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.
0/7
LOS A: Explain Ethics
00:00
LOS B: Ethics and Professionalism
00:00
LOS C: How Professions Establish Trust
00:00
LOS D and E: Professionalism in Investment Management
00:00
LOS F: Challenges to Ethical Conduct
00:00
LOS G: Ethical and Legal Standards
00:00
LOS H: Framework for Ethical Decision Making
00:00
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.
0/3
LOS A: Professional Conduct Program
00:00
LOS B: Code of Ethics
00:00
LOS C: Code and Standards
00:00
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.
0/7
Professionalism – First standard of Professional Conduct
00:00
Integrity of Capital Markets – Second Standard of Professional Conduct
00:00
Duties to Clients – Third Standard of Professional Conduct
00:00
Duties to Employer – Fourth Standard of Professional Conduct
00:00
Investment Analysis, Recommendations, & Actions
00:00
Conflict of Interest
00:00
Responsibility as a CFA Institute Member or CFA Candidate
00:00
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.
0/5
Why Were GIPS Standards Created?
00:00
Who Can Claim Compliance?
00:00
Who Benefits from Compliance?
00:00
Composites
00:00
Verification
00:00
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.
0/7
Objectives of GIPS
00:00
Overview of GIPS Standards
00:00
Compliance with GIPS
00:00
Recommendations
00:00
Scope of GIPS Standards
00:00
Implementation
00:00
Major Section of GIPS Standards
00:00
Ethical and Professional Standards
About Lesson

A.   Knowledge of Law

a.  This standard requires that all the members comply with all the applicable laws, rules, and regulations of any government, regulatory organization, licensing agencies, or professional organization governing their professional activities.

b.  In the event of any conflict, they should comply with stricter laws and regulations.

c.  The members must not knowingly participate, or assist in any, and must dissociate themselves from any violations of such laws, rules, or regulations.

A.1. Guidance

a.  The members and candidates must understand the applicable laws and regulations of the countries and the jurisdictions where they engage.

b.  The members and candidates must comply with the laws and regulations that directly govern their profession or activities.

c.  The members and candidates should know their firm’s policies and procedures for assessing the compliance guidance.

d.  The members and candidates should keep updating themselves regarding changes in the laws and regulations if any.

e.  When there is a conflict between the codes and standards and the applicable laws, and they require different conduct, the members and candidates must follow the stricter ones.
Thus, unless the member or the candidate is the resident of or is doing the business in the area with the laws stricter than the codes and standards, they must always follow the codes and standards.

A.2. Participation in or Association with Violations by Others

a.  The members and candidates are responsible for the violations they knowingly participate in or assist others in.

b.  If the members and candidates have reasonable grounds to believe that violations are or will occur then they must immediately dissociate or separate from such activity. They must also resign from the position if the need be. They may also:

     i.  report to the employer or the compliance department,

    ii.  step away from the job, or

   iii.  report to the CFA.

A.3. Investment Product and Applicable Laws

a.  The members and candidates involved in the creation of products and services should:

     i.  understand the laws and regulations of the country of origination,

    ii.  understand the laws and regulations of the country of the expected sale, and

   iii.  ensure that their distributors also abide by the applicable laws and regulations.

A.4. Compliance

The members and candidates must:

a.  Stay informed

b.  Review the procedures for getting guidance for compliance

c.  Maintain the current files for the laws, statutes, and regulations

d.  Seek legal advice for the compliance

e.  Dissociate immediately with the activities involving non-compliance

A.5. Requirements for Firms

The firms are required to:

a.  Develop and adopt a code of ethics

b.  Provide information on applicable laws

c.  Establish procedures for reporting violations

B.   Independence and Objectivity

a.  This standard requires that the members and candidates must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities.

b.  The members and candidates must not offer, solicit or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or other’s independence and objectivity.

B.1. Guidance

a.  The members and candidates should avoid real or perceived situations (including social situations) that could cause a loss of independence or objectivity in recommending investments or taking investment actions.

b.  It should be noted that modest gifts and entertainment are acceptable. And, if they are received from a client, they should be disclosed to the employer and be considered as supplementary compensation.

c.  The members and candidates are personally responsible for maintaining independence and objectivity concerning the research and recommendation. The opinions of the members and candidates should be true and free from any bias.

B.1.1. Investment Banking Relationship

a.  In the investment banking business, there may be pressure to issue favorable research reports on current and prospective investment banking clients.

b.  The analyst should not be coerced or enticed into issuing research that does not reflect their true opinions.

c.  To ensure the independence and objectivity of the investment banking professionals, the firewalls must be managed, which includes separating the investment banking and research departments.

     i.  There should be separate reporting structures for the investment banking and research departments.

    ii.  The compensation structure should be so designed to reward objectivity and accuracy.

B.1.2. Public Companies

a.  The analysts are under pressure to issue favorable reports for the companies they follow.

b.  The negative reviews may make it difficult to get access to the management, conference calls, etc.

B.1.3. Buy-Side Clients

a.  The portfolio manager may not want the negative opinions regarding the investments they are holding (in good quantity) to be released by the analysts. They may want at least a warning in advance.

b.  The portfolio managers, who may also happen to be CFA charter-holders, must not interfere with the research objectivity of the analysts, either directly or indirectly.

B.1.4. Fund Managers and Custodial Relationship

a.  The members and candidates who are responsible for selecting portfolio managers and custodians must appear independent.

B.1.5. Credit Rating Agency Opinions

a.  The members and candidates at the rating agencies must report without undue influence from the client companies.

b.  In case of any conflict, the members and candidates should have an understanding of the same if they are the consumers of the research.

B.1.6. Issuer Paid Research

a.  The member and candidates must disclose the potential conflict of interest including the nature of compensation received from the client. The compensation may vary from a flat fee to the options or warrants.

B.1.7. Travel Funding

a.  The travel funding received from the client introduces a source of conflict. Its effect must be considered in the context of its objectivity.

b.  Analysts should use commercial travel on their own or at the expense of their firms to avoid the appearance.

B.1.8. Performance Measurement & Attribution

a.  Those members and candidates working within a firm’s investment department reporting on company-run fund performance may have an impact on the objectivity.

B.1.9. Influence during the Manager Selection or Procurement Process

a.  The members and candidates must not solicit gifts, favors, donations from the target hire, if in a position to do so.

b.  They should also refuse to accept the gifts.

c.  If the members and candidates are the ones applying for the positions, they must not use gifts or favors to secure the positions.

NOTE: One should neither be influenced nor try to influence others.

B.2. Recommended Procedures for Compliance

a.  Protect the Integrity of Opinions: Every research or report presented by any member of the candidate must reflect the unbiased opinion of the writer.

b.  Create a Restricted List: The clients should be put on the restricted list if they are not ready to welcome any adverse opinion.

c.  Restrict Special Cost Arrangement: There should be no payment or reimbursement by any corporate issuer.

d.  Limit Gifts: The gifts received by the members and candidates should be limited to the token items or business-related entertainment only, that too, within reasonable limits.

e.  Restrict Investments: The members and candidates should restrict the investments such as private placements and IPOs.

f.  Review Procedures: There should be supervisory and review procedures related to personal investments.

g.  Independence Policy: There should be a written policy regarding the independence and objectivity of research. The research analysts should not be supervised by the potential influencing department.

C.   Misrepresentation

According to this standard, the members and candidates must not knowingly make misrepresentations relating to the investment analysis, recommendations, actions, or other professional activities.

C.1. Guidance

a.  The members and candidates should not make any written untrue statement or omission of fact resulting in misrepresentations.

b.  Any false or misleading statement, whether oral, written, or in electronic format should not be made.

c.  The members and candidates should not guarantee investment performance unless it is part of the product.

C.1.1. Impact on Investment Practice

a.  The members and candidates must not misrepresent any aspect of their practice, credentials qualifications, or performance record.

b.  The members and candidates should exercise care and diligence while using any third-party information.

c.  The members and candidates should disclose the intended use of external managers and must not claim their performance as their own.

C.1.2. Performance Reporting

a.  The members and candidates should not misrepresent the success of their performance record by comparing them with non-comparable benchmarks.

b.  The members and candidates should use a proper benchmark for performance and fee calculation.

c.  The members and candidates should provide accurate and reliable security pricing to the clients.

C.1.3. Omissions

There shouldn’t be the omission of any data point, whether model input or composite development.

C.1.4. Social Media

a.  The members and candidates should publish the same information as allowed to be distributed to the current and potential client on social media as well.

b.  All communications through social media should be compliant with the code and standards.

c.  The anonymity of information does not release the publisher from the obligation of owning the same.

C.1.5. Plagiarism

a.  It is the practice of copying, using in substantially the same form, materials prepared by others without acknowledging the source of the same.

b.  The material could be called plagiarized if someone else’s work is claimed by others as their own, or if they are using excerpts from someone else’s work verbatim or with no substantial changes.

c.  The text will be called plagiarized if it cites quotations from any leading analysts without any specific reference.

d.  When any material presenting statistical estimates or forecasts prepared by others is given along with the relevant citations but without statements of limitations that may have been used, it will be called plagiarized.

e.  The use of charts or graphs without stating the source is also plagiarism.

f.  Copying proprietary electronic spreadsheets or algorithms without the permission of the creator is also plagiarism.

g.  Plagiarism also includes oral communication, the use of audio or video media, and electronic media, without the permission of the real owner.

h.  It should be fine to distribute the third-party reports or even précis to those reports.

C.1.6. Work Completed for Employer

a.  The analyst may use previous internal research, which is the property of the firm.

b.  The analysts can’t, however, reissue a previously released report solely under their own name.

C.2. Recommended Procedures for Compliance

a.  Factual Presentations: The firms can guide written or oral communications, designating the persons who can speak on the behalf of the firm.

b.  A qualification summary should be provided as a part of the presentation.

c.  The outside information that is used should be duly verified.

d.  There should be web pages that monitor the materials posted.

e.  Plagiarism Policy: There should be a plagiarism policy that requires people to:

     i.  maintain a copy of source material for every reference

    ii.  all the projections, tables, and statistics should be attributed to quotations

   iii.  attribute the paraphrases and summaries

D.   Misconduct

The members and candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence.
Although CFA Institute discourages any sort of unethical behavior by members and candidates, the Code and Standards are primarily aimed at conduct and actions related to a member’s or candidate’s professional life.

D.1. Guidance

a.  The members and candidates should not engage themselves in any act or conduct that reflects poorly on their integrity or reputation.

b.  The members and candidates should not engage themselves in any conduct that damages trustworthiness or competence such as the use of alcohol or drugs during business hours, personal bankruptcy brought about by fraudulent or deceitful business conduct, etc.

c.  Misconduct also includes the absence of appropriate conduct or the lack of sufficient effort such as relying on someone else’s work without applying due diligence.

D.2. Recommended Procedures for Compliance

a.  The corporations should develop and adopt the code of ethics to which every employee must subscribe.

b.  The corporations should also prepare a list of violations along with the associated disciplinary actions.

c.  Employee References: The references need to be checked to ensure the character of the employees being recruited.

 

Previous
Next