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.   Loyalty

In matters related to their employment, Members and Candidates must act for the benefit of their employer and not:

a.  deprive their employer of the advantage of their skills and abilities,

b.  divulge confidential information, or

c.  otherwise, cause harm to their employer.

A.1. Guidance

a.  Employer responsibility: In an employer-employee relationship, there are responsibilities that both parties have against each other. Employers are usually not obligated to adhere to the code and standards. However, the members and candidates working as employees are obligated to follow the codes and standards prescribed by the CFA Institute.
The members and candidates need to explain their responsibility towards following the codes and standards to the employers, and the firms should adopt or develop conflicting practices.

b.  Independent Practice: The members and candidates must abstain from the independent competitive activity that could conflict with the interest of their employer. However, they are not completely restricted to do so; one can continue to do the independent business activity after making the disclosure of the same to the employer and they do not have any objection to the same.

c.  Leaving an Employer: If the members or candidates are planning to leave the service, they must continue to act in the employer’s best interest until the resignation takes
If the members of the candidates are leaving the service to start a business that is in competition with that of their employer, they must not:

     i.  misappropriate the trade secret of their previous employer,

    ii.  misuse the confidential information,

   iii.  solicit the employer’s clients before the cessation of their duty,

   iv.  indulge in self-dealing of the employer’s benefit,

    v.  misappropriate the clients or client-list of his employer.

It is, however, acceptable to make the arrangements while still being employed.

This standard does not prohibit the use of experience or knowledge gained while working for an employer at another. The records or work performed by the employee while on the service cannot be taken away by the employee unless permitted by the employer.

This standard does not prevent the members and candidates from contacting the previous employer, as long as:

d.  the names do not come from a list or record of the former employer, or

e.  there is no agreement or limiting contract.

f.  Use of Social Media: The members and candidates must not make use of communications through social media platforms such as Facebook, LinkedIn, Twitter, etc. in violation of the policies of the employer; especially at the time of leaving the service.

g.  Whistleblowing: It is the act of exposing the private information of the employer to the public. The act of whistleblowing should be refrained by the employee.
However, whistleblowing is permitted, if it protects the interests of the clients or the markets.

h.  Nature of Employment: The members and candidates may be working as an independent contractor, instead of as an employee. In such cases, the duties will be governed by the agreement between the members and candidates and the company, and not this standard.

A.2. Recommended Procedure for Compliance

The recommended procedure for compliance with this standard includes:

a.  Competition Policy: The members and candidates must understand and follow the competition policy followed by the firm in which they are employed.

b.  Termination Policy: This policy states the procedure to be followed while leaving the job. The members and candidates must understand and follow the same.

c.  Incident Reporting Procedures: The members and candidates should understand and follow the procedures and policies of the firm for whistleblowing and reporting the incidents.

d.  Employee Classification: There are different classes of employees in a firm, and different policies apply to each class. The members and candidates should understand and follow the same.

B.   Additional Compensation Arrangements

As per this standard, members and candidates must not accept gifts, benefits, compensation, or consideration that competes with or might reasonably be expected to create a conflict of interest with their employer’s interest unless they obtain written consent from all parties involved.

B.1. Guidance

a.  The members and candidates must obtain permission from their employer before accepting compensation that might create a conflict.

b.  “Written consent” includes any form of communication that can be documented.

c.  They need to discuss possible limitations to their abilities to provide services that may be competitive with your employer during the negotiation and hiring process.

B.2. Recommended Procedures for Compliance

a.  The members and candidates should make an immediate written report to the supervisor and compliance officer specifying any compensation they propose to receive.

b.  The details of the report should be confirmed by the party offering the additional compensation, including performance incentives offered by clients.

c.  This written report should state the terms of any agreement.

C.   Responsibility of Supervisors

a.  The members and candidates must make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations, and the code and standards.

b.  The members and candidates should ensure compliance by the subordinates whether they are members and candidates or not.

c.  It should be noted that merely delegating the duties does not do away with the responsibilities of this standard, the members and candidates must take reasonable steps to confirm the compliance.

C.1. Guidance

C.1.1. System of Supervision & Detection

a.  This standard requires the members and candidates to make reasonable efforts to have detection procedures in place in the firm.

b.  This includes establishing and implementing written compliance procedures, and a periodic review of whether these procedures are effectively implemented in the firm or not.

c.  If any violation is not detected, despite these efforts, it would not be a violation of this standard.

d.  But, if the members or candidates are aware of these procedures not being followed effectively, then despite them being in place; it will still be considered as a violation of this standard.

C.1.2.  Compliance Procedures

a.  Adequate compliance procedures are the ones that are designed to meet industry standards and regulatory compliance along with the codes and standards.

b.  The members and candidates must understand what makes an adequate compliance system.

c.  The members and candidates must make reasonable efforts to close any gaps from the current level to an adequate compliance system.

d.  There should also be reasonable effort to ensure that these efforts are monitored and enforced.

e.  Once the violation arises, the members and candidates must promptly initiate an investigation to assess its extent. Till the time the investigation is pending the suspected employee is placed on restricted access.

C.1.3.  Inadequate Compliance Procedures

a.  In case there is a lack of adequate compliance procedures, the members and candidates need to inform senior management and recommend corrective actions.

b.  The members and candidates may also decline the job responsibility if the lack of adequate procedures acts as a hindrance in the discharge of their supervisory duties.

C.1.4.  Enforcement of Non-Investment Related Policies

The non-investment-related policies such as those related to the workplace actions should be enforced at par with the investment-related policies.

C.2. Recommended Procedure for Compliance

a.  The members and candidates should recommend that the employer adopt a code of ethics.

b.  They should put in place specific policies and procedures to ensure that code and standards are complied with.

c.  The members should provide the code to the clients.

d.  The members and candidates should implement education and training programs to ensure that the code and ethics are followed appropriately.

e.  The incentives payable to the employees should be tied with strict adherence to the standards.

C.2.1.  Adequate Compliance Procedures

The members and candidates need to identify the situations in which violation is likely to occur and develop the compliance procedures that are:

a.  clearly written and accessible to the people in the firm

b.  easy to understand

c.  designate a compliance officer with the necessary authority, responsibility, and resources to carry the duty

d.  have a clearly defined hierarchy of supervision

e.  clearly outlined the scope of procedures along with the procedures to review such procedures

f.  procedures for reporting violations

Once the procedures are in place, the supervisor should:

a.  disseminate duties to appropriate personnel

b.  periodically review and update the procedures

c.  periodically review the employees

d.  enforce the procedures if violations occur

If any violation is discovered, the supervisors should:

a.  respond promptly to the situation

b.  make necessary investigations to determine its scope

c.  restrict those employees involved in violation in terms of action, till the time the outcome of the proceedings is pending

 

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