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.   Diligence and Reasonable Basis

The members and candidates must:

a.  Exercise diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions.

b.  Have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action.

A.1. Guidance

A.1.1. Defining Diligence and Reasonable Basis

a.  The diligence refers to the level and thoroughness of the information being reviewed. The level of diligence differs for each of the different products, services, and the level of security being analyzed.
The level of diligence depends on the support and evidence provided by the members and candidate employers

b.  The reasonable basis is based on a set of facts known and understood then.
The reasonable basis is formed through a balance of the resources appropriate for the security or decision being analyzed.

A.1.2. Using Secondary or Third Party Research

a.  Secondary research is the research conducted by any person other than the member or candidate himself in the firm.

b.  Third-party research is the research conducted by any person outside the firm.

c.  The members and candidates must make reasonable efforts to determine the creditworthiness of the research, based on which they are planning to take any decision or make recommendations.

d.  The members and candidates making use of the second and third party research should assess the following to determine its credibility:

    i.  assumptions used in making such research by the second or third party,

    ii.  the thoroughness of the analysis done,

   iii.  the date and timeliness of the research,

   iv.  evaluation of the objectivity, and

    v.  independence of the conclusions

d.  When research is chosen after the necessary diligence as above, the members and candidates may use the information in the good faith.

A.1.3. Using and Developing Quantitatively Oriented Research

a.  While using quantitatively oriented models such as those generated using computerized software, the members and candidates must know the parameters used, assumptions made, and limitations of such models.

b.  The members and candidates must make necessary efforts to test the efforts of the output of the investment models before incorporating the same into recommendations.

c.  Those members and candidates who are involved in the development of models or algorithms must understand its technical aspects thoroughly.

A.1.4.  Selecting External Advisors and Sub-Advisors

a.  The members and candidates must review the external managers and advisors as diligently and thoroughly as they review the securities.

b.  There should be a standardized criterion for reviewing the external advisors, which includes:

     i.  a thorough review of these manager’s and advisor’s code of ethics

    ii.  an understanding of the advisor’s compliance and internal control procedures

   iii.  an assessment of the quality of their published performance records

   iv.  a review of their investment process and their efficiency in holding to their stated strategies

A.1.5.  Group Research and Decision Making

a.  While considering group research, it should be noted that the output of such research should be the consensus of the members of the group.

b.  The names of all the members of the group should be in the report.

c.  If any member or candidate does not agree with the findings of the research, but the opinion has a reasonable basis, is independent, and objective, there is no need to disassociate from such group.

A.2. Recommended Procedure for Compliance

a.  Establish a policy that research reports must have a reasonable and adequate basis

b.  There should be an internal review of the report before it is released

c.  Written guidance for processes and review that establish the necessary rigor, accuracy, and quality hurdles

d.  There should be a criterion for assessing the quality of research

e.  There should be detailed, written guidance for testing of all computer-based models

f.  There should be measurable criteria for assessing outside providers

g.  There should be criteria for evaluating external advisers

B.   Communication with Clients and Prospective Clients

a.  Members and Candidates must:

b.  Disclose to clients and prospective clients the basic format and general principles of the investment processes they use to analyze investments, select securities, and construct portfolios and must promptly disclose any changes that might materially affect those processes.

c.  Disclose to clients and prospective clients significant limitations and risks associated with the investment process.

d.  Use reasonable judgment in identifying which factors are important to their investment analyses, recommendations, or actions and include those factors in communications with clients and prospective clients.

e.  Distinguish between fact and opinion in the presentation of investment analyses and recommendations.

f.  The communication between the member or candidates and the clients should, thus, be clear, frequent, and thorough.

g.  And, the clients, through these communications should have a clear understanding of the instrumental factors. They should also be able to clearly differentiate between the opinions and the facts.

B.1. Guidance

B.1.1. Informing Clients of the Investment Process

a.  The members and candidates must adequately describe how the investment decision-making process is conducted, and how and when the changes to the same are made.

b.  The investment decision-making process defines and describes what constitutes a suitable investment recommendation, especially in terms of expected return and risk on the portfolio.

c.  If the work of external advisors is used, their specialization or diversification expertise should be communicated to the clients.

B.1.2.  Different Form of Communication

a.  The communication with the clients can be made in different forms such as written, oral, media broadcast, social media, e-mailers, webinars, etc.

b.  The members and candidates must ensure that all the clients are treated fairly in terms of accessibility of information.

c.  If the content of the information being communicated to the clients is in shortened or capsule form, they should be given details of the location from where they can obtain the detailed information or analysis.

d.  The members and candidates should inform the clients about the significant risks or limitations of the analysis.

B.1.3.  Identifying Risk and Limitations

a.  The clients should be informed about all the risk factors that were known at the time of the release of the report or analysis.

b.  If there is no knowledge of the risk or limitation that results in a loss to the clients, its non-communication will not be considered as a violation of this standard.

B.1.4.  Report Presentation

a.  The report should present the conclusions and recommendations along with the basis of analysis and conclusions so that it can be challenged by its users.

b.  After reasonably adequate research, the report writer can emphasize and omit certain areas of research.

c.  The report made as a result of the quantitative analysis should be backed by the reference material.

B.1.5.  The distinction between Facts and Opinions

a.  The most important factor that separates facts from opinions is their ontological nature, i.e. whether it belongs to the past or future.

b.  Fact is the result of something that has occurred in the past.

     i.  And, opinion is made for something that might happen in the future.

    ii.  The quantitative conclusions must separate the facts from any statistical opinion based on incomplete information.

c.  The statistically developed projections are merely an estimate of the future result. A failure on the part of members and candidates to identify and communicate its limitations may be considered a violation of this standard.

B.2. Recommended Procedures for Compliance

The recommended procedure for compliance depends heavily on case-by-case review rather than a specific checklist. However, the research and communication should be defensible, in case of somebody questions it. Also, there should be a review process for the research.

C.   Record Retention

a.  According to this standard, the members and candidates must develop and maintain appropriate records to support their investment analyses, recommendations, actions, and other investment-related communications with clients and prospective clients.

b.  The records can be maintained either in hard copy or electronic form.

c.  Some of the examples of the records that need to be retained are:

     i.  Personal notes and minutes of the company meetings

    ii.  Press releases and presentations from covered meetings

   iii.  Inputs and outputs of the computer-based models

   iv.  Notes from meetings with clients

    v.  Risk and return analysis of securities in the portfolio

C.1. Guidance

C.1.1.  New Media Records

a.  Due to evolving technology, there is a constant change in the methods and formats of maintaining the records.

b.  The firms do have policies for maintaining the records, but they do become outdated due to constant changes.

c.  It is thus the responsibility of the members and candidates to take reasonable care in maintaining the records, despite the change in formats and methods of keeping these records.

C.1.2.  Records are a Property of Firm

a.  During employment, all the members and candidates provide output to the firm in the form of records. However, these records are the property of the firm and not the members and candidates.

b.  The members and candidates cannot take originals or copies of such records when they leave the firm without the consent of the employer.

c.  When the members and candidates join a new firm, they must re-create the research along with the supporting documents.

C.1.3.  Local Requirements

The regulators often impose requirements with a required timeframe for retaining the records (generally 7 years).

C.2. Recommended Procedures for Compliance

a.  The responsibility to maintain records that support investment action generally falls with the firm rather than individuals.

b.  The members and candidates should archive research notes and other documents that support investment-related communications.

 

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