of service and fees
(service levels/fees disclosed)
these must not result
(available to all clients)
in unfair treatments
B. Fair Dealing
⇒ Investment Recommendations
• Any opinion expressed by a m/c in regard to purchasing, holding,

or selling an investment
• May be disseminated to customers/clients only or to anyone outside
• All clients must have a fair opportunity to act on the recommendation
• Must prevent selective/discriminatory disclosure
• Clients should be aware of the type of communication they will receive
B. Fair Dealing
⇒ Investment Recommendations
• Changes in recommendations more critical than initial ones
• Communicated to all current clients, especially those who have
acted on the earlier advice
• Clients who place contrary orders should be advised before the
order is accepted
⇒ Investment Action
- treat all clients fairly in light of their investment objectives
i.e.
- allocation of new/secondary issues
- if oversubscribed, pro-rate basis

February 27, 2020
B. Fair Dealing
⇒ Investment Action
• m/c should forgo personal allotments if issues are oversubscribed
- if a family member is a similarly treated client, that is ok!
• Disclose allocation procedures
• m/c must never use allocated securities as rewards or to gain benefit
➀ Develop Firm policies (if none exist)
- guiding rule ⇒ no preferred or favoured status
B. Fair Dealing
• Keep knowledge of impending recommendations to as few people as
possible
• Shorten time between decision to issue and actual issue
• Written guidelines for pre-dissemination behavior
• Simultaneous disclosure – internally & to clients
• Maintain a list of clients & their holdings
• Develop/document trade allocation procedures that ensure:
- fairness to advisory clients – priority of execution
- allocation of price
- timeliness/efficiency in order execution
- accurate m/c records
B. Fair Dealing
Allocations/
• All orders time stamped
• Orders processed FIFO basis
- bundling when efficient
• Process to determine execution prices and partial fills
(for grouped trades)
• Group orders all get same execution price
• Pro-rata distribution on partial fills
• Allocation by client rather than portfolio manager

February 27, 2020
B. Fair Dealing
• Disclose allocation procedures
- if the allocation process is unfair, disclosure does not exempt
m/c from 3B
• Systematic account review
- suitability?
- preferential treatment?
• Disclose levels of service
- should not be offered selectively
C. Suitability
- when m/c are in an advisory relationship with a client, they must
a) make reasonable inquiry – investment experience
- risk/return objectives
- financial constraints
Prior to – investment recommendation
- taking investment actions
& reassess and update regularly
b) determine suitability – client’s financial situations
- clients written objectives
c) in the context of the whole portfolio
C. Suitability
- suitability does not mean no losses
- if advisory relationship does not exist, m/c may not be in a position to
determine suitability
i.e. unsolicited orders
- if m/c knows such an order is unsuitable, should get client
to acknowledge that awareness
⇒ Managing to an Index or Mandate
- no advisory relationship
- decisions should be consistent with the mandate

February 27, 2020
C. Suitability
- when managing a portfolio to a specific mandate, strategy or
style, must act in accordance with that mandate
⇒ Guidance ⇒ much of this Standard covered in Port. Mgmt. study session
- Investment Policy Statement
- Client’s Risk Profile ⇒ risk tolerance
- Update regularly
Also/ - Diversification
C. Suitability
- Investment Policy Statement
- Review Port. Mgmt.
- Regular updates/reviews
- Suitability test policies
- impact on diversification
- fit with risk tolerance
- fit with investment objectives
- when communicating investment performance information, m/c
must make reasonable efforts to ensure that it is fair, accurate,
and complete
- credible performance information
- avoid misstating or misleading
- both in presentation and measurement
- cannot state/imply that clients will experience a past performance level
𝐜𝐨𝐫𝐫𝐞𝐜𝐭 𝐜𝐚𝐥𝐥𝐬
- analysts promoting hit ratio 𝐭𝐨𝐭𝐚𝐥 𝐜𝐚𝐥𝐥𝐬
must present accurately and completely
• GIPS (next 2 readings)
• Without GIPS/
• Include all accounts
• Include terminated accounts
• Gross or net of fees, taxes, inflation
• Maintain data and records used to calculate performance

February 27, 2020
• m/c must keep information about current, former,
and prospective clients confidential unless:
1) information concerns illegal activities on the part of the client
2) disclosure is required by law
3) client or prospective client permits it
If applicable laws require confidentiality, even if
➀ above applies, m/c must follow law
• Many firms will have policies about storing client info on
personal laptops or portable drives
• This standard does not prevent the m/c from cooperating
with CFA-PCP if requested to supply client account info
- don’t disclose anything
- if its information outside of the scope of the confidential
relationship and does not involve illegal activity, may be ok!
Duties to Employers
A. Loyalty
• In matters related to their employment, m/c must act for
the benefit of their employer and not
1) Deprive employer of their skills and abilities
2) Divulge confidential information
3) Cause harm to their employer
e.g. – injure the firm, deprive it of profit, deprive if of
m/c skills/abilities
client > employer > m/c interest
interest interest (aside from personal/family
obligations)

February 27, 2020
A. Loyalty
⇒ Employer Responsibilities
Note/ Employers are not obligated to adhere to the
ble m
Pro Code of Standards
- m/c are however
∴ Firms should not adopt/develop conflicting practices
⇒ Independent Practice
• m/c must abstain from independent competitive activity that
could conflict with the interests of their employer
- does not preclude m/c from doing so, but does require disclosure
of intent to employer and their ok!
A. Loyalty
⇒ Leaving an Employer
• Must continue to act in employer’s best interest until
resignation takes effect
- if the m/c is leaving to compete (ok by the way) must not
1) Appropriate trade secrets
2) Misuse confidential information
3) Solicit employer’s clients prior to leaving
4) Take client lists
- is ok for m/c to make arrangements while still employed
A. Loyalty
⇒ Leaving an Employer
- does not prohibit experience or knowledge gained at one
employer from being used at another
- records or work performed that was codified are off limits
- does not prevent m/c from contacting previous clients as long as:
➀ The names do not come from a list
➁ There is no ‘agreement’ limiting contact

February 27, 2020
A. Loyalty
⇒ Whistleblowing – violating 4A is permitted when doing so protects
clients or the integrity of the markets
⇒ Nature of Employment
• m/c may be independent contractor
⇒ duties will be governed by the agreement between
m/c & company, not the standard
- Competition policy (non-compete)
- Termination policy
- Incident reporting procedures (whistleblowing)
- Employee classification – how policies apply to each class
B. Additional Compensation Arrangements

• m/c must not accept any gifts, benefits, compensation, or
consideration that competes with or might reasonably be expected
to create a conflict of interest with their employer’s interests
unless they obtain written consent from all parties involved
- in short, get permission before accepting
e.g. client offers extra bonus (free use of their ski chalet) if
a certain target return is achieved
• m/c must make reasonable efforts to detect and prevent
violations of applicable laws, rules, regulations and the c/s by
anyone subject to their supervision or authority
- whether or not they are m/c
- delegating supervisory duties is no relief from 4C
⇒ Detection Procedures
- reasonable efforts – establishing/implementing written
compliance procedures
- periodic reviews
• If a violation is not detected despite these efforts, would not
be a violation of 4C

February 27, 2020
- however, if m/c knows that procedures are not being followed,
merely having them would not be enough
⇒ Compliance Procedures
• m/c must understand what makes an
adequate compliance system
Those designed to ⇒ m/c must make reasonable efforts to
meet industry standards close any gaps from current to ‘adequate’
and regulatory compliance - then make reasonable effort to ensure
along with the c/s they are monitored and enforced
⇒ Compliance Procedures
- once a violation arises, m/c must promptly initiate an
investigation to assess extent (employee placed on restricted
access pending the outcome)
⇒ Inadequate Procedures
- inform senior mgmt. & recommend corrective action
- if m/c feels they cannot discharge supervising duties due to
inadequate procedures, they must decline the responsibility
⇒ Enforcement of Non-Investment Related Policies
- enforced equally
e.g. attendance, acceptable workplace actions
Principles → – recommend employer adopt a Code of Ethics
Implementation → – put in place specific policies/procedures to
ensure compliance
- provide the Code to clients
- implement education/training programs
- tie incentives to adherence

February 27, 2020
• Adequate compliance procedures/
- identity situations in which violations are likely to occur and
develop compliance procedures that are:
• Clearly written and accessible The Code of
• Easy to understand Ethics
• Designate a compliance officer (authority + resources)
• Clear hierarchy of supervisions (who’s watching who)
• Outline scope of procedures along with procedures to monitor/test
those procedures
• Procedures for reporting violations
• Once system is in place, supervisor should:
• Disseminate to appropriate personnel
• Periodically review/update
• Periodically review employees
• Enforce procedures if a violation occurs
• Once a violation is discovered, supervisor should:
• Respond promptly
• Investigate to determine scope
• Restrict employee actions pending outcome

February 27, 2020
Investment Analysis, Recommendations, and Actions

• m/c must 1) exercise diligence, independence and thoroughness in
analyzing investments, making investment recommendations, and
taking investment action
2) have a reasonable and adequate basis, supported by
appropriate research and investigation, for any investment analysis,
recommendation, or action
⇒ Defining Diligence and Reasonable Basis
Level and thoroughness - based on a set of facts

of the information reviewed known and understood at
- differs with product/security the time
being analyzed

⇒ Defining Diligence and Reasonable Basis
- Level depends on the - formed through a balance of
support and resources what is known and what
provided by m/c employer resources have been provided
⇒ Using Secondary or 3rd Party Research
Research conducted by Research conducted outside

someone else in the the firm
firm
• m/c must make reasonable efforts to determine if this
research is sound

February 27, 2020

⇒ Using Secondary or 3rd Party Research
- assess/
• Assumptions used
• Rigor of the analysis
• Date/timelines of the research
• Evaluation of the objectivity and independence of the conclusions
⇒ When research vendors are chosen from above, m/c may use
the information in good faith
⇒ Quantitatively Oriented Research
- must understand parameters used in models, assumptions
and limitations

⇒ Quantitatively Oriented Research
- should make every effort to test the output of investment
models before incorporating into recommendations
⇒ Developing Quantitatively Oriented Techniques
• m/c involved in the development of the models/algorithms
must understand the technical aspects
⇒ Selecting External Advisors
• m/c must review external managers as diligently as they
review securities

⇒ Selecting External Advisors
• Standardized criteria for reviewing external advisors
• Review their Code of Ethics
• Understand their compliance and internal control procedures
• Assess the quality of their published performance record
• Review their investment process and how well they hold to
their stated strategy

February 27, 2020

⇒ Group Research and Decision Making
• Output of group is the consensus of the group
• All names are on the report
• If m/c does not agree but the opinion has a reasonable basis,
is independent and objective, no need to dissociate
- a policy that research outputs have a basis that can be
substantiated as reasonable and adequate

• Internal review before release
• Develop review guidelines that establish the necessary rigor,
accuracy & quality hurdles
• For research
• For model testing
• For assessing external advisors
• For assessing 3rd party information providers

• m/c must ➀ disclose the basic format and general principles of
the investment process they use to analyze investments, select
securities, and construct portfolios and must promptly disclose
any changes that might materially affect those processes
➁ Use reasonable judgment in identifying which factors are
important to their investment analysis, recommendations, or
actions and include those factors in communications with clients
& prospective clients
➂ Distinguish between fact and opinion in the presentation
of investment analysis & recommendations

February 27, 2020
communication
m/c client
• Clear
• Frequent ↳ Understanding of/
updates
• Thorough • Instrumental factors
• Opinion vs. fact
⇒ Informing Clients of the Investment Process
• m/c must adequately describe how the investment
decision-making process is conducted + any changes
what constitutes a suitable inv. recomm.

(usually in terms of E(Rp) + σp)
• if external advisors are used, what specialization or
diversification expertise

⇒ Different Forms of Communication
• Written, oral, media broadcast, social media, e-mail, webinar
• m/c must ensure all clients are treated fairly in terms
of accessibility
• if content of communication is in capsule form (i.e. short),
m/c should notify clients that additional detail/analysis
is available
• m/c must outline significant risks and limitations of the analysis

⇒ Identifying Limitations of Analysis
• Risk disclosures relate to what was known at the time of release
• Having no knowledge of a risk/limitations that eventually
results in a loss is not a violation of 5(B)
⇒ Distinction Between Facts and Opinions
• Most common separation of past & future
Fact Opinion
• Quantitative conclusions – separate fact from
statistical conjecture

February 27, 2020

⇒ Distinction Between Facts and Opinions
• m/c may be in violation by failing to identify limitations of
statistically developed projections ⇒ merely an estimate of
future results
• Research review process (internal peer reviews)
• 1 word ⇒ Defensible
C. Record Retention
• m/c must develop and maintain appropriate records to support their
investment analysis, recommendations, actions and other investment-
related communications with clients and prospective clients
- either in hard copy or electronic form
e.g. personal notes from company meetings press
releases/presentations from covered companies’ computer-based
model outputs/inputs risk analysis of a security on a portfolio notes
from meetings with clients
C. Record Retention
⇒ Records are Property of the Firm
• All m/c output while employed
• Cannot take originals/copies when m/c leaves without consent
• m/c must re-create the research at the new firm along with all the
supporting records
⇒ Local Requirements
• Regulators often impose requirements with the required time frame
for retaining records (CFA ⇒ 7 years)
• Responsibility to maintain records rests with the firm
⇒ m/c must archive research notes

February 27, 2020
Conflicts of Interest
• m/c must make full and fair disclosure of all matters that could
reasonably be expected to impair their independence and
objectivity or interfere with respective duties to their clients,
prospective clients, and employer
• m/c must ensure that such disclosures are prominent, are delivered
in plain language, and communicate the relevant
information effectively
- best practice is to avoid real/perceived conflicts
- if avoidance is not possible, m/c must ensure that conflicts are
communicated effectively
⇒ Disclosures of Conflicts to Employers
• m/c must provide enough information for the employer to assess
the impact
e.g. ownership of stocks analyzed May be explicitly
participation on outside boards prohibited by an
employer
may interfere with rendering
unbiased investment advice
⇒ Disclosures of Conflicts to Employers
- typically, the same situations that would generate conflicts with
clients
- the mere appearance of a conflict could create problems for
m/c & their employers
- if a conflict occurs inadvertently, m/c must report promptly
⇒ Disclosures to Clients
• m/c must be, and be seen as, objective
- disclose relationship between an issuer and m/c or
employer – directorship, ownership, broker/dealer market making, etc...

February 27, 2020
⇒ Disclosures to Clients
- fee arrangements, subadvisory agreements & other
non-standard fee structures
- agreements in which the firm benefits directly from
investment recommendations
⇒ Cross-Departmental Conflicts
e.g. marketing/sales
Vs. analysts
broker/dealer
⇒ Conflicts with Stock Ownership
- m/c ownership of stock in companies being recommended to
clients
⇒ Conflicts with Stock Ownership
- prohibition is unfair, therefore beneficial ownership disclosure is
required
⇒ Conflicts as Director
• Conflict between duty owed to clients vs. to shareholders
• Option compensation vs. objectivity
• Material non-public information
• m/c should be isolated from those making investment decisions
- disclose special compensation agreements that might conflict
with client’s interests
e.g.
• bonuses based on short-term performance
• include information on compensation packages in
promotional literature

February 27, 2020
- investment transactions for clients and employers must have
priority over investment transactions in which a m/c is the
beneficial owner
⇒ Avoiding Potential Conflicts
• m/c is free to invest personally as long as:
1) the client is not disadvantaged by any trade
2) m/c does not benefit personally from trades undertaken
for clients
3) m/c complies with applicable regulatory requirements
- extends to trades that may run counter to current client
recommendations
⇒ Personal Trading Secondary to Trading for Clients
- objective is to prevent personal transactions from adversely
affecting the interests of clients and employers
⇒ Standards for Non-public Information
• m/c may have knowledge of pending transactions or may have
knowledge of material non-public information
• m/c would be prohibited from acting on or conveying such
information
⇒ Impact on All Accounts with Beneficial Ownership
• m/c can execute trades in accounts for which they are
beneficial owner only after clients and employers have had
adequate opportunity to act on a recommendation
- family accounts that are client accounts should be treated
like any other account
➀ Limited participation in equity IPOs
- m/c participation may be seen as
➀ taking an opportunity away from a client
➁ an incentive to make future favourable decisions to the party
providing the opportunity

February 27, 2020
➁ Restrictions on Private placements
- same logic as IPOs
➂ Establish blackout/restricted periods
- prior to trades for clients
- avoid front-running
- should cover all involved in the decision-making process
- not practical for large firms
➃ Reporting requirements
➀ Disclosure of holdings in which the employee has a beneficial
interest
➃ Reporting requirements
- disclosure should be made upon commencement of job and at least annually
➁ Provide duplicate confirmations of transactions
- verification of the timing of transactions versus only knowledge of holdings
- self-policing/monitoring
➂ Preclearance procedures
• m/c should examine all planned personal trades and avoid potential
conflicts
➃ Disclose personal investing policies to clients

February 27, 2020
C. Referral Fees
• m/c must disclose to their employer, clients, and
prospective clients, as appropriate, any compensation,
consideration, or benefit received from or paid to others
for the recommendations of products or services
Product 1 • m/c must

fee advise the client
Recommends BEFORE entry
m/c client into any formal
fee agreement
Service 1
Flat-fee or %age?
One-time or ongoing? disclose
Cash or soft dollars?
Responsibilities as a CFA Institute m/c
A. Conduct as m/c in the CFA Program

• m/c must not engage in any conduct that compromises the
reputation or integrity of CFA Institute or the CFA designation or
the integrity, validity, or security of the CFA examinations
⇒ Confidential Program Information
- candidates prohibited from disclosing confidential material gained
during the exam process
- specific details of questions appearing on the exam
- broad topical areas and formulas tested or not tested on the
exam

February 27, 2020
A. Conduct as m/c in the CFA Program

⇒ Confidential Program Information
- all aspects of the exam are considered confidential until CFA
releases them publicly
⇒ Additional CFA Program Restrictions
- violating any testing policies Calculator
is a violation of 7(A) Personal belongings
⇒ Expressing an Opinion Candidate Pledge
- m/c are free to disagree and express their disagreement with CFA
on policies/procedures
- cannot disclose content-specific information however
B. Reference to CFA Institute, the CFA designation, and

the CFA Program
- when referring to CFA Institute, CFA Institute Membership, the
CFA designation, or candidacy in the CFA Program, m/c must not
misrepresent or exaggerate the meaning or implications of membership
in CFA Institute, holding the CFA designation, or candidacy in the CFA
Program
- meant to prevent promotional efforts that make promises or
guarantees that are tied to the CFA designation

the CFA Program
- cannot imply that due to holding CFA, clients can expect
superior performance
⇒ CFA Institute Membership
Regular & affiliate who have met membership requirements

- once accepted as a member, to maintain status
➀ Remit annually a Professional Conduct statement
➁ Pay applicable membership dues
- fail to do ➀ or ➁, no longer active member
- must not represent themselves as such

February 27, 2020

the CFA Program
⇒ Using the CFA designation
- those who have earned it (?), may use the trademarks
‘Chartered Financial Analyst’ or ‘CFA’
- must also satisfy membership requirements to maintain
their right to use the designation
- fail to meet ➀ or ➁ earlier, forfeit right to use the CFA designation
- must not present yourself as a CFA charterholder

the CFA Program
⇒ Referring to Candidacy in the CFA Program
- must clearly state you are a candidate and must not
imply achievement of any partial designation
Candidate if/ ➀ application for registration has been accepted

and are enrolled to sit for a specified exam
➁ have sat for an exam but results are not out yet

the CFA Program
⇒ Referring to Candidacy in the CFA Program
- never state/imply partial designation or cite an
expected completion date
- if you pass all 3 levels in consecutive years, you can say
so, but you can’t say it gives you superior ability
⇒ Proper use of the CFA marks
- must be used only after a name or as an adjective
- cannot be used as part of the name of a firm

February 27, 2020
Introduction to the Global Investment

Performance Standards (GIPS)
a. explain why the GIPS standards were created, what parties the GIPS
standards apply to, and who is served by the standards;
b. explain the construction and purpose of composites in performance

reporting;
c. explain the requirements for verification.

February 27, 2020
GIPS - Introduction
- comparisons between investment firms are challenging if there LOS a

-explain
is no standard
- misleading practices include:
1) Representative accounts ⇒ presenting your best performing portfolios
as representing the firm as a whole
2) Survivorship bias ⇒ not including failed accounts or poor performing

accounts that closed
3) Varying time periods ⇒ presenting performance data for only those

time periods during which the fund outperformed its benchmark
∴ GIPS standard ⇒ provide clients and prospective clients with LOS a

comparable and representative investment performance data -explain
⇒ Industry-wide standard approach for calculation &
presentation

⇒ Who can claim compliance?

- any investment mgmt. firm that actually manages assets can
voluntarily choose to comply with GIPS
- compliance is a firm-wide process that cannot be achieved on a
single product or composite
- either fully comply, or don’t!
⇒ Who Benefits from Compliance? LOS a

-explain
- 2 main groups:
➀ Investment management firms
- assure clients that performance is both complete and fairly
presented
➁ Investors - have a greater level of confidence in the integrity

of performance presentations
- can more easily make comparisons across different firms

February 27, 2020

⇒ GIPS standard requires the use of LOS b
-explain
composites
formed by combining discretionary portfolios into one group that

represents a particular investment objective or strategy
(must include all actual, fee-paying, discretionary portfolios)
- criteria for classifying portfolios must be determined ex ante

(i.e. before performance is known), not after the fact
LOS c
- firms that claim compliance are responsible for ensuring that they
-explain
really are compliant
- once a firm claims compliance, they may hire an independent

third party to verify their claim
- verification is performed w.r.t the entire firm, not on specific composites
- verification tests/ (cannot be performed by the firm itself)
1) the firm has complied with all the composite construction

requirements on a firm-wide basis
2) the firm’s processes/procedures calculate and present performance

information in line with GIPS

February 27, 2020
Global Investment Performance Standards (GIPS)
a. describe the key features of the GIPS standards and the fundamentals of
compliance;
b. describe the scope of the GIPS standards with respect to an investment firm’s
definition and historical performance record;
c. explain how the GIPS standards are implemented in countries with existing
standards for performance reporting and describe the appropriate response
when the GIPS standards and local regulations conflict;
d. describe the nine major sections of the GIPS standards.

February 27, 2020
GIPS-Standards
LOS a
Objectives/
-describe
• establish best practices for calculating and presenting
investment performance
• obtain worldwide acceptance of a single standard based on fair
representation and full disclosure
• promote the use of accurate and consistent investment performance
data
• encourage fair, global competition
• foster a notion of industry self-regulation
Overview/key features/ LOS a

-describe
• are ethical standards to ensure full disclosure and fair
representation
• firms should include all actual, fee-paying, discretionary portfolios in
at least one composite
• adherence to certain calculation methodologies and to make specific
disclosures
• firms must comply with all requirements including updates & Guidance
Statements
Compliance/ LOS a
-describe
• must comply with all GIPS standards
• must comply with all applicable laws/regulations regarding
calculation and presentation of performance
• must not present misleading performance
• GIPS must be applied firm-wide
• must document policies/procedures used in establishing and maintaining
compliance
– if compliance is not firm-wide, cannot claim compliance

February 27, 2020
Compliance/ LOS a
• statements about calculation methodology such as -describe
‘in accordance’, ‘in compliance’, ‘consistent with’
GIPS ⇒ prohibited
• only GIPS - compliant firms can claim a portfolio was calculated in
accordance with GIPS standards
• should present all clients with a compliant presentation at least
every 12 months
• provide a complete list of composite descriptions to any prospective
client that requests it, plus a compliant presentation for any
composite listed
Compliance/ investment firms held out to clients LOS a

• Firms must be as a distinct business -describe
subsidiary
entity
division
• Changes in a firm’s organization must not lead to alteration of
historical composite performance
Recommendations/
• Firms should comply with GIPS
• Firms should be verified
• Firms should adopt the broadest definition of the firm
• Firms should provide each client with a compliant presentation
once a year
⇒ Firm Definition LOS b

- an investment firm, subsidiary, or division held out to -describe
clients as a ‘distinct business entity’

⇒ Historical Performance Record

- minimum of 5 years of GIPS–compliant investment performance
- if firm/composite < 5 years, then since inception
- after initiating compliance, firm must add 1yr of compliant
performance each yr up to 10 yrs

February 27, 2020
LOS b
⇒ Historical Performance Record:
-describe
- firms may link non-GIPS compliant performance records
to their compliant history as follows
Compliant
Jan 1, 2000
Non-Comp.
if non-comp. – disclose how presentation differs from GIPS
• Countries without an investment performance standard LOS c

strongly encouraged to promote the GIPS standard as -explain
the local standard

• Countries in which legal/regulatory standards regarding
performance exist, firms encouraged to adhere to GIPS in
addition to local laws
- if a conflict, use local laws, disclose the conflict

February 27, 2020
⇒ 9 Major Sections LOS d

-describe
0. Fundamentals of Compliance
– definition of a firm, documentation of policies/procedures,
maintaining compliance
1. Input Data – standards for input data to be used to calculate

investment performance
2. Calculation methodology
3. Composite Construction
⇒ 9 Major Sections LOS d

4. Disclosures -describe
5. Presentation and reporting
6. Real Estate
7. Private Equity – GIPS PE Valuation Principles must be used
8. Wrap Fee/SMA Portfolios – firms must include the performance

record of all accounts in appropriate composites

February 27, 2020
REVIEW

February 27, 2020
Ethics – C & S - Review
Professionalism/ Pg-1
A. Knowledge of the Law ➝ c/s always, unless ms
offer
B. Independence/Objectivity ➝ no gift/benefit/compensation solicit
that could reasonably compromise I/O accept
C. Misrepresentation ➝ practice, credentials, qualifications, performance

record, intended use of 3rd party managers
D. Misconduct – no act that reflects poorly on professional reputation,

integrity, competence
(dishonesty, fraud, deceit)
Integrity of Capital Markets/ Pg-2

A. Material Non-Public Information – cannot act. or cause
others to act on it
likely effect on price source
more ambiguous, less likely less reliable, less likely

Note: Analyst Report, using Mosaic Theory, is not a violation, and can be
shared with clients only before being made public
B. Market Manipulation information based intent to

· distort prices transaction based mislead market
· inflate volume participants

February 27, 2020
Duties to Clients/ Pg-3

reasonable care if custody of
A. Loyalty, Prudence & Care
prudent judgment assets, heightened
confidentiality level of responsibility
market
[client – employer – M/C]
integrity
beneficiary (suitability)
mandate
B. Fair Dealing – fair ≠ equal, fair = equitable
investment ➝ analysis
➝ recommendations at the same level
➝ action of service
· Ok to have different levels of service or fees
Duties to Clients/ Pg-4

C. Suitability KYC – know you client risk/ret. obj./reg.
IPS
KYM – know your mandate constraints
in the context
of the whole portfolio
fair
D. Performance Presentation · cannot guarantee
accurate
performance
complete
unless 1/ illegal activity on part of client
2/ required by law
3/ client permits it

February 27, 2020
Duties to Employer Pg-5

A. Loyalty – act for benefit of employer
- cannot compete with employer (unless you have permission)
- if leaving to compete: cannot
· take trade secrets or confidential information
· solicit clients or take customers lists
ok as long as
· take work that was codified
names do not
come from a list & there
is no agreement in place restricting that
B. Additional Compensation: from clients to M/C ➞ any compensation

that might reasonably create a
NOT: from employer
conflict of interest
to M/C
Duties to Employer Pg-6

C. Responsibilities of Supervisors ➞ reasonable effort to detect or
prevent violations of - laws
by anyone subject to supervision - rules/regulations
- C & S
(M/C or not)
- delegation is no relief
Investment Analysis, Recommendations, Action

A. Diligence, Reasonable Basis
- exercise diligence, independence, thoroughness
- reasonable and adequate basis (supported by fact)
B. Communication with Clients
· disclose investment process (general principles) – and any
· distinguish between fact & opinion changes to it
or people

February 27, 2020
Investment Analysis, Recommendations, Analysis Pg-7
C. Record Retention ➞ hard copy or electronic (property of firm)

➞ appropriate records to support investment analysis,
recommendations, actions, communication with clients
➞ can’t take copies w/o consent
A. Full Disclosure – full disclosure of all matters that could
reasonably be expected to impair indep. /obj.
- to clients and employers
(fee arrangements)
B. Priority of Transactions clients–employers–M/C

· M/C free to invest personally (but client can’t be disadvantaged by it)
· family accounts that are client accounts, treated as client accounts
Pg-8
C. Referral Fees · M/C must disclose to employers/clients any compensation,
consideration, benefit received from or paid to others for the
recommendation of products or services
Responsibility as a CFA M/C

A. Conduct as a M/C in the program – must not engage in any conduct that
compromises the integrity of CFAI or the CFA designation,
or the integrity of the exams
specific questions, broad topical

areas, formulas tested/not tested
B. Reference to CFAI, CFA designation, or CFA Program

- must not imply partial designation
- must not cite a completion date

February 27, 2020
Pg-9
➀ Regular Compensation vs. Additional Compensation
Employer Client potential
conflict of
M/C M/C interest?
- client migration bonus
- reasonably impair I/O? (Y) before the (N) after the

Y N fact fact

disclose no disclosure - permission in - notification/
writing disclosure

➁ Fee-sharing vs. Referral Fee vs. Referral fee/
no disclosure fee sharing
disclose ➞ employer - still a referral
(before ➞ client fee
entry to an ➞ prospective clients
agreement)
- given or received
+ nature (i.e. flat fee, %’age
one-time, continuing)


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February 27, 2020

Ethics and Trust in the Investment Profession

b. describe the role of a code of ethics in defining a profession;

c. describe professions and how they establish trust;

d. describe the need for high ethical standards in investment management;

e. explain professionalism in investment management;

f. identify challenges to ethical behavior;

g. distinguish between ethical and legal standards;

h. describe a framework for ethical decision making.

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- Moral/ethical principles: beliefs regarding what is good, acceptable or

- May be individual as well as shared beliefs regarding standards of behavior

- ethical conduct: - behavior that follows moral principles

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Ethics & Professionalism

- a profession is/ based on specialized knowledge and skills LOS b

- standards of conduct enhance and clarify the code of ethics

Professionalism in Investment Mgmt.

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2/ Professions provide a service to society - support economic activity

4/ Professions have high entry standards - thus membership is a signal to the

5/ Profession possesses a body of expert knowledge

6/ Professions encourage and facilitate continuing education

9/ Professions are recognized overseeing bodies - not-for-profit organizations

10. Professions encourage the engagement of members - through volunteer

→ investment management is a relatively young profession LOS e

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⇒ Expectations: honesty, integrity, altruism, continuous improvement, LOS e

Investment Industry & Ethics

- enhances allocational efficiency LOS d

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Challenges to Ethical Conduct

2. Underweighting the situational influences

external factors that shape our

3. Limitations to organizational compliance

Ethical vs. Legal Standards

laws and regulations - vary across countries/jurisdictions

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Ethical Decision-Making Frameworks

e.g./ Identify - relevant facts, stakeholders and duties owed,

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Code of Ethics and Standards of Professional Conduct

a. describe the structure of the CFA Institute Professional Conduct Program

c. explain the ethical responsibilities required by the Code and Standards,

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Professional Conduct Program

- all members + candidates (M/C) are required to comply with LOS a

responsible for the enforcement of

Conduct inquires may originate from: LOS a

2) written complaints received by the Professional Conduct staff

3) CFA staff through media, regulatory notices

5) post-exam behavior (online disclosure of confidential exam material)

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- may result in/

Adoption of the Code and Standards/

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Code & Standards ⇒ individual investment professionals LOS a