Course Content
ETHICS AND TRUST IN THE INVESTMENT PROFESSION
This chapter is covered in Reading 1 of the Study Session 1, of the study material prescribed by the institute. After reading this chapter a student should be able to: 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.
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LOS A: Explain Ethics
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LOS B: Ethics and Professionalism
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LOS C: How Professions Establish Trust
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LOS D and E: Professionalism in Investment Management
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LOS F: Challenges to Ethical Conduct
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LOS G: Ethical and Legal Standards
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LOS H: Framework for Ethical Decision Making
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CODE OF ETHICS AND STANDARDS OF PROFESSIONAL CONDUCT
This chapter is covered in Reading 2 of the Study Session 1, of the study material prescribed by the institute. After reading this chapter a student should be able to: 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.
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LOS A: Professional Conduct Program
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LOS B: Code of Ethics
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LOS C: Code and Standards
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GUIDANCE FOR STANDARDS I–VII
This chapter is covered in Reading 3 of the Study Session 1, of the study material prescribed by the institute. After reading this chapter a student should be able to: a. demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations involving issues of professional integrity; b. distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards; c. recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.
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Professionalism – First standard of Professional Conduct
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Integrity of Capital Markets – Second Standard of Professional Conduct
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Duties to Clients – Third Standard of Professional Conduct
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Duties to Employer – Fourth Standard of Professional Conduct
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Investment Analysis, Recommendations, & Actions
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Conflict of Interest
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Responsibility as a CFA Institute Member or CFA Candidate
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INTRODUCTION TO THE GLOBAL INVESTMENT PERFORMANCE STANDARDS (GIPS)
This chapter is covered in Reading 4 of the Study Session 1, of the study material prescribed by the institute. After reading this chapter a student should be able to: a. 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.
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Why Were GIPS Standards Created?
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Who Can Claim Compliance?
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Who Benefits from Compliance?
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Composites
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Verification
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GLOBAL INVESTMENT PERFORMANCE STANDARDS (GIPS)
This chapter is covered in Reading 5 of the Study Session 1, of the study material prescribed by the institute. After reading this chapter a student should be able to: 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.
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Objectives of GIPS
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Overview of GIPS Standards
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Compliance with GIPS
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Recommendations
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Scope of GIPS Standards
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Implementation
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Major Section of GIPS Standards
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Ethical and Professional Standards
About Lesson

A.   Conflict of Interests

a.  Members and Candidates must make full and fair disclosure of all matters that could

    i.  reasonably be expected to impair their independence and objectivity or

    ii.  interfere with respective duties to their clients, prospective clients, and employer.

b.  Members and Candidates must ensure that such disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively.

c.  The best practice for the members and candidates is to avoid any sort of real or perceived conflicts.

d.  If the avoidance of such conflicts is not possible, they should ensure that they are communicated effectively and appropriately.

A.1. Guidance

A.1.1.  Disclosure of Conflict to the Employer

a.  The members and candidates must provide enough information for the employer to assess the impact of the conflict.

b.  For example, dealing in the stocks analyzed may be explicitly prohibited by the employer, as it may interfere with rendering unbiased investment advice to the clients. Typically the same situations may also generate conflicts with the clients as well.

c.  The mere appearance of a situation of conflict could create a problem for the members and candidates and their employers.

d.  If a conflict appears inadvertently, the members and candidates must report them promptly.

A.1.2.  Disclosure to the Clients

a.  The member’s and candidate’s objectivity needs to be seen, as it may be impaired due to the existence of situations such as huge fees or brokerage on dealing in certain securities etc.

b.  The members and candidates should, therefore, disclose the relationship between an issuer and member and candidate, or employer, such as directorship, ownership, broker/dealer relationship, etc.

c.  The firms must disclose all the agreements due to which the firms benefit directly from investment recommendations, such as fee arrangements, sub-advisory agreements, and other non-standard fee structures.

A.1.3.  Cross-Departmental Conflicts

a.  There could be cross-departmental conflicts as the sales-side analysts may be asked by the brokers or dealers to write reports for them, whereas the buy-side analysts may be asked by the underwriters to do it for them.

b.  The members, candidates, and their firms should make necessary attempts to resolve the situations presenting such conflict of interests and make the necessary disclosures as per this section.

A.1.4.  Conflicts with Stock Ownership

a.  The ownership of stocks that members and candidates recommend to the clients is a source of conflict, as the analysts are prohibited from owning the same, whereas it may be discriminating for the members and candidates.

b.  If the members and candidates have any beneficial ownership in the stocks they are recommending, they must disclose the same according to this section.

A.1.5.  Conflicts as Directors

a.  As a director, there could be these three main sources of conflict:

     i.  between the duties owed to the clients versus those owed to the shareholders

    ii.  the compensation received by the director in the form of options versus their objectivity while reporting

   iii.  having access to material non-public information, which may be used by them

b.  The members and candidates in directorial positions providing investment services should be isolated from those making the investment decisions.

A.2. Recommended Procedures for Compliance

a.  Disclose special compensation arrangements with the employer that might conflict with client interests, such as bonuses based on short-term performance criteria, commissions, incentive fees, performance fees, and referral fees.

b.  If a firm does not permit such disclosure you should document the request and may consider dissociating from the activity

B.   Priority of Transactions

Investment transactions for clients and employers must have priority over investment transactions in which a member or candidate is the beneficial owner.

B.1. Guidance

B.1.1. Avoiding Potential Conflict

a.  The members and candidates are free to invest personally, if:

     i.  the client is not in any disadvantageous position due to their trades,

    ii.  the members and candidates do not benefit personally from the trades undertaken for the clients, and

   iii.  members and candidates are complying with the applicable regulatory requirements.

b.  The above extends to the trades that may run counter to current client recommendations.

B.1.2.  Personal Trading Secondary to Trading for Clients

The main objective of this standard is to prevent personal transactions from adversely affecting the interests of clients and employers.

B.1.3.  Standards for Nonpublic Information

a.  The members and candidates may know pending transactions or may know material non-public information.

b.  The members and candidates are prohibited from acting on or conveying such information to others so that they can directly benefit from the same.

B.1.4.  Impact on All Accounts with Beneficial Ownership

a.  The members and candidates can execute trades in accounts for which they are beneficial owners only after clients and employers have had adequate opportunity to act on a recommendation.

b.  The accounts of the family members who are also the clients should be treated at par with the other accounts.

B.2. Recommended Procedures for Compliance

a.  Limited participation in equity IPOs: If a member or candidate is participating in an IPO, it may be seen as:

    i.  taking the opportunity away from the client

    ii.  an incentive to make future favorable decisions to the party providing the opportunity

b.  Restrictions on private placements: Due to the same reasons why there should be limited participation in equity IPOs, there should also be restrictions on private placements as well.

c.  Establish blackout/restricted periods: The blackout or restricted periods should be established:

     i.  before trades for the clients

    ii.  to avoid front-running

It should cover all the members involved in the decision-making process.

d.  Reporting requirements:

     i.  Disclosure of holdings in which the employee has a beneficial interest.

    ii.  The disclosure should be made upon commencement of the job and on an annual basis.

   iii.  Providing duplicate confirmations of transactions. This includes verification of timings of the transactions instead of just the knowledge of the holding positions. There should also be self-monitoring policies in place.

   iv.  Preclearance procedures: The members and candidates should examine all planned personal trade and avoid all the potential conflicts

e.  Disclosure of policies: The members and candidates should disclose all personal investing policies to the clients.

C.   Referral Fee

Members and Candidates must disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services.

C.1. Guidance

a.  Advise the client or prospective client before entering into any formal agreement

b.  Disclose the nature of the consideration or benefit

C.2. Procedures for Compliance

a.  Encourage your employer to develop procedures related to referral fees

b.  Employers should have investment professionals provide to the client’s notification of approved referral fee programs and provide the employer regular (at least quarterly) updates on the amount and nature of compensation received

 

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