The Standards of Professional

Conduct
• These standards apply to:
– AIMR members
– CFA chartholders
– CFA candidates
– The term “member” applies to all three categori
es

2
 Standard I: Fundamental
Responsibilities
• I(A): Know and comply with laws,
regulations, ethical codes, and professional
standards
• I(B): Do not knowingly participate or assist
others in any violation of applicable
regulations or ethical codes

3
 Standard I: Purpose and Scope
1. Minimum standard of conduct in areas
not covered in Standards II through V
2. Must adhere to the Code and Standards
anywhere in the world, and to the stricter
of the local law or the Code and Standards
3. Do not require members to report illegal
activities to the authorities; however,
reporting such activities may be the only
way of dissociation
4
 Standard I: Purpose and Scope
4. When facing illegal activities, the member
should consult legal counsel (competent and
unbiased) and follow the attorney’s advice
without material deviation, dissociate from
illegal activities, and urge the firm to stop
the activities. This standard applies to the
firm’s paid employees, non-paid interns, or
volunteers, and consultants.
5
 Standard I: Procedures for
Compliance
• Maintain current files
• Keep informed; regular education of
employees
• Regular review of compliance procedures

6
 Standard I: TIP
• Differentiate between:
– Feels standard has been broken and,
– Knows standard has been broken
• If:
– Feels, then consult lawyer
– Knows, then report to supervisor, disassociate,
could report to regulatory organization

7
 Standard II: Relationships with and
Responsibilities to the Profession
• II (A): Use the CFA designation in a
dignified and judicious manner
• II (B): Do not engage in any act that
adversely reflects upon your honesty,
trustworthiness or professional competence
• II (C) : Do not plagiarize

8
 Standard II (A): Purpose and Scope
1. To prevent misuse of the CFA designation and
membership in AIMR
2. The CFA mark is registered with the U.S. Patent
and Trademark Office; a professional
designation, not an acronym or generic term
3. Requirements for being granted the designation:
• Successful completion of the CFA program
• Ongoing commitment to abide by the standards
• Maintain active membership in AIMR
• If failing to meet any one of the requirements, the
CFA designation is automatically suspended

9
 Standard II (A): Purpose and Scope

4. The CFA mark must be used as an adjective and

not as a noun. It should not be used in the plural
or the possessive
5. There is no special designation for a candidate
who has passed LI, II, or III. These people may
state the level(s) they have passed and the year in
which they passed the level(s). A person must be
registered to take the next scheduled CFA exam to
be a “candidate” in the CFA program
10
 Standard II (A): Procedures for
Compliance
• Only the mark “CFA” or the words “Charte
red Financial Analyst” should appear after t
he charterholder’s name
• The CFA mark may not be printed in type l
arger than that used for the charterholder’s
name
• CFA candidates in process

11
 Standard II (B): Purpose and Scope

1. It is about personal conduct, while

Standard I is about compliance with laws
and regulations governing professional
activities
2. Any action that would reflect negatively
on a person’s professional competence,
and/or repeated misdemeanors could fall
within the scope of this standard
12
 Standard II (B): Procedures for Compliance

• Be aware of the implications of all personal

actions
• Employers should:
– Indicate that personal behavior that reflects
adversely on the individual, the firm, or the
industry will not be tolerated
– Conduct character and background checks on
prospective employees
13
Standard II (C) : Purpose and Scope
1. Definition of Plagiarism
2. Factual information from recognized financial
reporting services, such as U.S. government,
Moody’s, and S&P, can be used without
acknowledgment
3. Members of a firm may present the firm’s
research findings without specific attribution
because they represent the firm
4. Examples of plagiarism

14
 Standard II (C) : Procedures for Compliance

• Keep copies of all materials used to prepare

the report
• Attribute direct quotations and any other
materials included in the report, such as
tables or models, prepared by other persons
• Attribute summaries of material prepared
by others
• Present statistical forecast with caveat
15
 Standard II: TIP

• To call oneself CFA candidate, must be

registered for the next exam
• Using factual information published by
leading financial/statistical agency does not
constitute plagiarism

16
 Standard III: Relationships with and
Responsibilities to the Employer
• III(A): Members must inform employers of their
obligation to comply with the Code and Standards
and deliver a copy of them to their supervisor unless
their employer acknowledges, in writing, that the
AIMR standards are incorporated as part of the
company’s policies regarding professional conduct
• III (B): Do not undertake any independent practice
in competition with your employer without written
consent from both your employer and your other
clients

17
 Standard III: Relationships with and
Responsibilities to the Employer
• III(C) : Disclose to your employer all matters that could
reasonably be expected to impair your ability to render
unbiased and objective advice. If a conflict of interest exists,
comply with any prohibitions on activities imposed by your
employer
• III (D): Disclose, in writing, all monetary or other benefits
received for services other than the usual and customary
compensation paid to you by your primary employer
• III (E): Members with supervisory responsibilities must
exercise control over their subordinates to prevent violations of
laws, statutes, or the Code and Standards by setting and/or
relying on reasonable procedures designed to detect and
prevent such violations
18
 Standard III
• Definition of an employee
– Someone in the service of another who has the
power or right to control and direct the
employee in the material details of how the
work is to be performed
– There does not have to be a written contract nor
compensation involved for an employer-
employee relationship to exist

19
Standard III (A): Purpose and Scope
1. AIMR believes that if members tell their firms
about the Code and Standards, their firms will be
less likely to implement non-compliant procedures
2. “In writing” means in any form of communication
that can be documented, such as e-mail
3. “Employer” means the immediate supervisor
4. Each member must assume responsibilities for this
Standard. However, the ultimate responsibilities
falls on the most senior member who reports to a
non-member

20
Standard III (A): Procedures for Compliance

• Notify your supervisor in writing of your

obligation to abide by AIMR’s Code and
Standards
• Keep a copy of your written notification
• Encourage your employer to adopt the Code
and Standards

21
Standard III (B): Purpose and Scope
1. The purpose is to prohibit any competitive
activity that would hurt the member’s employer
2. It also covers any activity that could result in
compensation – the actual receipt of
compensation is not required
3. “Undertaking independent practice” is defined
as “engaging in a competitive business, as
opposed to making preparations to begin such
practice”. A member
22
Standard III (B): Purpose and Scope
4. Examples of violation:
– Misappropriation of trade secrets
– Misuse of confidential information
– Inciting a conspiracy to bring about mass resignation
– Solicitation of employer’s clients prior to termination
of employment
– Self-dealing, i.e. securing a business opportunity that
belongs to the employer
– Misappropriation of clients or client lists

23
 Standard III (B): Procedures for Compliance
• No outside services should be rendered until the
employee has received written permission from the
employer
• Prospective clients should be informed by the
employee that the work being performed is
independent of the employer; no service should be
rendered until the prospective client gives written
consent
• Employees conducting job searches should not contact
existing clients or potential clients before leaving their
current employer. The current employer must give
permission for the removal of files or records

24
Standard III (C) : Purpose and Scope
1. Investment companies may restrict their
employees’ actions so that they avoid conflicts
of interest
2. Any conflict that may be detrimental to the
employer should be reported immediately.
• Ownership of securities analyzed or recommended by
the member
• Participation on boards of directors of companies
whose securities are covered by the firm

25
Standard III (C) : Procedures for Compliance

• Report, report, report

• Consult your compliance officer before
taking any action that could be construed as
a conflict of interest

26
Standard III (D): Purpose and Scope
1. Compensation here refers to not only money but
also any other direct or indirect benefit
2. “Writing” means any form of communication
that can be documented
Procedures for Compliance:
• Submitting a written report to your employer
specifying the compensation or benefit to be
received and the duration of the agreement

27
Standard III (E): Purpose and Scope
1. A supervisor is any person who has employees
“subject to their control”. The employees do not
have to be AIMR members, CFA charterholders,
or CFA candidates
2. Reasonable supervision is established by written
compliance procedures
3. There is no violation if an effective compliance
program has been adopted but the supervisor wa
s unable to detect the violation; there is violation
if the supervisor knows or should know that the
compliance procedures are not being followed
28
 Standard III (E): Purpose and Scope
4. Supervisors are expected to see that an adequate
compliance system is established and that it is
communicated to all covered personnel. Adequate
procedures are defined as those that meet industry
standards, regulatory requirements, the requirements
of the Code and Standards, and the nature of the firm.
They should be designed to anticipate the most likely
violations
5. If the compliance system is inadequate, the supervisor
should bring this to the attention of the firm’s senior
management and recommend corrective action

29
Standard III (E): Purpose and Scope

6. If there is no compliance system or if it is

inadequate, the supervisor should decline in
writing to accept supervisory
responsibilities until an adequate system is
established
7. If there is a violation the supervisor must
promptly investigate the incident

30
Standard III (E): Procedures for Compliance

• An adequate compliance system

– Is clearly written and easy to understand
– Designates a compliance officer with clearly
defined authority and responsibility
– Outlines the scope of the compliance
procedures
– Details permissible conduct
– Specifies procedures for reporting violations
31
 Standard III (E): Procedures for Compliance

• A supervisor should
– Give copies of the procedure to all covered persons;
update periodically; provide ongoing education and
reminder; regularly review actions of employees;
enforce the procedures in the case of violation
• If a violation is reported or discovered:
– Respond immediately
– Conduct a thorough investigation
– Increase supervision of the alleged violator until the
investigation is finished

32
 Standard III : TIP

• Informing the employer of the Standard must be in

writing
• If set up independent business, must have
approval from both employer and client (present
and future)
• Disclosure of additional benefit, benefit could be
monetary or non-monetary
• After delegation of supervisory duties, still retains
supervisory responsibilities

33
 Standard IV: Relationships with and
Responsibilities to Clients and Prospects
• IV (A.1): Have a reasonable and adequate basis, supported by
appropriate research, for recommendations or investment
action. Be diligent to avoid any material misrepresentation
and maintain appropriate records to support the
recommendation or action
• IV (A.2): In research reports:
– Use reasonable judgment to include relevant factors
– Distinguish between fact and opinion
– Indicate the basic characteristics of the investment
• IV (A.3): Use care to achieve and maintain independence and
objectivity in making investment recommendations or taking
investment action

34
 Standard IV: Relationships with and
Responsibilities to Clients and Prospects
• IV (B.1): Members have the affirmative responsibility to
understand and comply with their fiduciary duties. Members must
place client interests ahead of their own
• IV (B.2): Before any action is taken, a member must:
– Inquire about the client’s financial situation, investment experience, and
investment objectives (at least once a year)
– Make appropriate and suitable investment recommendation
– Distinguish between fact and opinion when making recommendation
– Disclose to clients the general principles and format of the investment
process by which securities are selected and portfolios are constructed;
promptly disclose any changes that might significantly affect the process
and obtain written authorization from the client to make the procedural
change

35
 Standard IV: Relationships with and
Responsibilities to Clients and Prospects

• IV (B.3): Deal fairly and objectively with all clients

when disseminating investment recommendations,
material changes in prior recommendations, and in
taking investment action
• IV (B.4): Priority of transactions should be given to
clients and employers over those in which you have a
beneficiary interest. Personal transactions should not
adversely affect the interest of clients
• IV (B.5): Preserve the confidentiality of client and
employer information unless it concerns illegal
activities
36
 Standard IV: Relationships with and
Responsibilities to Clients and Prospects
• IV (B. 6): Members may not misrepresent:
– The services that they or their firms are capable of performing
– Their or their firm’s qualifications
– Their academic or professional credentials
– By making or implying any guarantees regarding investment outcomes, e
xcept to communicate accurate information regarding the terms of the inv
estment and the issurer’s obligations
• IV (B. 7): Disclose to clients and prospects all matters that could r
easonably be expected to impair your ability to render unbiased an
d objective advice
• IV (B. 8): Disclose to clients any consideration you have paid to ot
hers for recommending your services to that client

37
 Standard IV (A.1): Purpose and Scope
1. Compliance with this standard is fulfilled if a recommen
dation is based on:
• The firm’s research
• The research of other firms, as long as they use diligence and t
horoughness in the research process
• Quantitatively-based models or filters based on prescribed crite
ria
2. There is the additional duty to consider the recommendat
ion within the context of the needs, preferences, and the t
otal portofolio of the client
3. This Standard also applies to IPOs, private placements, a
nd secondary offerings

38
 Standard IV (A.1): Purpose and Scope
4. The research should include:
– Industry analysis, company analysis, personnel evaluation,
capital structure analysis, environmental considerations,
identification of potential conflicts of interest
5. A reasonable effort should be made to determine the
accuracy of the research report or investment
recommendation.
6. All relevant issues should be covered in arriving at a
conclusion. The determination of what is relevant is
determined by the investment style used (technical vs.
fundamental)

39
 Standard IV (A.1): Purpose and Scope

7. For foreign securities, relevant information

would include:
– The liquidity of the foreign market, taxes,
settlement issues and problems, capital or
money controls
8. Maintain records of the dates of investment
recommendations and the reports that
supported the recommendation
40
 Standard IV (A.1): Procedures for Compliance
• Analyze the basic characteristics of an investment before
recommending it
• Maintain written records of the investment’s basic
characteristics, which include:
– Business risk, quality rating, basis for recommendation (quantitative,
fundamental, technical)
• Analyze the client’s portfolio needs on a continuous basis. The
portfolio should be analyzed in its totality, not in terms of
individual items
• Develop a written statement of investment objectives with the
client at the beginning of the investment relationship with the
client

41
 Standard IV (A.2): Purpose and Scope
1. A report is defined as any:
• Written document, oral statement (either in person or via
telephone), media broadcast, transmission by a computer
2. If the recommendation is brief, the client should be notified
that additional, more detailed information is available
3. The risks of expected cash flows should be analyzed when
describing the basic characteristics of an investment (credit
risk, financial risk, overall market risk)
4. Company analysis should include:
– Earning power, cash flow, operating and financial strength and
viability, dividend potential

42
 Standard IV (A.2): Purpose and Scope

5. The writer of the report has the duty to select the

areas that need emphasis in the report. The report
should be structured so that the reader can follow,
and if necessary, challenge the analyst’s reasoning
process
6. Facts must be separated from opinion in the
research report. Estimates or forecasts must be
clearly separated from historical performance data
7. The analyst can ask the company’s management to
review the report for factual errors
43
Standard IV (A.2): Procedures for Compliance
• The analyst must take reasonable steps to ensure
the reliability, accuracy, and appropriateness of
the data used in the report
• Any calculations based on the data should be
checked for consistency with the analytical focus
of the report
• Avoid plagiarism
• Maintain records indicating the nature of the
research

44
 Standard IV (A.3): Purpose and Scope
1. Avoid situations which would cause or could be
perceived to cause a loss of independence or
objectivity
2. Influence could come via:
• Gifts
• Invitations or tickets to functions, such as a sporting event
• Job referrals
• Allocation of shares to oversubscribe IPOs to investment
managers for their personal accounts
• Modest gifts (valued at less than $100, are permitted; over
$100, should be reported to the employer

45
Standard IV (A.3): Procedures for Compliance

• Establish policies that state the research reports

are to reflect the unbiased opinion of the analyst
• Design compensation systems that maintain the
independence and objectivity of the analyst
• Disclose instances in which the firm underwrites
the securities of a company or makes a market in
that company’s securities
• Disclose the directorships held in other companies
by members of the firm
• Disclose all beneficial holdings of securities
46
 Standard IV (A.3): Procedures for Compliance
• If the senior management is unwilling to publish an adverse
opinion about a client, the firm should place the client on a
restricted list and issue only factual information about the
client
• Gifts should be limited to less than $100
• Restrict employee purchases of equity or IPO securities
• When attending meetings at the client’s HQ, the analyst’s firm
should pay for the analyst’s transportation and hotel expenses
• Review and/or implement effective supervisory procedures so
that employees comply with the policies related to their
personal investing actions

47
 Standard IV (B.1) Purpose and Scope
1. The definition of a fiduciary
2. A fiduciary’s duty to a client
3. Members should determine to whom the
fiduciary duty is owed
4. Different types of fiduciary relationship
– Trust
– Charitable organizations and public pension plan
– Corporate pension plans
– Soft dollars

48
Standard IV (B.1) Procedures for Compliance

• Follow all applicable rules and laws

• Establish the investment objectives of the client
• Diversify
• Deal fairly with all clients with respect to investment
actions
• Disclose all possible conflicts of interest
• Disclose compensation arrangements
• Preserve the confidentiality of client information
• Maintain loyalty to the plan beneficiaries

49
 Standard IV (B.2) Purpose and Scope

1. Know your client in all phases of the

investment process
2. Inform your client about all changes
3. Get client consent

50
Standard IV(B.2) Procedures and Compliance

• Different investment policies for different

clients in different periods
• An investment policy should include:
– Client identification
– Client objective
– Client constraints

51
 Standard IV (B.3) Purpose and Scope

1. Fairly does not mean equally; suitability

should be considered as well
2. The duty of fairness and loyalty to clients
cannot be overridden by a client’s consent
to an unfair allocation procedure
3. Trading ahead of informing clients is
prohibited

52
Standard IV (B.3) Procedures for Compliance

• Issues to be addressed:
– Limit sources of non-compliance
– Facilitate fair and immediate dissemination
– Control and monitor employees’ trading
activity
– Maintain written records of clients and their
holdings, and the allocation procedure

53
 Standard IV (B.4) Purpose and Scope

1. Designed to prevent any potential conflict of

interest or the appearance of conflict of interest
2. Transactions in an account for which the
member is a beneficial owner or has an indirect
interest must take place after clients and the
member’s employer have had an adequate time
to act on the recommendation

54
Standard IV (B.4) Procedures for Compliance
• Limit the number of access persons
• The compliance procedures should also define
personal transactions, investments, and prohibited
transactions
• Establish reporting and prior clearance
requirements for personal transactions. Trading
records should be kept (date, nature of the
transaction, price, name of the institution through
which it was made)
• Enforcement

55
 Standard IV (B.5) Purpose and Scope

1. If the information concerns illegal activities by

the client, there may be an obligation to report it
to the appropriate authorities
2. It does not prevent people from cooperating with
AIMR’s Professional Conduct Program
3. A member cannot refuse to cooperate with an
AIMR investigation on the basis of a
confidentiality agreement

56
Standard IV (B.5) Procedures for Compliance

• Do not disclose any info received from a

client except to authorized persons and/or in
cases where illegal activities are involved
• Factors to be considered:
– The context in which the information was
disclosed
– The nature of the material – is it background
info that will improve the service to the client
57
 Standard IV (B.6) Purpose and Scope

1. Definition of misrepresentation
2. Misrepresentation could occur in:
• Oral statements
• Advertising
• Research reports
• Market letters
• Newspaper columns
• books
58
Standard IV (B.6) Procedures for Compliance

• Understand and have a written list of the

firm’s services
• Designate employees who are authorized to
speak for the firm
• Know yourself
• Periodic review

59
 Standard IV (B.7) Purpose and Scope

• Disclosures should be made regarding the

following situations:
– Special relationships between the firm and the issuer of
the securities (e.g. holding a directorship)
• To whom the fiduciary duties are owned
• The receipt of material nonpublic info as a director
– Material beneficial ownership of stock
– Other areas of disclosures may include: compensation
arrangements, commissions, incentive/referral fees, etc.

60
Standard IV (B.7) Procedures for Compliance

• Firms should require employees to report

– All personal transactions (including for families)
– All material beneficial ownerships of securities
– All corporate or special relationships with outside
companies
• Disclosure should be made before making any
recommendation or taking investment action

61
 Standard IV (B.8) Purpose and Scope
1. The disclosure of any benefit received from referrals
helps the client evaluate:
• Any partiality shown in any recommendation or service
• The full cost of the service
2. “Any benefit” includes cash and non-cash items, such
as fees or the provision for research. The estimated
dollar-value of non-cash benefits should be disclosed
3. Disclosure should be made to the prospective client
before they enter into a formal agreement for service

62
 Standard V (A) Purpose and Scope
1. It prohibits taking investment action based upon material
nonpublic information that is known to have been or should
have known to have been misappropriated or illegally
obtained. The communication of this info is also prohibited
2. A member cannot trade or cause others to trade in a
security while the member is in possession of material
nonpublic info relating to a tender offer of the security
3. Info is material if:
• Its disclosure would likely have an impact on the price of a
security
• Reasonable investors would want to know the info before making
an investment decision

63
 Standard V (A) Purpose and Scope
4. Info is nonpublic until it has been disseminated to
the marketplace in general and investors have had
an opportunity to react to the info
5. Test for determining if a tipper is breaking fiduciary
duty: whether the tipper personally benefits directly
or indirectly. Types of personal benefits:
– Monetary or reputational benefit that translates into future
earnings
– Quid pro quo relationship
– The gift of info to someone, such as a relative

64
 Standard V (A) Purpose and Scope
7. A fiduciary duty cannot be imposed unilaterally
by trusting a person with confidential info
8. Imposing a duty to disclose solely because an
individual receives and acts upon material
nonpublic info obtained from a corporate insider
could undermine the function security analyst
serve in disseminating info in the marketplace

65
 Standard V (A) TIP
• Remember the following 6 situations
– If information received through work, then owes fiduciary duty
– If receiving it from someone else who is breach fiduciary duty, then
make effort to disclose it and cannot trade on it
– Information received from insider who is not breaching fiduciary
duty may be traded
– If information received in a public forum, and has been
disseminated, and one can trade on it
– If you figure it out on your own, via the mosaic theory, then you can
use it
– If no firewall established and material non-public information, then
analyst is considered to have breached standard V(A)

66
 Standard V (B) Purpose and Scope

1. Fair, accurate and complete presentation

2. Avoid misrepresentation
3. GIPS are voluntary. However, to claim
compliance without meeting the
mandatory requirements of GIPS is a
violation of the Standard

67
 Standard V (B) Procedures for Compliance

• Maintain written data about the firm’s

investment performance
• Consider the knowledge and investment
sophistication of the audience that is being
presented the performance data
• Consider the types of disclosures that would
fully explain the performance results being
presented

68