01 Ethics

2013CFA
Ethics
CFA

2013330

CFA
TOPICAREA LEVEL LEVEL Exam
EthicalandProfessionalStandards(total) 15 10 1+1
QuantitativeMethods 12 510 1+0
Economics 10 510 0+1
FinancialStatementAnalysts 20 1525 2+2
CorporateFinance 8 515 1+1
InvestmentTools(total) 50 3060
AnalysisofEquityInvestments 10 2030 2+2
AnalysisofFixedIncomeInvestments 12 515 1+1
AnalysisofDerivatives 5 515 1+1
AnalysisofAlternativeInvestments 3 515 1+0
AssetValuation(total) 30 3575
PortfolioManagement(total) 5 515 0+1
TOTAL 100 100 10+10
2230 100%ContributionBreedsProfessionalism
FrameworkofEthics
CodeofEthicsandStandardsofPractice
SoftDollarStandards
ResearchObjectivityStandards
Casestudy
Case1:TheGlenarm Company
Case2:PrestonPartners
Case3:SuperSelection
TradeAllocation:FairDealingAndDisclosure
Case4:ChangingInvestmentObjectives
PrudenceinPerspective
Ethics&ProfessionalStandards
MembersofCFAInstitute(MembersandCandidates)must:
Actwithintegrity,competence,diligence,respect,andinanethical
mannerwiththepublic,clients,prospectiveclients,employers,
employees,colleaguesintheinvestmentprofession,andother
participantsintheglobalcapitalmarkets.
Placetheintegrity oftheinvestmentprofessionandtheinterestsof
clientsabovetheirownpersonalinterests.
Usereasonablecareandexerciseindependent professionaljudgment
whenconductinginvestmentanalysis,makinginvestment
recommendations,takinginvestmentactions,andengaginginother
professionalactivities.
Practiceandencourageotherstopracticeinaprofessionaland ethical
mannerthatwillreflectcredit onthemselvesandtheprofession.
Promotetheintegrity of,andupholdtherulesgoverning,capital
markets.
Maintainandimprovetheirprofessionalcompetence andstriveto
maintainandimprovethecompetenceofotherinvestmentprofessionals.
SevenStandardsofProfessionalConduct
Knowledgeofthelaw;
Professionalism Independenceandobjectivity;
Misrepresentation;
Personal Misconduct
conduct Integrity of capital MaterialNonpublicinformation;
markets Marketmanipulation
Loyalty,prudenceandcare;
Fairdealing;
DutyToClients Suitability;
Duties Performancepresentation;
PreservationofConfidentiality
Loyalty;
DutyToemployers Additionalcompensation
arrangements;
CodeandEthics Responsibilityof supervisors
Diligenceandreasonablebasis;
Investment Communicationwithclients;
Recordretention
Investment Conflictsofinterest
Disclosureofconflicts;
Priorityoftransactions;
process Referralfees
Conductasmembersand
Responsibilityas candidates;
members Referencetoinstitute,
designation,program
GuidanceforStandardsIVII
Knowledge of the law;
Independence and objectivity;
Professionalism
Misrepresentation;
Misconduct
Material nonpublic information;
Integrity of capital markets
Market manipulation
Loyalty, prudence and care;
Fair dealing;
Duty To Clients Suitability;
Performance presentation
Standards Preservation of confidentiality
Loyalty;
Duty To employers Additional compensation arrangements;
Responsibility of supervisors
Diligence and reasonable basis;
Investment Communication with clients;
Record retention
Disclosure of conflicts;
Conflicts of interest Priority of transaction;
Referral fees
Conduct as members and candidates;
Responsibility as members
Reference to CFA institute, designation
StandardI(A):Content
Content
1. MembersandCandidatesmustunderstandandcomplywith allapplicable
laws,rules,andregulations(includingtheCFAInstituteCodeofEthicsand
StandardsofProfessionalConduct)ofanygovernment,regulatory
organization,licensingagency,orprofessionalassociationgoverningtheir
professionalactivities.
2. Intheeventofconflict,membersandcandidatesmustcomplywiththe
morestrict law,rule,orregulation.
3. Membersandcandidatesmustnotknowingly participateorassistinand
mustdissociatefrom anyviolationofsuchlaws,rules,orregulations.
StandardI(A):GuidanceCodeandStandardsvs.locallaw
Guidance CodeandStandardsvs.locallaw
4. Mustknowandshouldknow thelawsandregulationsrelatedtotheir
professionalactivitiesinallcountriesinwhichtheyconductbusiness.
5. Notexpertonalllawsthatcouldgovernhisactivitiesnotexperton
compliance,howevermustcomplywithlawdirectlygoverning.
6. Alwaysadheretothemoststrict(Ms) rulesandrequirements(laworCFA
instituteStandards)thatapply.DonotviolateCodeorStandardsevenif
theactivityisotherwiselegalunderlocallaws.(Lessstrict,Ls)
7. Complywiththelastapplicablelaw iftransferableapplicability
work(applicable) live compliance
Ms Live Ls Ls<Code Code
Ls Live Ms Ms>Code Ms
StandardI(A):Guidance Participationorassociationwithviolations
byothers
Guidance Participationorassociationwithviolationsbyothers
8. Know reportthroughsupervisororcompliancedepartment may
considerconfrontingwrongdoersifunsuccessful dissociate
anddocument consultforfurtheraction evenquit
9. Suspect Consult butcantbeabsolved fromrequirementsto
compliance
10. ThereisnorequirementunderStandardstoreport violationsto
governmentalauthorities,butthismaybeadvisable insome
circumstancesandrequiredbylawinothers.
11. Inactioncombinedwithcontinuingassociation withthoseinvolvedin
illegalorunethicalconductmaybeconstruedasparticipationor
assistanceintheillegalorunethicalconduct.
StandardI(A):Guidance InvestmentProductsandApplicableLaws
Guidance InvestmentProductsandApplicableLaws
12. Membersandcandidatesinvolvedincreatingormaintaininginvestment
services,investmentproducts,packagesofsecuritiesandderivatives
shouldbemindfulofwheretheseproductsorpackageswillbesoldaswell
astheirplacesoforigination.(wheretosellandoriginate)
13. Theapplicablelawsandregulationsofthecountriesorregionsof
originationandexpectedsaleshouldbeunderstoodbythoseresponsible
forthesupervisionof theservicesorcreationandmaintenanceofthe
productsorpackages.(supervisor)
14. Shouldmakereasonableeffortstoreviewwhetherassociatedfirms that
aredistributingproductsorservicesalsoabidebythelawsandregulations
ofthecountryandregionsofdistribution.(associatedfirms)
15. Shouldundertakenecessaryduediligence whentransactingcrossborder
business tounderstandthemultipleapplicablelawsandregulations,in
ordertoprotectthereputationofthefirmandthemselves.(crossborder)
StandardI(A):Procedures Formembersandcandidates
Recommendedprocedures Formembersandcandidates
16. Stayinformed:
Shouldestablishorencourage employerstoestablishaprocedure by
whichemployeesareregularlyinformedaboutchangesinlaws,rules
andregulations.
Inmanyinstances,theemployerscompliancedepartmentorlegal
counselcanprovidesuchinformationintheformofmemorandums
distributedtoemployeesintheorganization.
Participationinaninternalorexternalcontinuing educationprogramis
apracticalmethodofstayingcurrent.
17. Reviewprocedures: Shouldreview,orencouragetheiremployersto
review,thefirmswrittencomplianceproceduresonaregularbasisto
ensurethattheproceduresreflect currentlawandprovideadequate
guidancetoemployeesaboutwhatispermissibleconductunderthelaw
ortheCodeandStandards.
18. Maintaincurrentfiles:Shouldmaintainorencouragetheiremployersto
maintainreadilyaccessiblecurrentreferencecopies ofapplicable
statutes,rules,regulations.
StandardI(A):Procedures Formembersandcandidates
Recommendedprocedures distributionarealaw,legalcounsel,dissociation
Distributionarealaws: Makereasonableeffortstounderstandthe
applicablelawsforthecountriesandregionswheretheirinvestment
productsaredevelopedanddistributedtoclients.
Legalcounsel: Whenindoubt abouttheappropriateaction,itis
recommendedtoseektheadviceoflegalcounselorcompliance
personnel.
Ifapotentialviolationiscommitted,seektheadviceoflegal
counselorcompliancedepartment.
Dissociation:Whendissociatingfromviolation,documentthe
violationandurgethefirmtopersuadetheperpetratorstoceasesuch
conduct.
Mayhavetoquitthejob.
StandardI(A):Procedures ForFirms
Recommendedprocedures ForFirms
19. Theformalityandcomplexityofcomplianceproceduresforfirmsdepend
onthenatureandsize oftheorganizationandthenatureofits
investmentoperations.
20. Shouldencouragethefirmtoconsiderthefollowingpolicies:
Developoradoptacodeofethics: Theethicalculturestartsatthetop.
Encouragesupervisorsormanagerstoadopt.
AdheringtotheCodefacilitatessolutionswhenpeopleface
ethicaldilemmasandcanpreventtheneedforemployeesto
resorttoawhistleblowing solutionpubliclyallegingconcealed
misconduct.
StandardI(A):Procedures ForFirms
Recommendedprocedures ForFirms
20. Shouldencouragethefirmtoconsiderthefollowing:(cont)
Provideinformationonapplicablelaws:
Pertinentinformationthathighlightsapplicablelawsand
regulationsmightbedistributed toemployeesormadeavailable
inacentrallocation.
Informationsources mightincludeprimaryinformation
developedbytherelevantgovernmentalagencies,regulatory
organizationsandprofessionalassociations(e.g.,fromwebsites);
andassociationpublications(e.g.,CFAMagazine).
Establishproceduresforreportingviolations: Firmsmightprovide
writtenprotocolsforreportingsuspectedviolations.
Professionalism
Misrepresentation;
Misconduct
Market manipulation
Fair dealing;
Loyalty;
Record retention
Referral fees
StandardI(B):Content
Content:
1. MembersandCandidatesmustusereasonablecareandjudgmentto
achieveandmaintainindependenceandobjectivityintheirprofessional
activities.
2. Mustnotoffer,solicit,oracceptanygift,benefit,compensation,or
considerationthatreasonablycouldbeexpectedtocompromise theirown
oranothersindependenceandobjectivity.
StandardI(B):Guidance
Guidance Giftsfromthethirdpartyandclients
3. Rejectgiftthatcouldbeexpectedtocompromise theirownoranothers
independenceandobjectivity.(BestPractice)
Modestandnormalgift isOKonlyif itspurposeisnottoinfluence
independence.Benefitsmayincludegifts,invitationstolavish
functions,tickets,favors,jobreferrals,andsoon.
4. Giftfromclients:Receivingagift,benefit,orconsiderationfromaclient
canbedistinguishedfromgiftsgivenbyentitiesseekingtoinfluence
independencetothedetrimentofotherclients.Clientsgiftshouldbe
disclosed,ifnot violateI(B).
Whenpossible,priortoacceptingbonuses orgiftsfromclients,
disclosetoemployerssuchbenefitsofferedbyclients.
Ifnotificationisnotpossiblepriortoacceptance,discloseto
employersbenefitspreviouslyacceptedfromclients.
Disclosureallowstheemployertomakeanindependent
determinationabouttheextenttowhichthegiftmayaffectthe
membersorcandidatesindependenceandobjectivity.
Guidance
5. Mainlyconcerninghowtodealwithinternalandexternalconflicts.
6. Maintainindependenceandobjectivitywhenmakingresearchreports,
investmentrecommendations,andinvestmentactiononbehalfofclients.
Recommendationsmustconveytrueopinions,freeofbias from
internalorexternalpressures,andbestatedinclearand
unambiguouslanguage.
7. Pressurefromemployer
issuefavorableresearchreportsforcertaincompanieswithpotential
orcontinuingbusinessrelationshipswiththefirm.
situationisaggravatedifanexecutivesitsontheinvestment
firmsboardandinterfereinvestmentdecisionmaking.
8. Externalfinancialsupport. Someprofessionalorsocialactivitieswithin
CFAInstituteormembersocietiesmaysubtlythreatenindependenceor
objectivity.
Whenseekingcorporatefinancialsupportforconventions,seminars,
weeklysocietyluncheons,evaluateboththeactualeffect on
independenceandwhetherobjectivitymightbeperceivedtobe
compromisedintheeyesofclients.
StandardI(B):GuidanceBuySideclientsandportfoliomanagers
GuidanceBuySideclients(portfoliomanagers)
9. BuySideClientsmaytrytopressuresellsideanalysts.
Institutionalclientsaretheprimaryusersofsellsideresearch,either
directlyorwithsoftdollarbrokerage.
Ratingdowngrade affecttheportfoliosperformanceand
managerscompensation Portfolioperformanceissubjecttomedia
andpublicscrutiny,affectthemanagersprofessionalreputation
someportfoliomanagersmaysupportsellsideratingsinflation
10. Portfoliomanagershavearesponsibilitytorespectintellectual honestyof
sellsideresearch.
Impropertothreatenorengageinretaliatorypractices.
Theperceptionbytheresearchanalystthatareprisalispossiblemay
causeconcern andmakeitdifficulttomaintainindependence.
StandardI(B):GuidanceFundmanagerrelationships
GuidanceFundmanagerrelationships
11. Membersandcandidatesresponsibleforhiringandretainingoutside
managers shouldnotacceptgifts,entertainment,ortravelfundingthat
maybeperceivedas impairingtheirdecisions.
12. Primaryandsecondaryfundmanagers oftenarrangeeducationaland
marketingeventstoinformothersabouttheirbusinessstrategiesor
investmentprocess.
Mustreviewthemeritsofeachofferindividuallyindetermining
whethertheymayattendyetmaintainindependence.
StandardI(B):GuidanceInvestmentbankingrelationships
GuidanceInvestmentbankingrelationships
13. Firewallbetweenresearchandinvestmentbankingshouldbebuiltto
minimizeconflictsofinterest.
Keyelement:Separatereportingstructuresforpersonnelonthe
researchside andpersonnelontheinvestmentbankingside.
Anotherelement:Compensationarrangementthatminimizesthe
pressures onresearchanalystsandrewardsobjectivityandaccuracy.
Compensationshouldnotlinkanalystremunerationdirectlyto
investmentbankingassignmentsinwhichanalystmayparticipate
asateammember.
14. Itisappropriatetohaveanalystsworkwithinvestmentbankersonly
when theconflictsareadequatelyandeffectivelymanagedanddisclosed.
15. Firmsshouldalsoregularlyreviewpoliciesandprocedures todetermine
whetheranalystsareadequatelysafeguardedandtoimprovethe
transparencyofdisclosures.
StandardI(B):Guidance Publiccompanies
Guidance Publiccompanies
16. Analystsshouldnotbepressuredtoissuefavorableresearchbythe
companiestheyfollow.
Canpromise tocoverthefirm,shouldnotpromisefavorablereportabout
thefirm.
Duediligenceinfinancialresearchandanalysisinvolvesgathering
information frompublicdisclosuredocumentsandalsocompany
managementandinvestorrelationspersonnel,suppliers,customers,
competitors,andotherrelevantsources.
StandardI(B):Guidance Creditratingagencyopinions
Guidance Creditratingagencyopinions(NEW)
17. Membersandcandidatesatratingagenciesshouldensurethat
proceduresattheagenciespreventundueinfluencesfromasponsoring
company duringtheanalysis.
18. Shouldabidebytheiragencies andtheindustrysstandardsofconduct
regardingtheanalyticalprocessandthedistributionofreports.
19. Theratingagenciesneedtodevelopthenecessaryfirewallsand
protectionstoallowtheindependentoperationsoftheirdifferent
businesslines.
20. Whenusinginformationprovidedbycreditratingagencies,Shouldbe
mindfulofthepotentialconflictsofinterest.
StandardI(B):Guidance IssuerPaidresearch
Guidance IssuerPaidresearch
21. Issuerpaidresearchisfraughtwithpotentialconflicts.
22. Analysts compensationforpreparingsuchresearchshouldbelimited,
andthepreferenceisforaflatfeethatisnotlinkedtotheirconclusions
orrecommendations (directlyorindirectly)
23. Mustfullydisclosepotentialconflictofinterest,includingthenatureof
compensation.Ifnot misleadinginvestors
24. Conductathoroughanalysis ofthecompanysfinancialstatementsbased
onpublicinformation,benchmarkingwithinapeergroup,andindustry
analysis.
Distinguishbetweenfactandopinion.
Guidance TravelFunding
25. Maybeinfluencedbydiscussionsexclusivelywiththecompany
executiveswhenflyingonacorporatejet.
26. Bestpractice: alwaysusecommercialtransportationratherthanaccept
paidtravelarrangements fromanoutsidecompany.
Ifcommercialtransportationisunavailable,mayacceptmodestly
arrangedtraveltoparticipateinappropriateinformationgathering
events,suchasapropertytour.
StandardI(B):RecommendedproceduresforCompliance
RecommendedproceduresforCompliance
Protecttheintegrityofopinions
Establishpoliciesthateveryresearchreportconcerningthesecuritiesof
acorporateclientshouldreflectunbiasedopinion
compensationsystemsshouldprotectintegrityininvestmentdecision
processbymaintainingindependenceandobjectivityofanalysts.
Createarestrictedlist
Ifthefirmisunwillingtodisseminateadverseopinions,encouragethe
firmtoputcontroversialcompanyonrestrictedlistanddisseminate
onlyfactualinformation.
Restrictspecialcostarrangements payityourself;Notreimbursedby
corporateissuer;Usecorporateaircraftonlywhen commercial
transportationisnotavailable;Issuershouldntalwayshosttheanalyst.
Limitgifts tokenitemsonly. Customaryandordinarybusinessrelated
entertainmentisOKaslongasitspurposeisnottoinfluenceindependence;
valuelimitthatisbasedonlocalcustoms andaddresswhetherthelimitis
pergiftorannualtotalamount.
StandardI(B):RecommendedproceduresforCompliance
RecommendedproceduresforCompliance(cont)
Restrictinvestments:
Formalpoliciesrelatedtoemployeepurchasesofequityorequity
relatedIPO;
RequirepriorapprovalforemployeeparticipationinIPO,withprompt
disclosureofinvestmentactionstakenfollowingtheoffering;
Strictlylimitacquiringsecuritiesinprivateplacements.
Reviewprocedures - Implementeffectivereviewproceduresabout
personalinvestmentactivitiestoensurecompliancewithfirmpolicies.
Independencepolicy: formalwrittenpolicy toensurethatanalystsarenot
controlled/supervisedbyanydepartmentthatcouldcompromise
independence.
Appointedofficer:
tosuperviseforcompliance;
provideeveryemployeewithproceduresforreportingviolation.
Professionalism
Misrepresentation;
Misconduct
Market manipulation
Fair dealing;
Loyalty;
Record retention
Referral fees
StandardI(C):Content
Content:
1. Mustnotknowingly makeanymisrepresentationsrelatingtoinvestment
analysis,recommendations,actions,orotherprofessionalactivities.
StandardI(C):Guidance DefinitionofMisrepresentation
Guidance
2. Amisrepresentationisanyuntruestatementoromissionofafact orany
statementthatisotherwisefalseormisleading.
Mustnotknowingly omitormisrepresentinformationorgiveafalse
impressionofafirm,organization,orsecurityinoralrepresentations,
advertising(whetherinthepressorthroughbrochures),electronic
communications,orwrittenmaterials(whetherpubliclydisseminated
ornot).
Knowingly meansthateitherknoworshouldhaveknown thatthe
misrepresentationwasbeingmadeorthatomittedinformation could
altertheinvestmentdecisionmakingprocess.
Ensurethattheanalysesincorporateabroadrangeofassumptions
fromverypositivescenariostoextremelynegativescenarios.
StandardI(C):Guidance classificationofmisrepresentation1
Guidance ImpactonInvestmentPractice
3. Guaranteetheinvestmentperformance
Prohibit fromguaranteeingspecificreturnwhichisinherentlyvolatile.
Notprohibit fromguaranteeingreturnwhichisbuiltintothestructure
oftheproductorforwhichaninstitutionhasagreedtocoverany
losses.
4. Misrepresentingservices
Acompanyisprohibitedfromsayingwecanprovideallservicesyou
need.Properwayistoprovidealistofservicesavailable.
5. Misrepresentingqualificationsofindividualandfirm
Oncefindingmisrepresentationofqualification(e.g.typographical
error),onlyifcorrectitassoonaspossible,orviolateI(C).
StandardI(C):Guidance classificationofmisrepresentation1
Guidance ImpactonInvestmentPractice
6. Investingthroughoutsidemanagers
Ifinvestinareasoutsideafirmscorecompetenciesthroughoutside
managers,mustdiscloseintendeduseofexternalmanagers,members
andcandidatesmustnotrepresentoutsidemanagers investment
practicesastheirown.
7. Usingthirdpartyinformation
Exercisecareanddiligencewhenusing3rdpartyinformation.
Whenitaffectsbusinesspractices,investmentprofessional shouldbe
responsibleforthemisrepresentation.
StandardI(C):Guidance classification2(plagiarism)
GuidancePlagiarism
8. Plagiarism
Definition: Copyingorusinginsubstantiallythesameformmaterials
preparedbyotherswithoutacknowledgingthesourceofthematerial
oridentifyingtheauthorandpublisherofsuchmaterial.
Appliedinoralcommunications(e.g.groupmeetings);visitswith
clients;useofaudio/videomedia;andtelecommunications.
Mustnotcopy(orrepresentastheirown)originalideas/material
withoutpermission.Mustacknowledgeandidentifythesourceof
ideas/material.(e.g.acomputermodelderivedfromothers idea)
9. Plagiarismincludes:
Takingastudydonebyothers,changename,andrelease.
Usingexcerptsfromothers reportswithoutacknowledgement.
Citingquotationsasleadinganalysts andinvestmentexperts
withoutnamingspecificreference.
Usingchartsandgraphs withoutstatingsources.
Presentingstatisticalestimatesofforecastspreparedbyothers and
identifyingthesourceswithoutincludingthequalifyingstatementsor
caveats thatmayhavebeenused.
StandardI(C):Guidance Plagiarism
Guidance Plagiarism
9. Plagiarismincludes:cont
Copyingproprietarycomputerizedspreadsheetsoralgorithmswithout
authorizationofthecreators.
Preparationofresearchreportsbasedonmultiplesourceswithout
acknowledgingthesources.(e.g.ideas,statisticalcompilations,and
forecastscombinedtogivetheappearanceoforiginalwork).
Cannotuseundocumentedforecasts,earningsprojections,asset
values,etc.Sourcesmustberevealedtobringtheresponsibility
directlybacktotheauthororthefirminvolved.
Indistributing3rdparty,outsourcedresearch,mayuseanddistribute
reportsaslongasnotrepresentingoneselfastheauthor.
Mayaddvaluefortheclientbysiftingthroughresearchand
repackagingitforclients.
Shoulddisclosewhethertheresearchpresentedcomesfrom
anothersource,fromeitherwithinoroutsidethemembersfirm.
Thisallowsclientstounderstandwhohastheexpertise.
StandardI(C):Guidance Plagiarism
Guidance Plagiarism
10. Whencitingfrommainstreammediaoutlet:
Cannotonlycitetheinformationfromtheintermediary,incaseof
misunderstandingandpotentialdeviationfromtheviewpointofthe
originalauthor.
Bestpractice:
Either obtaintheinformationdirectlyfromtheauthorandcite
onlythatauthor
or usetheinformationprovidedbytheintermediaryandcite
bothsources.(seeCase11)
StandardI(C):Guidance WorkCompletedforEmployer
Guidance WorkCompletedforEmployer
11. Firmmayissuefuturereportswithoutattributiontoprioranalysts,buta
memberorcandidatecannotreissueapreviouslyreleasedreportsolely
underhisorhername.
May useotherpeopleswork(research,models,etc.)withinthesame
firm withoutcommittingaviolation.
Whentheoriginalanalystleavesthefirm,researchandmodels
developedwhileemployedarethepropertyofthefirm. Thefirm
retainstherighttocontinueusingtheworkcompletedafter leaving.
Thefirmmayissuefuturereportswithoutprovidingattributionto
theprioranalysts.
Amemberorcandidatecannot reissueapreviouslyreleased
reportsolelyunderhisorhername.
StandardI(C):RecommendedproceduresforCompliance
Factualpresentations:
fairlypresentfirmscapabilities
Provideawrittenlistofavailableservicesandadescriptionof
qualifications.
Bydesignatingwhichemployeesareauthorizedtospeakonbehalf of
thefirm.
Qualificationsummary:
listofservicesavailable,qualificationsandexperience
Firmsperiodicallyreviewemployeecorrespondenceanddocuments
thatcontainrepresentationsofqualifications.
Verifyoutsideinformation:
misrepresentationbythirdpartymaydamageitsreputationand
integrityofcapitalmarket.
Encouragetodeveloppolicytoverify.
Maintainwebpage:
regularlymonitormaterialspostedonthesitetoensurecurrent
information.
Takeprecautionstoprotectthesitesintegrity,confidentialityand
security,andensurethatthesitedoesnotmisrepresentandprovides
fulldisclosure.
StandardI(C):RecommendedproceduresforCompliance
Plagiarismpolicy:
Maintaincopies:Keepcopiesofallmaterialcontainingresearchideas,
newstatisticalmethodologies,andothermaterialsthatwerereliedon
inpreparingtheresearchreport.
Attributequotations:Attributetotheirsourcesanydirectquotations,
includingprojections,tables,statistics,model/productideas,andnew
methodologiespreparedbypersonsotherthanrecognizedfinancial
andstatisticalreportingservicesorsimilarsources.
Attributesummaries:Attributetotheirsourcesanyparaphrasesor
summariesofmaterialpreparedbyothers. Ifattributeother
analystssummariestosupporthisownanalysis,hemust
acknowledgeinhisreporttherelianceontheotheranalystsreport.
Professionalism
Misrepresentation;
Misconduct
Market manipulation
Fair dealing;
Loyalty;
Record retention
Referral fees
StandardI(D):Content
Content
1. Mustnotengageinanyprofessionalconductinvolvingdishonesty,fraud,
ordeceit orcommitanyactthatreflectsadverselyontheirprofessional
reputation,integrity,orcompetence.
StandardI(D):Guidance
Guidance
2. I(D)addressesallconductthatreflectspoorlyontheprofessionalintegrity,
goodreputation,orcompetence ofmembersandcandidates.
Anyactthatinvolveslying,cheating,stealing,orotherdishonest
conductisviolationiftheoffensereflectsadverselyonprofessional
activities.
DonotabuseI(D)tosettlepersonal,political,orotherdisputes
unrelatedtoprofessionalethics.Primarilyaimedatconductrelated
toprofessionallife.
3. Absenceofappropriateconductandsufficienteffort
Memberorcandidateisexpectedtoconductthenecessarydue
diligencetounderstandthenatureandrisksofinvestmentbefore
makinginvestmentrecommendations.
Ifnottakingsuchsteps,instead,relyingonothers,isviolation.
StandardI(D):Guidance
Guidance
4. Conductthatdamagestrustworthinessorcompetencemayinclude
behaviorthatnegativelyaffectsabilitytoperformprofessionalactivities.
E.g.abusingalcoholduringbusinesshours.Becauseitcouldhavea
detrimentaleffectontheabilitytofulfillprofessionalresponsibilities.
Personalbankruptcy maynotreflectontheintegrityor
trustworthinessofthepersondeclaringbankruptcy,
butifthecircumstancesofthebankruptcyinvolvefraudulentor
deceitfulbusinessconduct,thebankruptcymaybeaviolationof
thisstandard.
StandardI(D):RecommendedproceduresforCompliance
Codeofethics: Adoptacodeofethicstowhicheveryemployeeshould
subscribeandmakeclearthatanypersonalbehaviorthatreflectspoorly
ontheindividual,institution,orinvestmentindustrywillnotbetolerated.
Listofviolations: Disseminatealistofpotentialviolationsandassociated
disciplinarysanctionstoallemployees.
Employeereferences: Checkreferencestoensuregoodcharacterand
eligibleforworkintheinvestmentindustry.
Professionalism
Misrepresentation;
Misconduct
Market manipulation
Fair dealing;
Loyalty;
Record retention
Referral fees
StandardII(A):Content
Content:
1. MembersandCandidateswhopossessmaterialnonpublicinformation
thatcouldaffectthevalueofaninvestment mustnotact orcauseothers
toact ontheinformation.
StandardII(A):Guidance
Guidance
2. Tradingorinducingotherstotradeonmaterialnonpublicinformationwill
causeinvestorstoavoidcapitalmarkets becausethemarketsare
perceivedtoberigged infavoroftheknowledgeableinsider.
3. Mustnotusesuchinformationto
directlybuyandsellofindividualsecuritiesorbonds
influencetheirinvestmentactionsrelated toderivatives, mutual
funds,orotheralternativeinvestments.
StandardII(A):Guidance WhatIsMaterial Information
Guidance WhatIsMaterial Information

4. MaterialNonpublicInformation(MNI)
Informationismaterial ifitsdisclosurewouldlikelyhaveanimpact
onthepriceofasecurityor ifreasonableinvestorswouldwantto
knowtheinformationbeforemakinganinvestmentdecision.
Informationisnonpublic until ithasbeendisseminatedoris
availabletothemarketplaceingeneral.
Reliablesource?
Material?
Clearimpact?
MNI?
Nonpublic?
StandardII(A):Guidance WhatIsMaterial Information
Guidance WhatIsMaterial Information

5. Substanceandspecificitydeterminesthemateriality
Earnings
Mergers,acquisitions,tenderoffers,orjointventures
Changesinassets
Innovationsproducts,processes,ordiscoveries
Newlicenses,patents,registeredtrademarks,orregulatory
approval/rejectionofaproduct
Developmentsregardingcustomersorsuppliers(e.g.theacquisition
orlossofacontract)
Changesinmanagement
Changesinauditornotificationorthefactthattheissuermayno
longerrelyonanauditorsreportorqualifiedopinion
Eventsregardingtheissuerssecurities
Bankruptcies
Significantlegaldisputes
Governmentreportsofeconomictrends (employment,housingstarts,
currencyinformation,etc.)
Ordersforlargetradesbeforetheyareexecuted
Reportsfromwellknownanalyst
Competitorsestimation notMNI
StandardII(A):Guidance Whatconstitutesnonpublic Information
Guidance Whatconstitutesnonpublic Information

6. Informationisnonpublic untilithasbeendisseminatedorisavailableto
themarketplace.
Notnecessarytowaitfortheslowestmethodofdelivery.
Oncetheinformationis disseminatedtothemarket,itispublic
information thatisnolongercoveredbythisstandard.
7. Selectivedisclosure
Analystsshouldbealerttothepossibilitythattheyareselectively
receivingMNIwhenacompanyprovidesthemwithguidanceor
interpretationoffinancialstatementsorregulatoryfilings.
SelectivedisclosuremayviolateMNI.IfMNIwasdisclosedselectively,
thelistedcompanyshouldissueapressreleaseorreachpublic
dissemination.
Disclosuretoaroomfullofanalystsdoesnotnecessarilymake
thedisclosedinformationpublic.
StandardII(A):Guidance Mosaictheory
Guidance MosaicTheory
8. Mosaictheory:
Material Nonmaterial
Public ,butunnecessary
Nonpublic
Mayuseconclusionsfromtheanalysisofmaterialpublicandnonmaterial
nonpublicinformation evenifthoseconclusionswouldhavebeen
materialinsideinformationhadtheybeencommunicateddirectly tothe
analystbyacompany.
Aperceptiveanalystreachesaconclusionaboutacorporateactionor
eventthroughananalysisofpublicinformationanditemsof
nonmaterialnonpublicinformation. notviolateII(A)
Shouldsaveanddocumentalltheresearchwhenapplyingmosaic
theory StandardV(C).
StandardII(A):Guidance InvestmentResearchReports
Guidance InvestmentResearchReports
9. Simplybecausethepublicingeneralfindtheconclusionsmaterialdoes
notrequirethattheanalystmakehis/herworkpublic.Investorswhoare
notclientsoftheanalystcaneitherdotheworkthemselvesorbecome
clientsoftheanalystforaccesstotheanalystsexpertise.
StandardII(A):RecommendedProceduresforCompliance
Achievepublicdissemination.
Adoptcomplianceprocedures10.
Adoptdisclosureprocedures.
Issuepressreleases11.
Firewallelements12.
Appropriateinterdepartmentalcommunications.
Physicalseparationofdepartments.
Preventionofpersonneloverlap.
Areportingsystem13.
Personaltradinglimitations14.
Recordmaintenance15.
Proprietarytradingprocedures16.
Communicationtoallemployees17.
10. Adoptcomplianceprocedures.
Shouldencouragefirmstoadoptcomplianceprocedurestoprevent
themisuseofMNI.
Particularlyimportantisimprovingcomplianceinsuchareasasthe
reviewofemployeeandproprietarytrading,documentationoffirm
procedures,andthesupervisionofinterdepartmental
communicationsinmultiservicefirms.
Complianceproceduresshouldsuittheparticularcharacteristics ofa
firm,includingitssizeandthenatureofitsbusiness.
11. Issuepressreleases.
Companiesshouldconsiderissuingpressreleasespriortoanalyst
meetingsandconferencecalls andscriptingthose meetingsandcalls
todecreasethechancethatfurtherinformationwillbedisclosed.
IfMNIisdisclosedforthefirsttimeinananalystmeetingorcall,the
companyshouldpromptlyissueapressreleaseorotherwisemakethe
informationpubliclyavailable.
12. Firewall
Theminimumelements include,butarenotlimitedto,thefollowing:
substantialcontrol ofinterdepartmentalcommunications,
preferablythroughaclearanceareaineitherthecomplianceor
legaldepartment;
documentationoftheprocedures designedtolimittheflowof
informationbetweendepartmentsandoftheactionstakento
enforcethoseprocedures;
reviewofemployeetradingthroughthemaintenanceofwatch,
restricted, andrumor lists;
heightenedrevieworrestrictionofproprietarytrading whilea
firmisinpossessionofMNI.
13. Areportingsystem.
Primaryobjectiveofeffectivefirewallprocedure:
establishareportingsysteminwhichauthorizedpeoplereviewand
approvecommunicationsbetweendepartments.
Interdepartmentcommunication:
shouldconsultadesignatedcomplianceofficertodeterminewhether
sharingtheinformationisnecessaryandhowmuchtobeshared.
Ifsharingisnecessary,thecomplianceofficershouldcoordinatethe
processoflookingoverthewall sothatthenecessaryinformation
willbesharedandtheintegrityoftheprocedurewillbemaintained.
Asinglesupervisororcomplianceofficershoulddecidewhetherornot
informationismaterialandwhetheritissufficientlypublic tobeusedas
thebasisforinvestmentdecisions.
Ideally,thesupervisororcomplianceofficerresponsiblefor
communicatinginformationtoafirmsresearchorbrokerageareawould
notbeamemberofthatarea.(independent)
14. Personaltradinglimitations.
Considerrestrictionsorprohibitions onpersonaltradingandcarefully
monitor proprietarytrading.
Requireemployeestomakeperiodicreports oftheirowntransactions
andtransactionsmadeforthebenefitoffamilymembers.
Securitiesshouldbeplacedonarestrictedlistwhenafirmhasormay
haveMNI.Thebroaddistributionofarestrictedlistoftentriggersthe
sortoftradingthelistwasdevelopedtoavoid.
awatchlistshowntoonlythefewpeopleresponsiblefor
compliance monitortransactionsinspecifiedsecurities.
watchlistincombinationwitha restrictedlist isacommonmeans
ofensuringeffectivecontrolofpersonaltrading.
15. Recordmaintenance.
Multiservicefirmsshouldmaintainwrittenrecordsofthe
communicationsbetweenvariousdepartments.Firmsshouldplacea
highpriorityontrainingandconsiderinstitutingcomprehensive
trainingprograms,particularlyforemployeesinsensitiveareas.
16. Proprietarytradingprocedures:Proceduresoftherestrictionorreview
ofproprietarytradingdependonthetypesofproprietarytradingifMNI.
Prohibitiononall proprietaryactivitywhenowningMNIisnot
appropriate.
Whenafirmactsasamarketmaker,aprohibitiononproprietary
tradingmaybecounterproductivetothegoalsofmaintainingthe
confidentialityofinformationandmarketliquidity.
Inmanysituations,afirmwilltakeasmallissuerpublicwiththe
understandingthatthefirmwillcontinuetobeamarketmakerinthe
stock.Insuchinstances,awithdrawalbythefirmfrommarketmaking
actswouldbeacleartiptooutsiders.
FirmsthatcontinuemarketmakingwhilepossessingMNIshouldinstruct
theirmarketmakerstoremainpassivetothemarkettotakeonlythe
contrasideofunsolicitedcustomertrades.
Riskarbitragetrading:Besttostop;Ifnotstop,provetheadequacyof
theirinternalprocedures,demonstratestringentreviewand
documentationoffirmtrades.
17. Communicationtoallemployees.
Writtencompliancepoliciesandguidelines shouldbecirculatedtoall
employees.
Policiesandguidelinesshouldbeusedinconjunctionwithtraining
programsaimedatenablingemployeestorecognizeMNI.
Sufficienttrainingtoeithermakeaninformeddecisionortorealize
theyneedtoconsultasupervisororcomplianceofficer before
engaginginquestionabletransactions.
Professionalism
Misrepresentation;
Misconduct
Market manipulation
Fair dealing;
Loyalty;
Record retention
Referral fees
StandardII(B):Content
Content:
1. MembersandCandidatesmustnotengageinpracticesthatdistortprices
orartificiallyinflatetradingvolumewiththeintenttomisleadmarket
participants.
StandardII(B):Guidance
Guidance
2. Marketmanipulationincludes:
Infobased:spreadingfalse ormisleadinginformation
Pumpuppricesbyissuingmisleadingpositiveinfo,thendump.
Transactionbased:transactionsthatdeceiveorwouldbelikelyto
misleadmarketparticipantsbydistortingthepricesettingmechanism
offinancialinstruments.Itincludes:
artificiallyaffectpricesorvolumetogivemisleadingimpressionof
pricemovement,whichrepresentadiversionfromthe
expectationsofafairandefficientmarket.
securingadominantpositiontoexploitandmanipulatetheprice
ofrelatedderivativeandtheunderlyingasset.
StandardII(B):Guidance
Guidance
3. Theintent oftheactioniscriticaltodeterminingwhetheritisaviolation
Notprohibitlegitimatetradingstrategiesthatexploitadiffinmarket
power,info,orotherinefficiency.
Notprohibittradefortaxpurposes,sellingthenbuyingback.
4. Toincreaseliquidity,FuturesExchange madeagreementswithmembers
toinsuretheminimumtradingvolumeinexchangeforreductionof
commission.
Iffortheinterestofclientsanddisclosed,notviolate.(seeCase5)
Professionalism
Misrepresentation;
Misconduct
Market manipulation
Fair dealing;
Loyalty;
Record retention
Referral fees
StandardIII(A):Content
Content:
1. MembersandCandidateshaveadutyofloyalty totheirclientsandmust
actwithreasonablecareandexerciseprudentjudgment.
2. Mustactforthebenefitoftheirclientsandplacetheirclients interests
beforetheiremployersortheirowninterests.
StandardIII(A):Guidance
Guidance
3. Investment actions mustbe carriedout for the sole benefit of the client
andinamannerthememberorcandidatebelieves,giventheknownfacts
andcircumstances,tobeinthebestinterestoftheclient.
4. Members and candidates must exercise the same level of prudence,
judgment,andcareasinthemanagementoftheirowninterestsinsimilar
circumstances.
5. Prudencerequirescautionanddiscretion.
Theexerciseofprudencerequiresactingwithcare,skill,anddiligence
inthecircumstancesthatareasonablepersonactsinalikecapacity
andfamiliarwithsuchmatterswoulduse.
Inmanagingaclientsportfolio,prudencerequiresfollowingthe
investmentparameterssetbytheclientandbalancingriskandreturn.
Actingwithcarerequiresaprudentandjudiciousmannerinavoiding
harmtoclients.
StandardIII(A):Guidance
Guidance
6. III(A)setsminimumexpectations formembersandcandidateswhen
fulfillingresponsibilitiestoclients.
III(A)benefitsinvestorsbyestablishingabenchmarkforloyalty,
prudence,andcareandclarifiesthatallmembersandcandidates are
requiredtocomplywiththeseresponsibilities.
However,III(A)isnotasubstituteforlegalorregulatoryobligations.
7. Fiduciary duty(actingforthebenefitoftrustee)exceedswhatis
acceptableinotherbusinessrelationshipsbecauseafiduciaryisinan
enhancedpositionoftrust.
Ifhavingeffectivecontrolofclientassets,aheightenedlevel of
responsibilityarises.
Mustmanageanypoolofassetsincontrolinaccordancewiththe
termsofthegoverningdocuments.
StandardIII(A):Guidance IdentifyingtheActualInvestmentClient
Guidance IdentifyingtheActualInvestmentClient
8. Determinetheidentityofclient towhomthedutyofloyaltyisowed.
Individuals: Aninvestmentmanagermanagesthepersonalassets of
anindividual.
Beneficiary: Whenthemanagerisresponsiblefortheportfoliosof
pensionplansortrusts,theclientisthebeneficiariesoftheplanor
trust.Thedutyofloyaltyisowedtotheultimatebeneficiaries.
Mandate: Insomesituations,theactualclientorbeneficiariesmay
notexist.Membersandcandidatesmanagingafundtoanindexoran
expectedmandate owethedutyofloyalty,prudence,andcaretothe
statedmandate.
Investingpublic: Theclientmaybetheinvestingpublicasawhole,the
goalsofindependenceandobjectivityofresearchsurpassthegoalof
loyaltytoasingleorganization.
StandardIII(A):Guidance DevelopingtheClientsPortfolio
Guidance DevelopingtheClientsPortfolio
9. Thedutyofloyalty,prudence,andcaretoclientisespeciallyimportant
becausetheinvestmentmanagertypicallypossessesgreaterknowledge
ininvestmentthantheclientdoes.Thisdisparityplacestheindividual
clientinavulnerableposition;theclientmusttrustthemanager.
Themanagerinthesesituationsshouldensurethattheclients
objectivesandexpectationsoftheaccountarerealisticandsuitable to
theircircumstancesandthattherisksinvolvedareappropriate.
Inmostcircumstances,recommendedinvestmentstrategiesshould
relatetothelongtermobjectivesandcircumstancesoftheclient.
10. Particularcaremustbetakentodetectwhetherthegoalsofthe
investmentmanagerorthefirminplacingbusiness,sellingproducts,and
executingsecuritytransactionspotentiallyconflictwiththebestinterests
andobjectivesoftheclient.
11. Mustfollowanyguidelinessetbytheirclientsforassetmanagement.
12. Investmentdecisionsmustbejudgedinthecontextofthetotalportfolio
ratherthanbyindividualinvestment withintheportfolio.
StandardIII(A):Guidance SoftCommissionPolicies
Guidance SoftCommissionPolicies
13. Aninvestmentmanageroftenhasdiscretionovertheselectionof brokers
executingtransactions.
Conflicts arisewhenaninvestmentmanagerusesclientbrokerageto
purchaseresearchservicesthatbenefittheinvestmentmanager.
14. Wheneverusingclientbrokeragetopurchasegoodsorservicesthatdo
notbenefittheclient,disclosetoclientsthemethodsorpoliciesfollowed
inaddressingthepotentialconflict.
AmemberorcandidateviolatesIII(A)whenhepaysahigher
commissionthanhewouldnormallydo,withoutcorresponding
benefittotheveryclient.
StandardIII(A):Guidance SoftCommissionPolicies
Guidance SoftCommissionPolicies (cont)
15. Directedbrokerage:Aclientdirectedamanagertousethebrokerageto
purchasegoodsorservicesfortheclient.Becausebrokeragecommission
isanassetoftheclientandisusedtobenefitthatclient,notthemanager,
suchapracticedoesnotviolateanydutyofloyalty.
Seekbestprice andbestexecution,andassurethatthegoodsor
servicespurchasedfromthebrokeragewillbenefittheaccount
beneficiaries.
Bestexecution referstoatradingprocessthatseekstomaximize
thevalueoftheclientsportfolio withintheclientsstatedinvestment
objectivesandconstraints.
Disclosetotheclientandobtainwrittenconsent thattheclientmay
notbegettingbestexecutionfromthedirectedbrokerage.
StandardIII(A):Guidance ProxyVotingPolicies
Guidance ProxyVotingPolicies
16. Votingproxiesinaninformedandresponsiblemanner.
Proxieshaveeconomicvalue toaclient.
Mustensureproperly safeguardandmaximizethisvalue.
Aninvestmentmanagerwhofailstovote,castsavotewithout
consideringtheimpactofthequestion,orvotesblindlywith
managementonnonroutine governanceissuesmayviolateIII(A).
Acostbenefit analysismayshowthatvotingallproxiesmaynot
benefittheclient,sovotingproxiesmaynotbenecessaryinall
instances.
Membersandcandidatesshoulddisclosetoclientstheirproxy
votingpolicies.
StandardIII(A):Recommendedproceduresforcompliance
Recommendedproceduresforcompliance
Regularaccountinformation17
Clientapproval18
Firmpolicies
Followallapplicablerulesandlaws
Establishtheinvestmentobjectivesoftheclient
Consideralltheinformationwhentakinginvestmentactions.(Return
objectivesandrisktolerance)19
Diversify20
Carryoutregularreviews
Dealfairlywithallclientswithrespecttoinvestmentactions
Discloseconflictsofinterest
Disclosecompensationarrangements
Voteproxiesinthebestinterestofbeneficiariesandclients(disclose
toclientstheirproxyvotingpolicies)21
Maintainconfidentiality
Seekbestexecution
Placeclientinterestfirst
17. Regularaccountinformation.
Membersandcandidateswithcontrolofclientassetsshouldsubmit
toeachclient,atleastquarterly,anitemizedstatement showing
thefundsandsecurities incustodyplusalldebits,credits,and
transactionsthatoccurredduringtheperiod;
shoulddisclosetotheclientwheretheassets aretobe
maintained,whereorwhentheyaremoved;
shouldseparate theclientsassetsfromanyotherpartysassets,
includingthemembersorcandidatesownassets.
18. Clientapproval.
Ifuncertainabouttheappropriateaction toaclient,shouldaskwhat
heorshewouldexpectordemandifheweretheclient.
Ifindoubt,shoulddisclosequestionablematterinwriting totheclient
andobtainclientapproval.
19. Whentakinginvestmentactions,mustconsidertheappropriatenessand
suitabilityoftheinvestment relativeto:
theclientsneedsandcircumstances
theinvestmentsbasiccharacteristics
thebasiccharacteristicsofthetotalportfolio.
20. Diversify:
Shoulddiversifyinvestmentstoreducetheriskofloss,unless
diversificationisnotconsistentwithplanguidelinesoriscontraryto
theaccountobjectives.
21. Voteproxies
Inmostcases,shoulddetermine:
whoisauthorized tovoteshares
voteproxiesinthebestinterestsofclientsandultimate
beneficiaries.
Professionalism
Misrepresentation;
Misconduct
Market manipulation
Fair dealing;
Loyalty;
Record retention
Referral fees
StandardIII(B):Content
Content:
1. Mustdealfairlyandobjectivelywithallclientswhen
providinginvestmentanalysis
makinginvestmentrecommendations
takinginvestmentaction,orengaginginotherprofessionalactivities.
StandardIII(B):Guidance
Guidance
2. Fairly equally
Fairly:Nottodiscriminateagainstanyclients whendisseminating
recommendationsortakinginvestmentaction.
Notequally:Notrequiredtotreatallclientsexactlythesame,e.g.
reachallclientsexactlythesametime.
3. Premium level service is okay, if not disadvantage or negatively affect
otherclients.
Thedifferentservicelevelsshouldbedisclosedtoclientsandbe
availabletoeveryone(differentservicelevelsshouldnotbeoffered
selectively).
StandardIII(B):Guidance InvestmentRecommendations
Guidance InvestmentRecommendations
4. Thefirstcategoryofconduct involvesmembersandcandidateswhose
primaryfunctionisthepreparationofinvestmentrecommendationstobe
disseminatedeithertothepublicorwithinafirmfortheuseofothersin
makinginvestmentdecisions.
E.g.investmentcounseling,advisory,orconsultingfirmsaswellas
banks,brokeragefirms,andinsurancecompanies.
5. Thecriterion: theprimaryresponsibility isthepreparationof
recommendationstobeactedonbyothers.
6. Aninvestmentrecommendationisanyopinioninregardtopurchasing,
selling,orholdingagivensecurityorotherinvestment.
Theopinionmaybedisseminatedthroughaninitialdetailedresearch
report,throughabriefupdatereport,byadditiontoordeletionfrom
alist ofrecommendedsecurities,orsimplybyoralcommunication.
Arecommendationdistributedtoanyoneoutsidetheorganizationis
consideredacommunicationforgeneraldistribution.
StandardIII(B):Guidance InvestmentRecommendations
Guidance InvestmentRecommendations
7. Ensurethatinformationisdisseminatedinamannerthatallclientshavea
fairopportunity toactoneveryrecommendation.
encouragefirmstodesignanequitablesystem topreventselectiveor
discriminatorydisclosure
informclientsaboutwhatkindofcommunicationstheywillreceive.
8. Materialchangesinpriorrecommendationsshouldbecommunicatedto
allcurrentclients;
particularcareshouldbetakenthattheinformationreachesthose
clientswhohaveactedonorbeenaffectedby theearlieradvice.
Clientswhodonotknowthatthememberorcandidatehaschangeda
recommendation andwho,therefore,placeorderscontrarytoa
currentrecommendation shouldbeadvisedofthechanged
recommendationbeforetheorderisaccepted.
StandardIII(B):Guidance InvestmentAction
Guidance InvestmentAction
9. Thesecondcategoryofconductincludesthosemembersandcandidates
whoseprimaryfunctionistakinginvestmentaction(portfolio
management)onthebasisofrecommendationspreparedinternallyor
receivedfromexternalsources.
10. Treatallclientsfairly inlightofinvestmentobjectivesandcircumstances.
11. Whenmakinginvestmentsinnewofferingsorinsecondaryfinancings,
shoulddistributetheissuestoallcustomerswhoaresuitableforthe
investmentandconsistentwiththepoliciesofallocatingblocksofstock.
12. Iftheissueisoversubscribed,shouldbeproratedtoallsubscribers.
shouldbetakenonaroundlotbasistoavoidoddlotdistributions.
iftheissueisoversubscribed,shouldforgoanysalestothemselvesor
immediatefamilies inordertofreeupadditionalsharesforclients.
StandardIII(B):Guidance InvestmentAction
Guidance InvestmentAction (Cont)
13. Iftheinvestmentprofessionalsfamilymemberaccountsaremanaged
similarlytotheaccountsofotherclientsofthefirm, theseaccounts
shouldnotbeexcludedfrombuyingsuchshares.
14. Mustmakeeveryefforttotreatallindividualandinstitutional clientsina
fairandimpartialmanner.
15. Disclosetoclientsandprospectiveclientsthedocumentedallocation
proceduresinplaceandhowtheprocedures wouldaffectthem.
16. Shouldnottakeadvantageoftheirposition tothedetrimentofclients.
StandardIII(B):Recommendedproceduresforcompliance
Developfirmpolicies
aninvestmentadvisorwhoisasoleproprietorandhandlesonly
discretionaryaccountsmightnotdisseminaterecommendationstothe
public,butshouldhaveformalwrittenprocedures toensurethatall
clientsreceivefairinvestmentaction
Considerthefollowingpointswhenestablishingcomplianceprocedures:
Limitthenumberofpeoplewhoareprivy tothefactthata
recommendationisgoingtobedisseminated
Shortenthetimeframe betweendecisionanddissemination17
Publishguidelineforpredisseminationbehavior
Simultaneousdissemination18
Maintainalistofclientsandtheirholdings
Developanddocumenttradingallocationprocedures19
Disclosetradeallocationprocedures20
Establishsystematicaccountreviewprocedures todetectwhethertrading
inoneaccountisbeingusedtobenefitafavoredclient
Disclosethelevelofservicesavailable
17. Shortenthetimeframebetweendecisionanddissemination
Ifadetailedrecommendationis still inpreparation,shouldpublish a
shortsummaryincludingtheconclusioninadvance.
Inlargefirmswithextensivereviewprocess,thelongpassageof
timeisnotwithinthecontroloftheanalyst.Shouldcommunicate
tocustomersandfirmpersonnelbyanupdateorflash report.
18. Simultaneousdissemination
Shouldnotgivefavoredclientsinfowhensuchactionmay
disadvantageotherclients.
Discusswithsomeclientsafteremaildissemination,okay.
19. Develop and document trade allocation procedures: develop a guiding
principlesthatensure
fairness to advisory clients, both in priority of execution of orders
(FIFO)andintheallocationofthepriceinexecutionofblockorders,
timelinessandefficiencyintheexecutionoforders,
accuracyoftherecordsastotradeordersandclientaccountpositions.
20. Disclosetradeallocationprocedures
Tradeallocationproceduresmustbefairandequitable.
Disclosure of inequitable allocation methods does not relieve the
memberorcandidateofthisobligation.
21. Shoulddeveloporencouragetheirfirmtodevelopwrittenallocation
procedures,withparticularattentiontoproceduresforblocktradesand
newissues.
Documentordersandtimestamped
FIFObasis
developapolicytoaddresssuchissuesascalculatingexecution prices
andpartialfills whentradesaregrouped,orinablock,forefficiency;
samecommission,sameexecutionprice
Allocatepartiallyexecutedordersamongclientaccountsprorata
basedonordersize (notaccountsize),notbelowaminimumlotsize.
Whenallocatingtradesfornewissues,obtainadvanceindicationsof
interest,allocatesecuritiesbyclient(ratherthanportfoliomanager),
andprovideamethodforcalculatingallocations.
Professionalism
Misrepresentation;
Misconduct
Market manipulation
Fair dealing;
Loyalty;
Record retention
Referral fees
StandardIII(C):Content
Content
1. Wheninanadvisoryrelationshipwithaclient,must:
Makeareasonableinquiryintoaclientorprospectiveclients
investmentexperience,riskandreturnobjectives,andfinancial
constraints priortomakinganyinvestmentrecommendationortaking
investmentaction,mustreassessandupdateatleastannually.
Determinethataninvestmentissuitabletotheclientsfinancial
situationandconsistentwithwrittenobjectives,mandates,and
constraintsbeforemakinganinvestmentrecommendationortaking
investmentaction.
Judgethesuitabilityinthecontextoftheclientstotalportfolio.
2. Whenresponsibleformanagingaportfoliotoaspecificmandate, strategy,
orstyle,mustonlymakeinvestmentrecommendationsortake
investmentactionsthatareconsistentwiththestatedobjectivesand
constraintsoftheportfolio.
StandardIII(C):Guidance
Guidance
3. Injudgingsuitabilityofpotentialinvestment,reviewaspectsoftheclients
knowledge,investmentexperience,andfinancialsituation.
riskoftheinvestmentcomparedwithconstraintsoftheclient
impactoftheinvestmentonthediversityoftheportfolio
whethertheclienthasthemeansornetworthtoassumethe
associatedrisk,etc.
4. Thosewhoareinadvisoryrelationshipshouldberesponsiblefor gathering
informationandmakesuitabilityanalysispriortorecommendationand
investmentaction.
Others,suchassellsideanalysts,maynothavetheopportunityto
judgethesuitabilityofaparticularinvestmentfortheultimateclient.
5. Ifunsolicitedtraderequestsareunsuitablefortheclient,
refrainfrommakingthetrade,or
seekanaffirmativestatementfromtheclientthatsuitabilityisnota
consideration
Guidance DevelopinganInvestmentPolicy
6. Inanadvisoryrelationship,mustgatherclientinformationattheinception
oftherelationship.
Informationincludestheclientsfinancialcircumstances,personal
data(suchasageandoccupation)thatarerelevanttoinvestment
decisions,attitudestowardrisk,andobjectivesininvesting.
Informationshouldbeincorporatedintoawritteninvestmentpolicy
statement(IPS) thataddressestheclientsrisktolerance,return
requirements,andallinvestmentconstraints
Guidance UnderstandingtheClientsRiskProfile
7. Oneofthemostimportantfactorstobeconsideredinmatching
appropriatenessandsuitabilityofaninvestmentwithaclientsneedsand
circumstancesismeasuringthatclientstoleranceforrisk.
Guidance UpdatinganInvestmentPolicy
8. UpdatingIPSshouldberepeatedatleastannually andalsopriorto
materialchanges toanyspecificinvestmentrecommendations.
Forindividualclients,importantchangesincludethenumberof
dependents,personaltaxstatus,health,liquidityneeds,risk
tolerance,amountofwealthbeyondthatrepresentedintheportfolio,
andextenttowhichcompensationandotherincomeprovidefor
currentincomeneeds.
Forinstitutionalclient,suchchangesrelatetothemagnitudeof
unfundedliabilitiesinapensionfund,thewithdrawalprivilegesinan
employeesavingsplan,orthedistributionrequirementsofa
charitablefoundation.
9. Clientshouldfullydisclosecompletefinancialportfolio,includingthose
portionsnotmanagedbythememberorcandidate.
Ifclientswithholdinformation,thesuitabilityanalysiscannot be
expectedtobecomplete
Guidance TheNeedforDiversification
10. Aninvestmentwithhighrelativeriskmaybesuitableinthecontextofthe
entireportfolio or whentheclientsstatedobjectivescontemplate
speculativeorriskyinvestments.
11. Themanagermayberesponsibleforonlyaportionoftheclientstotal
portfolio,ortheclientmaynothaveprovidedafullfinancialpicture.
Membersandcandidatescanberesponsibleforassessingthe
suitabilityofaninvestmentonlyonthebasisoftheinformationand
criteriaactuallyprovidedbytheclient.
Guidance ManagingtoanIndexorMandate
12. Whenmanagingafundtoanindexormandateratherthanforindividuals,
investinamannerconsistentwiththestatedmandate.
13. Thosewhomanagepooledassetstoaspecificmandatearenot
responsibleforanyindividualinvestor.
Onlythosewhohaveadvisoryrelationshipareresponsiblefor
individualclients.
StandardIII(C):RecommendedProceduresforCompliance
RecommendedProceduresforCompliance
14. Investmentpolicystatement(IPS).Considerthefollowing:
clientidentification(1)typeandnatureofclient,(2)theexistenceof
separatebeneficiaries,and(3)approximateportionoftotalclient
assetsundermanagement;
investorobjectives(1)returnobjectivesand(2)risktolerance;
investorconstraints(1)liquidityneeds,(2)expectedcashflows,(3)
investable funds,(4)timehorizon,(5)taxconsiderations,(6)
regulatoryandlegalcircumstances,(7)investorpreferences,
prohibitions,circumstances,anduniqueneeds,and(8)proxyvoting
responsibilitiesandguidance;
performancemeasurementbenchmarks.
15. Regularupdates.
Objectivesandconstraintsshouldbemaintainedandreviewed
periodicallytoreflect anychangesintheclientscircumstances.
Changesineitherfactormayresultinafundamentalchangein
assetallocation.
Shouldregularlycompareconstraintswithcapitalmarket
expectations toarriveatanappropriateassetallocation.
Annualreviewisreasonableunlessbusinessorotherreasons,suchas
amajorchangeinmarketconditions,dictatemorefrequentreview.
Shoulddocumentattemptstocarryoutreviewifcircumstances
preventit.
16. Suitabilitytestpolicies.
Withtheincreaseinregulatoryrequiredsuitabilitytests,members
andcandidatesshouldencouragetheirfirmstodeveloprelated
policiesandprocedures.
Thetestproceduresrequiretheinvestmentprofessionaltolook
beyondthepotentialreturn oftheinvestmentandinclude:
ananalysisontheimpactontheportfoliosdiversification,
acomparisonoftheinvestmentriskswiththeclientsassessed
risktolerance,and
thefitoftheinvestmentwiththerequiredinvestmentstrategy.
Professionalism
Misrepresentation;
Misconduct
Market manipulation
Fair dealing;
Loyalty;
Record retention
Referral fees
StandardIII(D):Content
Content:
1. Whencommunicatinginvestmentperformanceinformation,mustmake
reasonableeffortstomakesurethatitisfair,accurate,andcomplete.
StandardIII(D):Guidance
Guidance:
2. Thepresentationshouldbefair,accurate,complete
3. Notmisrepresentpastperformanceorreasonablyexpectedperformance.
Notstateorimplytoobtainwhatwasachievedinthepast
4. Includeterminatedportfolioaspartofperformancehistory.
5. Theperformanceofweightedrateofreturnratherthanasingle
performance.
6. Ifthepresentationisbrief,must
makeavailabletoclientsandprospects,onrequest,thedetailed
informationsupportingthatcommunication.
Bestpractice:briefpresentationsincludeareferencetothelimited
natureoftheinformationprovided.
StandardIII(D):RecommendedProceduresforCompliance
7. ApplyGIPSstandards.
Forthosewhoareshowingperformancehistoryoftheassetsthey
manage,compliancewiththeGIPSstandardsisthebestmethodto
meettheirobligationsunderStandardIII(D).
ShouldencouragefirmstocomplywiththeGIPSstandards.
StandardIII(D):RecommendedProceduresforCompliance
8. CompliancewithoutapplyingGIPSstandards.Canalsomeetobligations
underStandardIII(D)by:
consideringtheknowledgeandsophistication oftheaudienceto
whomaperformancepresentationisaddressed,
presentingtheperformanceoftheweightedcompositeofsimilar
portfoliosratherthanusingasinglerepresentativeaccount,
includingterminated accountsaspartofperformancehistorywitha
clearindicationofwhentheaccountswereterminated,
includingdisclosuresthatfullyexplaintheperformanceresults being
reported.
Simulatedperformanceusingmodels?
Performancerecordfrompriorentity?
Isperformancegrossoffees(investmentmanagementfee),net
offees,oraftertax?
maintainingthedataandrecords usedtocalculatetheperformance
beingpresented.
Professionalism
Misrepresentation;
Misconduct
Market manipulation
Fair dealing;
Loyalty;
Record retention
Referral fees
StandardIII(E):Content
Content:
1. Mustkeepinformationaboutcurrent,former,andprospectiveclients
confidentialunless:
Theinformationconcernsillegalactivitiesonthepartoftheclient;
Disclosureisrequiredbylaw;or
Theclientorprospectiveclientpermitsdisclosureoftheinformation.
StandardIII(E):Guidance
Guidance
2. Requirepreservationoftheconfidentialityofinformationcommunicated
byclients,prospectiveclients,andformerclients4.III(E)isapplicablewhen:
receivinginformationbecauseofspecialabilitytoconductaportionof
theclientsbusinessorpersonalaffairs,and
receivinginformationthatarisesfromorisrelevanttothatportionof
theclientsbusinessthatisthesubjectofthespecialorconfidential
relationship.
3. Ifdisclosureisrequiredbylawortheinformationconcernsillegalactivities
bytheclient,mayhaveanobligationtoreporttheactivitiestothe
appropriateauthorities.
Guidance StatusofClient
4. Mustcontinuetomaintaintheconfidentialityofclientrecords evenafter
theclientrelationshiphasended.Ifaclientorformerclientexpressly
authorizesthedisclosure,mayfollowthetermsoftheauthorizationand
providetheinformation.
Guidance CompliancewithLaws
5. Asageneralmatter,mustcomplywithapplicablelaw.
Ifapplicablelawrequiresdisclosureofclientinformation incertain
circumstances,membersandcandidatesmustcomplywiththelaw.
Ifapplicablelawrequiresmaintainingconfidentiality,evenifthe
informationconcernsillegal activitiesonthepartoftheclient,should
notdisclose.
Whenindoubt, shouldconsultwithcompliancepersonnelorlegal
counselbeforedisclosingconfidentialinformationaboutclients.
Guidance ElectronicInformationandSecurity
6. StandardIII(E)doesnotrequiremembersorcandidatestobecome experts
ininformationsecuritytechnology,buttheyshouldhaveathorough
understandingofthepoliciesoftheiremployers.Thesizeandoperations
ofthefirmwillleadtodifferingpoliciesforensuringthesecurityof
confidentialinformationmaintainedwithinthefirm.
Guidance ProfessionalConductInvestigationsbyCFAInstitute
7. RequirementsofIII(E)arenotintendedtopreventfromcooperatingwith
aninvestigation bytheCFAInstituteProfessionalConductProgram(PCP).
8. Whenpermissibleunderapplicablelaw,shallconsiderthePCPan
extensionofthemselves whenrequestedtoprovideinformationabouta
clientinsupportofaPCPinvestigationintotheirownconduct.
Encouragedtocooperate withinvestigationsintotheconductof
others.
AnyinformationturnedovertothePCPiskeptinthestrictest
confidence.
Willnotbeconsideredinviolationofthisstandardbyforwarding
confidentialinformationtothePCP.
StandardIII(E):RecommendedProceduresforCompliance
9. Thesimplest,mostconservativeandeffectivewaytocomplywith III(E)is
toavoiddisclosinganyinformationreceivedfromaclientexceptto
authorizedfellowemployeeswhoarealsoworkingfortheclient.
10. Insomeinstances,maywanttodiscloseinformationfromclientsthatis
outsidethescopeoftheconfidentialrelationshipanddoesnotinvolve
illegalactivities.Beforemakingsuchadisclosure,shouldaskthefollowing:
Inwhatcontextwastheinformationdisclosed?Ifdisclosed,isthe
informationrelevanttothework?
Istheinformationbackgroundmaterialthat,ifdisclosed,willenable
betterservicetotheclient?
Professionalism
Misrepresentation;
Misconduct
Market manipulation
Fair dealing;
Loyalty;
Record retention
Referral fees
StandardIV(A):Content
Content:
1. Inmattersrelatedtotheiremployment,mustactforthebenefitof
employerandnotdepriveemployeroftheadvantageoftheirskillsand
abilities,divulgeconfidentialinformation,orotherwisecauseharm to
theiremployer.
StandardIV(A):Guidance
Guidance
2. Corerule: Whetherinjurethefirm,deprivethefirmofitsprofit,or
compromisetheadvantageofemployeesskillandcapability
Guidance EmployerResponsibilities
3. Encouraged toprovideemployerwithacopyoftheCodeandStandards.
Thesematerialswillinformtheemployeroftheresponsibilities ofaCFA
InstitutememberorcandidateintheCFAProgram.TheCodeand
Standardsalsoserveasabasisforquestioningemployerpoliciesand
practicesthatconflict withtheseresponsibilities.
4. EmployersarenotobligatedtoadheretotheCodeandStandards.Senior
managementhastheadditionalresponsibilitytodevisecompensation
structuresandincentivearrangementsthatdonotencourageunethical
behavior.
StandardIV(A):Guidance IndependentPractice
Guidance IndependentPractice
5. Undertakingindependentpractice meansengagingincompetitive
business,asopposedtomakingpreparationstobeginsuchpractice.
6. Shouldabstainfromindependentcompetitiveactivity thatcouldconflict
withtheinterestsoftheiremployer.
AlthoughIV(A)doesnotprecludefromenteringintoanindependent
businesswhilestillemployed,thosewhoplanningtoengageinsuch
practiceforcompensationmustnotifytheiremployeranddescribe:
typesofservices theywillrendertoprospectiveindependent
clients,
theexpectedduration oftheservices,
thecompensation fortheservices.
7. Shouldnotrenderservicesuntiltheyreceiveconsentfromtheiremployer
toallofthetermsofthearrangement.
StandardIV(A):Guidance LeavinganEmployer
Guidance LeavinganEmployer
8. Beforeleaving,thefollowingwillcauseaviolation:
Misappropriation oftradesecrets
Misappropriationofclientlists.Memorizingclientlists(nameand
address)isnotpermitted,unlesstheinfodoesnotcomefromthe
recordsofformeremployerorviolatenoncompete agreement.
Misuse ofconfidentialinformation.
Solicitingemployersclientspriortocessation ofemployment.
Selfdealing(appropriatingforonesownpropertyabusiness
opportunityorinformationbelongingtoonesemployer)
9. Afterleaving, thefollowingwillcauseaviolation:
Violationoftermsinexistingnoncompetecontract
Takingrecordsorfiles(evenrejectedidealist)toanewemployer
withoutthewrittenpermissionofthepreviousemployer
StandardIV(A):Guidance LeavinganEmployer
Guidance LeavinganEmployer(cont)
10. Oncenoticeisprovidedtotheemployeroftheintenttoresign, must
followthepoliciesandprocedures tonotifyclientsofplanneddeparture.
11. Onceanemployeehasleftthefirm,theskillsandexperiencethatan
employeeobtainedwhileemployedarenotconfidential orprivileged
information.
IV(A)doesnotprohibitexperienceorknowledge gainedatone
employerfrombeingusedatanotheremployer.
12. Simpleknowledgeofnamesandexistenceofclients isnotconfidential
informationunlessdeemedsuchbyanagreementorbylaw.
13. Firmrecordsorworkperformedonbehalfofthefirmthatisstoredin
papercopyorelectronicallywhileemployedshouldbeerasedorreturned
totheemployerunlessthefirmgivespermission tokeepthoserecords
afteremploymentends.
StandardIV(A):Guidance
Guidance Whistleblowing
14. Personalinterests,andinterestsofemployer,aresecondaryto protecting
theintegrityofcapitalmarketsandtheinterestsofclients.
15. Whenanemployerisengagedinillegalorunethicalactivities,actions
takenbytheemployeethatwouldnormallyviolateloyaltytoemployer
(e.g.violatingcertainpolicies,contradictingemployerinstructions, or
preservingarecordbycopyingemployerrecords)maybejustified.Such
actionwouldbepermittedonlyiftheintent isclearlyaimedatprotecting
clientsortheintegrityofthemarket,notforpersonalgain.
Guidance NatureofEmployment
16. Theapplicabilityisbasedonthenatureoftheemploymentemployee
versusindependentcontractor. Dutieswithinanindependentcontractor
relationshiparegovernedbytheoralorwrittenagreementbetweenthe
memberandtheclient.
StandardIV(A):RecommendedProceduresforCompliance
17. Ifthepoliciesarenotcurrentlyintheirprocedures,encouragefirms to
adoptthefollowing:
Competitionpolicy
Mustunderstandanyrestrictions placedbytheemployeron
offeringsimilarservicesoutsidethefirmwhilestillemployed.
Ifanemployerelectstohaveitsemployeessignanoncompete
agreement,shouldensurethatthedetailsareclearandfully
explainedpriortosigningtheagreement.
Terminationpolicy.
Shouldestablishclearproceduresregardingtheresignation
process,includingaddressinghowtheterminationwillbedisclosed
toclientsandstaff.
Mayalsooutlinetheprocedures fortransferringresponsibilities of
ongoingresearchresponsibilitiesandaccountmanagement.
StandardIV(A):RecommendedProceduresforCompliance
RecommendedProceduresforCompliance (cont)
Incidentreportingprocedures.
Shouldbeawareoffirmspoliciesrelatedtowhistleblowing and
encouragefirmstoadoptindustrybestpractices.Manyfirmsare
requiredbyregulatorymandatestoestablishconfidentialand
anonymousreportingprocedures thatallowemployeestoreport
potentiallyunethicalandillegalactivitiesinthefirm.
Employeeclassification.
Shouldunderstandstatuswithinemployerfirm.Firmsare
encouragedtoadoptastandardizedclassificationstructurefor
employeesandindicatehoweachofthepoliciesappliestoeach
employeeclass.
Professionalism
Misrepresentation;
Misconduct
Market manipulation
Fair dealing;
Loyalty;
Record retention
Referral fees
StandardIV(B):Content
Content:
1. Mustnotacceptgifts,benefits,compensation,orconsiderationthat
competeswith,ormightreasonablybeexpectedtocreateaconflictof
interestwith,theiremployersinterestunless theyobtainwrittenconsent
fromallpartiesinvolved.
StandardIV(B):Guidance
Guidance
2. Nogifts,benefits,compensationorconsiderationaretobeacceptedwhich
maycreateaconflict ofinterestwiththeemployersinterestunless
writtenconsentisreceivedfromallparties.
3. WrittenConsent includesanyformofcommunicationthatcanbe
documented(forexample,communicationviacomputeremailthatcanbe
retrievedanddocumented).
4. Mustobtainpermissionforadditionalcompensation/benefitsbecause
sucharrangementsmayaffectloyaltyandobjectivityandcreatepotential
conflictsofinterest.
disclose consent violate
IV(B)

IV(B)VI(A) I(B)
StandardIV(B):RecommendedProceduresforCompliance
5. Shouldmakeanimmediatewrittenreport toemployerspecifyingany
compensationtheyproposetoreceiveforservicesinadditionto the
compensationorbenefitsreceivedfromtheiremployer.
6. Thedetailsofthereportshouldbeconfirmedbythepartyoffering the
additionalcompensation,includingperformanceincentives byclients.
7. Thewrittenreportshouldstatethetermsofanyagreementunder which
amemberorcandidatewillreceiveadditionalcompensation;
Includethenatureofthecompensation,theapproximate amountof
compensation,andtheduration oftheagreement.
Professionalism
Misrepresentation;
Misconduct
Market manipulation
Fair dealing;
Loyalty;
Record retention
Referral fees
StandardIV(C):Content
Content:
1. Mustmakereasonableeffortstodetectandpreventviolations of
applicablelaws,rules,regulations,andtheCodeandStandardsbyanyone
subjecttotheirsupervisionorauthority.
StandardIV(C):Guidance
Guidance
2. Exercisereasonablesupervisionbyestablishingandimplementing written
compliancesystemandensuringthatproceduresarefollowedthrough
periodicreview.
3. Supervisorshouldknowwhatanadequatesystemis,andmake
reasonableeffortstoseethatappropriateproceduresareestablished,
documented,communicatedtocoveredpersonnel,andfollowed.
Adequate proceduresarethosedesignedtomeetindustry
standards,regulatoryrequirements,requirementsoftheCodeand
Standards,andthecircumstancesofthefirm.
4. Thosewhohavesupervisoryresponsibilityshouldbringaninadequate
compliancesystemtotheattentionofthefirmsseniormanagersand
recommendcorrectiveaction.
5. Theymaydelegatesupervisoryduties,butdelegationdoesnotrelieve
themoftheirsupervisoryresponsibility.
instruct subordinatesaboutmethodstopreventanddetectviolations
oflaws,rules,regulations,firmpolicies,andtheCodeandStandards.
Guidance
6. Ifcannotdischargesupervisoryresponsibilitiesbecauseoftheinadequate
orabsenceofacompliancesystem,shoulddeclineinwritingtoaccept
supervisoryresponsibilityuntiladoption.
7. Onceknowingapotentialviolation,supervisormustpromptlyinitiatean
investigationtoascertaintheextentofthewrongdoing.
Relyingonemployeesstatementsorassurancesthatthewrongdoing
willnotrecurisnotenough.
Reportingthemisconductupthechainofcommandandwarningthe
employeetoceasetheactivityarealsonotenough.
Shouldtakestepstoensurethattheviolationwillnotberepeated,by
placinglimitsontheemployeesactivities or increasingthe
monitoring oftheemployeesactivities.
Guidance DetectionProcedures
8. Ifadoptedreasonableproceduresandtookstepstoinstituteaneffective
complianceprogram,maynotviolateIV(C)ifhedoesnotdetectviolations
thatoccurdespitetheseefforts.
9. MayviolateIV(C) ifheknowsorshouldknowthattheprocedures
designedtodetectandpreventviolationsarenotbeingfollowed.
Guidance EnforcementofNonInvestmentRelatedPolicies
10. Thosewhohavesupervisoryresponsibilityshouldenforcepoliciesrelated
toinvestmentandnoninvestmentrelatedactivitiesequally.
11. Establishpoliciesrelatedtoattendanceandacceptableworkplaceactions,
suchasmandatoryvacationsforspecificpositions.
StandardIV(C):RecommendedProceduresforCompliance
12. Codesvs.Procedures
Codes:Consistoffundamental,principlebasedethicalconcepts
applicabletoallofthefirmsemployees.
Theseconceptsshouldbeimplementedbydetailed,firmwide
complianceprocedures.
inplainlanguageandaddressgeneralfiduciaryconcepts.
Procedures: Assistfirmspersonnelinfulfillingtheresponsibilitiesin
codesofethics,andmakeprobablethattheidealsinthecodeswillbe
adheredtointhedaytodayoperation.
Minglingcomplianceproceduresinthecodesgoesagainstthegoalof
reinforcingtheethicalobligationofemployees.
Separatingthecodesfromcomplianceprocedureswillreducethe
legalterminologyandboilerplate languagethatcanmakethe
underlyingethicalprinciplesincomprehensibletotheaverageperson.
Aboveall,toensurethatacultureofethicsiscreated,theprinciplesin
thecodesmustbeaccessibleandunderstandable toeveryoneinthefirm.
13. AsupervisorcomplieswithIV(C)byidentifyingsituationsinwhichlegal
violationsorviolationsofthecodesarelikelytooccur andbyestablishing
andenforcingcomplianceprocedurestopreventsuchviolations.
Adequatecomplianceproceduresshould:
Beclearlywrittenandtailoredtothefirmsoperations;
Inplainlanguage,easytounderstand;
Designateacomplianceofficer;
Describehierarchy ofsupervisionandassigndutiesamongsupervisors;
Createasystemofchecksandbalances;
Outlinethescopeoftheproceduresandprocedurestodocumentthe
monitoringandtestingofcomplianceprocedures;
Outlinepermissibleconduct;
Delineateprocedureforreportingviolationsandsanctions.
14. Adequateprocedure(cont)
Oncecomplianceprogramisinplace,asupervisorshould:
Disseminatethecontentsoftheprogramtopersonnel;
Periodically update procedures to ensure that the measures are
adequateunderthelaw;
Continuallyeducatepersonnelregardingcomplianceprocedures;
Issueperiodicremindersofprocedurestopersonnel;
Incorporateprofessionalconductevaluation inemployees
performancereview;
Reviewtheactionsofemployees;
Takestepstoenforceproceduresonceviolationoccurred.
Onceviolationisdiscovered,asupervisorshould:
Promptlyrespond;
Thoroughlyinvestigatetodeterminethescopeofthewrongdoing;
Increasesupervisionorplaceappropriatelimitations onthe
wrongdoerpendingtheoutcomeoftheinvestigation.
Professionalism
Misrepresentation;
Misconduct
Market manipulation
Fair dealing;
Loyalty;
Record retention
Referral fees
StandardV(A):Content
Content:
MembersandCandidatesmust:
1. Exercisediligence,independence,andthoroughness inanalyzing
investments,makinginvestmentrecommendations,andtaking
investmentactions.
2. Haveareasonableandadequate basis,supportedbyappropriate
researchandinvestigation,foranyinvestmentanalysis,
recommendation,oraction.
StandardV(A):Guidance DefiningDiligenceandReasonableBasis
Guidance
Therequirementsforresearchconclusionsvaryinrelationtotherolein
investmentdecisionmakingprocess,butmustmakereasonableeffortsto
coverallpertinentissueswhenarrivingatarecommendation.
Providesupportinginformationtoclients enhancetransparency
Guidance DefiningDiligenceandReasonableBasis
3. Inprovidinginvestmentservice,oftenuseavarietyofresources(company
reports,thirdpartyresearch,andresultsfromquantitativemodels).
4. Someattributestoconsider:
currentstageoftheindustrysbusinesscycle,
companysoperatingandfinancialhistory,
mutualfundsfeestructureandmanagementhistory,
outputandpotentiallimitations ofquantitativemodels,
quality oftheassetsincludedinasecuritization,
appropriatenessofselectedpeergroup comparisons.
5. Canbasedecisionsonlyontheinformationavailableatthetime the
decisionismade.Thestepstakenindevelopingadiligentandreasonable
recommendationshould minimizeunexpecteddownsideevents.
StandardV(A):Guidance UsingSecondaryorThirdPartyResearch
Guidance UsingSecondaryorThirdPartyResearch
6. Criteriainforminganopiniononwhetherresearchissound include:
assumptionsused,
rigoroftheanalysisperformed,
date/timelinessoftheresearch,and
evaluationofobjectivityandindependenceofrecommendations
Ifrelyonsecondaryorthirdpartyresearch,mustmakereasonableand
diligenteffortstodeterminewhetheritissound.Ifsuspectthesoundness,
mustnotrelyonthatinformation.
Mayrelyonothers inthefirmtodeterminesoundness andusethe
informationingoodfaithassumingtheduediligenceprocesswasdeemed
adequate.
Shouldverifythatthefirmhasapolicyaboutthetimelyandconsistent
reviewofapprovedresearchproviders toensurethequalityofthe
research.
Ifsuchpolicynotinplace,shouldencouragedevelopmentandadoption.
StandardV(A):Guidance QuantitativelyOrientedResearch
Guidance QuantitativelyOrientedResearch
7. Needtohave anunderstandingoftheparametersusedinthe modelor
quantitativeresearch.
8. Althoughnotrequiredtobeexpertsintechnicalaspectsofthemodels,
mustbeabletoexplaintotheirclientstheimportance ofthequantitative
researchandhowtheresultswereusedinthedecisionmakingprocess.
9. Needtoconsiderthetimehorizonofdatainputinfinancialmodels.
10. Indevelopmentofarecommendation,mayneedtotestthemodelsby
usingvolatilityandperformanceexpectations thatrepresentscenarios
outsidetheobservabledatabases.
11. Inreviewingcomputermodelsortheresultingoutput,payattentiontothe
assumptionsandrigoroftheanalysistoensurethatthemodel
incorporatesnegativemarketevents.
StandardV(A):Guidance SelectingExternalAdvisersandSubadvisers
Guidance SelectingExternalAdvisersandSubadvisers
12. Whyadoptexternaladvisersandsubadvisers?
Theprogressionoffinancialinstrumentsandallocationtechniques
leadstotheuseofspecializedmanagerstoinvestinspecificasset
classes thatcomplementthefirmsinhouseexpertise.
13. Needtoensure thatthefirmhasstandardizedcriteria forreviewing
externaladvisers.Suchcriteriawouldinclude,butwouldnotbelimitedto,
thefollowing:
reviewingtheadvisersestablishedcodeofethics
understandingtheadviserscomplianceandinternal control
procedures
assessingthequalityofthepublishedreturn information
reviewingtheadvisersadherencetoitsstated strategy
StandardV(A):Guidance GroupResearchandDecisionMaking
Guidance GroupResearch andDecisionMaking

14. Theconclusionsorrecommendationsofthegroupreportrepresentthe
consensusofthegroup,butmaynotnecessarilybetheviewsofthe
memberorcandidate,eventhoughhisnameisincludedonthereport.
15. Insomeinstances,thememberorcandidatewillnotagreewiththeview
ofthegroup.
Iftheconsensusopinionhasareasonableandadequate basisandis
independentandobjective,neednotdeclinetobeidentified withthe
report.
Ifthememberorcandidateisnotconfidentintheprocess,should
dissociate fromthereportwhetheritdoesnotreflecthisopinionor
not
16. Alwaysrecommendinghot issueindicatesNO reasonablebasis.
17. Spreadingfalseinformationcanbeconstruedashavingnoreasonable
basis.
StandardV(A):RecommendedProceduresforCompliance
18. Shouldencouragefirms toconsiderthefollowing:
Establishapolicyrequiringthatresearchreports,creditratings,and
investmentrecommendationshaveabasisthatcanbesubstantiated
asreasonableandadequate.
Developdetailed,writtenguidanceforanalystsandreview
committeesforjudgingreasonableandadequatebasisofaparticular
recommendation.
Developmeasurablecriteriaforassessingthequalityofresearch,the
reasonablenessandadequacyofthebasisforanyrecommendationor
rating,andtheaccuracyofrecommendationsovertime.
Developdetailed,writtenguidancethatestablishesminimumlevelsof
scenariotesting ofallcomputerbasedmodelsusedindeveloping,
rating,andevaluatingfinancialinstruments.
StandardV(A):RecommendedProceduresforCompliance
RecommendedProceduresforCompliance(cont)
Developmeasurablecriteria forassessingoutsideproviders,including
thequality ofinformationbeingprovided,
thereasonablenessandadequacyoftheproviderscollection
practices,
andtheaccuracy oftheinformationovertime.
Adoptastandardizedsetofcriteriaforevaluatingtheadequacy of
externaladvisers.Thepolicyshouldincludehowoftenandonwhat
basis theallocationoffundstotheadviserwillbereviewed.
Professionalism
Misrepresentation;
Misconduct
Market manipulation
Fair dealing;
Loyalty;
Record retention
Referral fees
StandardV(B):Content
Content
MembersandCandidatesmust:
1. Disclosetoclientsandprospectiveclientsthebasicformatandgeneral
principles oftheinvestmentprocessesusedtoanalyzeinvestments,select
securities,andconstructportfoliosandmustpromptlydiscloseany
changes thatmightmateriallyaffectthoseprocesses.
2. Usereasonablejudgmentinidentifyingwhichfactorsareimportantto
theirinvestmentanalyses,recommendations,oractionsandincludethose
factorsincommunications withclientsandprospectiveclients.
3. Distinguishbetweenfactandopinioninthepresentationofinvestment
analysisandrecommendations.
willbe fact
maybe opinion
StandardV(B):Guidance
Guidance InformingClientsoftheInvestmentProcess
4. Keepclientsinformedonanongoingbasisaboutchanges tothe
investmentprocess.
5. Understandingthebasiccharacteristics ofaninvestmentisimportantin
judgingsuitabilityonastandalonebasis,itsespeciallyimportantin
determiningtheimpacteachinvestmentwillhaveonthecharacteristics
ofaportfolio.
6. Shouldinformclientsaboutthespecializationordiversificationexpertise
ofexternaladvisers.
Guidance DifferentFormsofCommunication
7. Allmeansofcommunications areincludedhere,notjustresearchreports,
soinperson,overthecall,orbythecomputerareokay.
8. Ifrecommendationsareincapsuleform (suchasarecommendedstock
list),shouldnotifyclientsthatadditionalinformationandanalysesare
availableuponrequest.
StandardV(B):Guidance
Guidance IdentifyingLimitationsofAnalysis
9. Outlineknownlimitationsoftheanalysisandconclusionscontainedin
theirinvestmentadvice.Includethoselimitationsinthereport.
Guidance DistinctionbetweenFactsandOpinionsinReports
10. Separateopinionsfromfacts:
Ifnotindicatethatearningsestimates,changesinthedividend
outlook,andfuturemarketpriceinformationareopinions subjectto
futurecircumstances,thusfailtoseparatepastfromfutureand
violateV(B).
Inthecaseofcomplexquantitativeanalyses,analystsmustclearly
separatefactfromstatisticalconjectureandshouldidentifythe
knownlimitations ofananalysis.
StandardV(B):RecommendedProceduresforCompliance
11. Changes ininvestmentstyle,investmentcommitteeandceilingsfor
investmentuniverseshouldbedisclosedtoclientsandprospectclients.
12. Becausetheselectionofrelevantfactorsisananalyticalskill,
determinationofwhetheranalystshaveusedreasonablejudgmenton
selectionoffactorsdependsoncasebycasereview ratherthanaspecific
checklist.
Toassistintheafterthefactreviewofareport,mustmaintain
recordsindicatingthenatureoftheresearchandshouldbeable to
supplyadditionalinformationtotheclient(oranyuserofthereport)
coveringfactorsnotincludedinthereport.
Professionalism
Misrepresentation;
Misconduct
Market manipulation
Fair dealing;
Loyalty;
Record retention
Referral fees
StandardV(C):Content
Content:
1. MembersandCandidatesmustdevelopandmaintainappropriaterecords
tosupporttheirinvestmentanalysis,recommendations,actions,and
otherinvestmentrelatedcommunicationswithclientsandprospective
clients.
StandardV(C):Guidance
Guidance
2. Recordsmaybemaintainedeitherinhardcopyorelectronicform.
Guidance RecordsArePropertyoftheFirm
3. Recordscreatedinprofessionalactivitiesarethepropertyofthefirm.
Whenleavingthefirm,cannottakethoserecords,includingoriginalsor
copiesofsupportingrecordsofhiswork,tothenewemployerwithoutthe
expressconsentofthepreviousemployer.
4. Cannotusehistoricalrecommendationsorresearchreportscreatedatthe
previousfirmbecausethesupportingdocumentationisunavailable.
5. Forfutureuse,mustrecreatethesupportingrecordsatthenewfirm
throughpublicsources,ordirectlyfromcoveredcompany,andnotfrom
memoryorsourcesthroughpreviousemployerunlesswithpermission.
StandardV(C):Guidance
Guidance LocalRequirements
6. Fulfillinglocalregulatoryrequirementsalsomaysatisfy therequirements
ofStandardV(C),butshouldexplicitlydeterminewhetheritdoes.
7. Ifnoregulatoryguidanceinplace,CFAInstituterecommendsmaintaining
recordsforatleast7years.Ifthereisalegalrequirementforretention
period,followthelegalrequirement.
Iflegalrequirementregardingrecordmaintenanceis5years,how
longshouldwekeeprecords?
StandardV(C):RecommendedProceduresforCompliance
8. Theresponsibilitytomaintainrecordsthatsupportinvestmentaction
generallyfallswiththefirmratherthanindividuals.
Mustarchiveresearchnotesandotherdocuments,either
electronicallyorinhardcopy,thatsupporttheircurrentinvestment
relatedcommunications.
Doingsowillassisttheirfirmsincomplyingwithrequirementsfor
preservationofinternalorexternalrecords.
Professionalism
Misrepresentation;
Misconduct
Market manipulation
Fair dealing;
Loyalty;
Record retention
Referral fees
StandardVI(A):Content
Content:
1. MembersandCandidatesmustmakefullandfairdisclosureofallmatters
thatcouldreasonablybeexpectedtoimpairtheirindependenceand
objectivityorinterferewithrespectivedutiestotheirclients,prospective
clients,andtheiremployer.
2. Mustensurethatsuchdisclosuresareprominent,aredeliveredinplain
language,andcommunicatetherelevantinformationeffectively.
StandardVI(A):Guidance
Guidance
3. Avoidactualconflicts ortheappearanceofconflictsofinterestwhen
possible.
4. Disclosuresmustbeprominentandmustbemadeinplainlanguage
Bestpractice: updatedisclosureswhenthenatureofaconflictof
interestchangesmaterially e.g.ifthenatureofaconflictofinterest
deepensthroughtheintroductionofbonusesbasedoneachquarters
profits asopposedtothepreviousreviewbasedonannualprofits.
5. Ifananalystwasaskedtocoverthecompany,wheninheritthesharesof
thecompanyinsubject
mustdiscloseifcontinuetofollow
Bestpractice:assignanotheranalysttofollowupthecompany
Guidance
6. DisclosuretoEmployers
Mereappearanceofconflictofinterestmaycreateproblems.
Restrictpersonaltrading,outsideboardmembership,andrelated
activitiestopreventsituationsthatcouldgivetheappearanceofa
conflictofinterest.
Ifinadvertentlyfindconflicts,mustreportandresolveasquicklyand
effectivelyaspossible.
7. DisclosuretoClients:
Disclose:
corporatefinancing(e.g.M&A,secondaryoffering)
marketmakingrelationship;
Securityholding
Directorship
Individualrelationship
Alsodisclosefeearrangements,subadvisory arrangements or
situationsinvolvingnonstandardfeestructures.Equallyimportantisto
disclosearrangementsinwhichthefirmbenefitsdirectlyfrom
recommendations
Guidance
8. CrossDepartmentalConflicts
InternalconflictbetweenR&DandIBanking
Externalconflictwithlistedfirms
Brokersponsoredlimitedpartnershipstoinvestventurecapital.
9. ConflictswithStockOwnership
May prohibitfromowninganysuchsecurities overlyburdensome.
Sellsidediscloseownershipinstockrecommended,buysidedisclose
proceduresforreportingrequirementsforpersonaltransactions.
10. ConflictsasaDirector
Dutiesowedtoclientsandtoshareholdersofthecompany
Investmentpersonnelasadirectorreceivethesecuritiesoroptions
BoardservicereceivingMNI
StandardVI(A):RecommendedProceduresforCompliance
11. Disclosureofperformancearrangement
Firmsareencouragedtoincludeinformationoncompensation
packageinfirms promotionalliterature.
Iffeebasedoncapitalgainsorcapitalappreciation (performancefee),
shoulddisclose;
Ifoutstandingoptionsexistforincentives,shoulddisclosetheamount
andexpirationdateoftheseoptionsasafootnotetoanyresearch
reportpublished.
12. Incentivefeesshouldnotbeinconflictwiththeinterestsofclients.
IfYes,shoulddisclosetoclients;
Ifemployernotpermitdisclosure,shoulddissociate,orquitthejob.
Professionalism
Misrepresentation;
Misconduct
Market manipulation
Fair dealing;
Loyalty;
Record retention
Referral fees
StandardVI(B):Content
Content:
1. Investmenttransactionsforclientsandemployersmusthavepriorityover
investmenttransactionsinwhichaMemberorCandidateisthebeneficial
owner.
StandardVI(B):Guidance
Guidance
2. Investingpublic>Client>employer>individual
Individual beneficialowner.
Guidance AvoidingPotentialConflicts
3. Conflictsbetweentheclientsinterestandaninvestmentprofessionals
personalinterestmayoccur.
4. Althoughconflictsofinterestexist,itsOKforindividualmanagers,
advisers,orfundemployeesmakingmoneyfrompersonalinvestmentsas
longas
theclientisnotdisadvantagedbythetrade,
theinvestmentprofessionaldoesnotbenefitpersonallyfromtrades
undertakenforclients,
complywithapplicableregulatoryrequirements
Guidance PersonalTradingSecondarytoTradingforClients
5. Theobjectiveistopreventpersonaltransactionsfromadversely affecting
theinterestsofclientsoremployers.
StandardVI(B):Guidance
Guidance StandardsforNonpublicInformation
6. Prohibitfromconveyingnonpublicinformationtoanypersonwhose
relationshiptothememberorcandidatemakeshimabeneficialowner
ofthepersonssecurities.Mustnotconveythisinformationtoanyother
personifthenonpublicinformationcanbedeemedmaterial.
Guidance ImpactonAllAccountswithBeneficialOwnership
7. Personaltransactions includethoseforownaccount,forfamily(including
immediatefamilymembers)accounts,andforaccountsofdirector
indirectpecuniaryinterest,suchasatrustorretirementaccount
8. Familyaccountsthatareclientaccounts shouldbetreatedlikeanyother
firmaccount,shouldnotbedisadvantagedbecauseofthatrelationship.
Disadvantageparentswhoarenormalfeepayingclients:violateIII(B)
fairdealing
9. Ifamemberorcandidatehasabeneficialownershipintheaccount,the
memberorcandidatemaybesubjecttopreclearance orreporting
requirementsoftheemployerorapplicablelaw.
StandardVI(B):RecommendedProceduresforCompliance
RecommendedProceduresforCompliance:
10. Basicprocedures:
LimitedparticipationinequityIPOs;
Restrictionsonprivateplacement;
Establishblackout/restrictedperiods;
Bestmethodformonitoringandenforcingproceduresisthrough
reportingrequirements.
disclosureofpersonalholdings/beneficialownerships atleast
annually
Providingduplicateconfirmationsoftransactions.
preclearance ofparticipationinIPOs.
Oncetradingrestrictionsareinplace,mustbeenforced.
Disclosuresofpolicies
Professionalism
Misrepresentation;
Misconduct
Market manipulation
Fair dealing;
Loyalty;
Record retention
Referral fees
StandardVI(C):Content
Content:
1. MembersandCandidatesmustdisclosetotheiremployer,clients, and
prospectiveclients,asappropriate,anycompensation,consideration,or
benefitreceivedfrom,orpaidto,othersfortherecommendation of
productsorservices.
StandardVI(C):Guidance
Guidance
2. Suchdisclosurewillallowtheclientoremployertoevaluate
anypartiality showninanyrecommendationofservices
thefullcost oftheservice.
3. Discloseclientreference,toemployer.
employer Prospectiveclientsbeing
referred
Interfirm
Interdepartment
Salesperson
Fundsmanager ,bestto
*:disclose,:noneedtodisclose
4. Disclosenatureofconsideration.
StandardVI(C):Recommendedproceduresforcompliance
Encourageemployerstodevelopprocedures forreferralfees.
Firmmaycompletelyrestrict suchfees;ifnotrestrict,shouldindicatethe
appropriatestepsforrequestingapproval.
Employersshouldhaveinvestmentprofessionalsprovidetotheclients
notificationofapprovedreferralfeeprograms andprovidetheemployer
regular(atleastquarterly)updatesontheamountandnatureof
compensationreceived.
Professionalism
Misrepresentation;
Misconduct
Market manipulation
Fair dealing;
Loyalty;
Record retention
Referral fees
StandardVII(A):Content
Content:
1. MembersandCandidatesmustnotengageinanyconductthat
compromisesthereputationorintegrityofCFAInstituteortheCFA
designationortheintegrity,validity,orsecurityoftheCFAexaminations.
StandardVII(A):Guidance
Guidance:
2. Conductcoveredincludesbutisnotlimitedto
Cheating orassistingothersontheCFAexaminationoranyotherCFA
Instituteexamination;
Disregardingtherulesandpolicies oftheCFAProgramrelatedto
examadministration;
Providingconfidentialprogramorexaminformationtocandidatesor
thepublic;
Disregardingorattemptingtocircumventsecuritymeasures
establishedbyCFAInstitutefortheCFAexam;
ImproperlyusingtheCFAdesignationinanyformofcommunication;
ImproperlyusinganassociationwithCFAInstitutetofurtherpersonal
orprofessionalgoals;
MisrepresentinginformationontheProfessionalConductStatement
orintheCFAInstituteContinuingEducationProgram.
StandardVII(A):Guidance
Guidance ConfidentialProgramInformation
3. CFAInstituteisvigilantaboutprotectingtheintegrityoftheCFAProgram
contentandexaminationprocessandprohibitscandidatesfromdisclosing
confidentialmaterialgainedduringtheexamprocess.
Guidance AdditionalCFAProgramRestrictions
4. Violatinganyofthetestingpolicies,suchasthecalculatorpolicy,personal
belongingspolicy,ortheCandidatePledge,constitutesaviolationof
StandardVII(A).
Guidance ExpressinganOpinion
5. ExpressingopinionsregardingtheCFAProgramorCFAInstituteisOK.
Professionalism
Misrepresentation;
Misconduct
Market manipulation
Fair dealing;
Loyalty;
Record retention
Referral fees
StandardVII(B):Content
Content:
1. WhenreferringtoCFAInstitute,CFAInstitutemembership,theCFA
designation,orcandidacyintheCFAProgram,MembersandCandidates
mustnotmisrepresentorexaggeratethemeaningorimplicationsof
membershipinCFAInstitute,holdingtheCFAdesignation,orcandidacyin
theCFAProgram.
StandardVII(B):Guidance
Guidance
2. HowtouseCFA:
Rightuse:CFAorCharteredFinancialAnalyst
adj,notn.
Alwayscapitalized.
CFAlevel
C.F.A
Dontaltertocreatenewwordsorphrases.
Mustntbeusedaspartofthenameofafirm.
Shouldntbegivenmoreprominencee.g.larger,boldthanthe
charterholder name.
3. Mustntcitetheexpecteddateofexamcompletionandawardofcharter.
4. AcandidatewhohaspassedlevelIIIbuthasnotreceivedchartercantuse
CFAdesignation.
5. Incitingthedesignationinaresume,acharterholder shouldusethedate
thatheorshereceivedthedesignationandshouldciteCFAinstituteasthe
conferringbody.
ExampleCFA,2001,CFAInstituteoptionalCharlottesville,Virginia,
USA
Guidance
6. ItsonlyappropriatetouseCFAlogoonthebusinesscardorletterheadof
eachindividual CFAcharterholder.CandidatescanmentionintheirC.V.
7.TheorderofCFAandCPAdoesntmatter.
Guidance CFAInstitutemembership
8. Onceacceptedasamember,mustsatisfythefollowingstomaintainstatus:
RemitannuallytoCFAInstituteacompleteProfessionalConduct
Statement.
Paymembershipduesannually.

Guidance UsingCFADesignation
9. Ifacharterholder failstomeetmembershiprequirements,heforfeitsthe
righttouseCFAdesignation.Untilmembershipisreactivated,canonly
statethattheywerecharterholders inthepast.
Guidance Referringtocandidacy
10. Whencanyoustateyourselfasacandidate?
AfterreceivingregistrationacceptanceletterbyCFAInstitute
Beforeexamresultshavebeenreceived
11. Ifacandidatepasseseachleveloftheexamonthefirsttryandwantsto
statethatheorshedidso,thatisnotaviolationbecauseitisastatement
offact,
butmustnotoverpromisethecompetencyandfutureinvestment
results
StandardVII(B):Recommendedprocedures
Shoulddisseminatewritteninformationandtheaccompanyingguidance to
legal,compliance,publicrelations,andmarketingdepartments.
Shouldencouragefirmstocreatetemplatesthatareapprovedbyacentral
authority (suchasthecompliancedepartment)asbeingconsistentwith
VII(B).
Contrastbetweensomesimilarstandards
1I(C)Misrepresentation,III(D)performancePresentation,V(B)Communication
withclients
I(C)focusesonperformancepresentation,soguaranteetheinvestment
performance withvolatilereturn,misrepresentationofserviceand
qualification,andplagiarismviolatethisstandard.
III(D)focusesonthestatementofperformancetoclients,sothemisleading
statementconcerningperformance,includinggiveclientsthehintthatthey
canearnthehistoricalyield,violatethisstandard
V(B)focusesondisclosingthemembersownchangesforclients,letting
clientsknowtheirinformation,anddifferenciatingbetweenfact and
opinion
TIPS
IV(B)VI(A)I(B)
III(D)I(C)
I(C)Misrepresentation
III(D)Performancepresentation
V(B)CommunicationwithClientsand
ProspectiveClients
2III(B)Fairdealing,VI(B)PriorityofTransactions
III(B)focusesonconstrainingthefairnessoftheorderoftransaction
betweenclients
VI(B)focusesontheorderoftransactionamongclients,individualsand
employers
3IV(B)Additionalcompensationarrangement,VI(A)DisclosureofConflicts
IV(B)focusesondisclosingtheadditionalcompensationfromclientsand
thethirdpartytotheemployer
VI(A)focusesondisclosingthepossibleinterestconflicttoclientsand
public,sothatclientscanhaverightjudgments
III(B)

FairDealing
VI(B)
>>
PriorityofTransactions
IV(B)
AdditionalCompensation
Arrangements
VI(A)

Disclosureofconflicts
FrameworkofEthics
SoftDollarStandards
Casestudy
CFAInstituteSoftDollarStandard
Los a. define soft-dollar arrangements, and state the general principles of the Soft
Dollar Standards;
Purposeofthestandards:
definesoftdollars,
identifywhatisallowable research,
establishstandardsforsoftdollaruse,
createmodeldisclosureguidelines,
andprovideguidanceforclientdirectedbrokeragearrangements.
Voluntarystandards,ifclaimcompliance
certainStandardsaremandatoryandothersarerecommended.
compliancewillnotsupplanttheresponsibilitytocomplywithapplicable
law(e.g.complywithlocallaw)
Ifsoft$standardsaremorestrict andnotconflictwithlocallaw,the
MemberisheldtothemandatoryprovisionsoftheseStandards
Background
Safeharbor iscreatedtoprotectinvestmentmanagersfromclaimsthat
theyhadbreachedtheirfiduciarydutiesbyusingtheirclientcommissions
topayahighercommissiontoacquireinvestmentresearchthantheymight
havepaidforexecution services.
theprotectionisavailableonlyforsecuritiestransactionsconductedonan
agencybasis.
securitiestransactionsconductedonaprincipalbasiscannotclaim
safeharbor protection.
Bothprincipaltransactionsandthoseagencytransactionsunable to
qualifyforsafeharbor protectionarenotnecessarilyillegal butare
evaluatedbasedontheexistenceoffulldisclosure,informedclient
consent,andotherfundamentalfiduciaryprinciples,includingplacing
theclientsinterestsfirst.
TheSoft$Standardsfocusonsixkeyareas
Definitions
toenableallpartiesdealingwithsoftdollar$practicestohaveacommon
understandingofallofthedifferentaspectsofsoft$.
Research
togiveclearguidancetoinvestmentmanagersonwhatproductsandservices
areappropriateforamanagertopurchasewithclientbrokerage.
MixedUseProducts
toclarifythemanagersdutytoclearlyjustifytheuseofclientbrokeragetopay
aportionofamixeduseproduct
Disclosure
toobligateinvestmentmanagerstoclearlydisclosetheirsoft$ practicesand
givedetailedinformationtoeachclientwhenrequested.
RecordKeeping
toensurethattheclientcan(1)receiveassurancesthatwhattheinvestment
managerisdoingwiththeclientsbrokeragecanbesupportedinanaudit,
and(2)receiveimportantinformationonrequest.
ClientDirectedBrokerage
toclarifythemanagersroleandfiduciaryresponsibilitieswithrespecttoclients.
CFAInstituteSoftDollarStandard Overview
Corerule:Soft$shouldbeusedtobenefitinvestmentdecisionprocessfor
clients.
Soft$Standardsareintendedtoensure:
fullandfairdisclosureofaninvestmentmanagersuseofaclients
brokerage
consistentpresentationofinformation
uniformdisclosureandrecordkeeping
highstandardsofethicalpractices
Meetingtheobjectiveoffullandfairdisclosureandensuringthattheclient
comesfirst obligatesaninvestmentmanagertodisclosefullyandclearlytoits
clienttheinvestmentmanagerspracticewhenaddressinganypotential
conflictconcerningthepaymentmethodsforinvestmentresearch.
CFAInstituteSoftDollarStandard Overview
Fundamentalprinciples
aninvestmentmanagerisafiduciary and,assuch,mustdiscloseall
relevantaspectsconcerninganybenefitthemanagerreceivesthrougha
clientsbrokerage;
proprietaryresearch andthirdpartyresearcharetobetreatedthesamein
evaluatingsoftdollararrangements,becausetheresearchthatan
investmentmanagerreceivesfromeachispaidforwithclientbrokerage;
researchshouldbepurchasedwithclientbrokerageonlyiftheprimaryuse
oftheresearch,whetheraproductoraservice,directlyassiststhe
investmentmanagerinitsinvestmentdecisionmakingprocessandnotin
themanagement oftheinvestmentfirm;
whenindoubt,theresearchshouldbepaidforwithinvestmentmanager
assets,notclientbrokerage.
CFAInstituteSoftDollarStandard Comparison
DefinitionofSoftDollarArrangements
Proprietary,inadditiontothirdparty,research.
Traditionalaspect:softdollararrangementsareproductsorservices
providedtotheinvestmentmanagerbysomeoneotherthanthe
executingbroker(thirdparty research).
SoftDollarStandard:softdollararrangements includeproprietary,as
wellasthirdparty,researcharrangementsandseektotreatboth
categoriesthesame.
Althoughnotsuggestanunbundling ofproprietaryresearch,do
requireprovidingcertainbasicinformationregardingthetypesof
researchobtainedwithclientbrokeragethroughproprietaryresearch
arrangements.
Notrequire researchobtainedthroughthirdpartyorproprietary
arrangementstobeattributedonanaccountbyaccountbasis or
otherwisetorequireatracing ofproductsorservices.
DefinitionofSoftDollarArrangements(cont)
Principal,inadditiontoagency,trades.
Traditionalaspect:Softdollars referstocommissionsgeneratedby
tradesconductedonanagencybasis. failtorecognizethatresearch
maybeobtainedthroughtheuseofspreads ordiscounts generated
bytradesconductedonaprincipalbasis.
SoftDollarStandard:softdollararrangementsincludetransactions
conductedonanagencyorprincipalbasis.
DefinitionofResearch,whatisallowable research?
Traditionalaspect:Whetheritprovideslawfulandappropriateassistance
intheinvestmentdecisionmakingprocess.
SoftDollarStandard:requiretheprimaryuseofsoft$todirectlyassistthe
investmentmanagerinitsinvestmentdecisionmakingprocessandnotin
themanagementoftheinvestmentfirm.
Aninvestmentmanagermustuseitsbestjudgmentasafiduciarytojustify
theuseofclientbrokeragetopayforaproductorservice.
EnhancedDisclosure
Traditionalaspect:Disclosureofbrokeragepracticeswillprovideclient
withameansofevaluatingsoftdollarpracticesandhowclientbrokerageis
used.
SoftDollarStandard:requiretheMembertodisclosetheavailabilityof
additionalinformation,whichdoesnotactuallyhavetobeprovided,unless
itisspecificallyrequestedbytheclient.
Aninvestmentmanagermustuseitsbestjudgmentasafiduciarytojustify
theuseofclientbrokeragetopayforaproductorservice.
ComplianceStatement
voluntary statementofcompliance
Onceclaimcompliance,mustcomplywithallofthemandatoryprovisions
oftheseStandardsandonlyastotheclientbrokeragethatitscompliance
statementrelates.
CFAInstituteSoftDollarStandard Definitions
AgencyTrade:transactioninvolvingthepaymentofacommission.(percentage
oftransactionamount)
PrincipalTrade:transactioninvolvingadiscount oraspread.
BestExecution:transactionsthattheclientstotalcostisthemostfavorable.
Brokerage: Theamountgiventoabrokertobeuseddirectlyorindirectlyas
paymentforexecutionservicesand,ResearchinconnectionwithSoftDollar
ArrangementsorforbenefitsprovidedtotheClientinClientDirected
BrokerageArrangements.
tradesmaybeconductedonanagencyorprincipalbasis
BrokeragearrangementincludesInvestmentmanagerdirectedandClient
directedbrokeragearrangement
Client:naturalperson,investmentfund,orseparateaccount,designatedto
receivethebenefits,includingincome,fromtheBrokerage.
mayberepresentedbyatrusteeorotherFiduciary,whomayormaynot
haveInvestmentDiscretion.
ClientDirectedBrokerageArrangement: Clientdirectsthattradesforits
accountbeexecutedthroughaspecificBrokerinexchangeforwhichtheClient
receivesabenefitinadditiontoexecutionservices.
includerebates,commissionbanking,commissionrecaptureprograms
AClientmaydirecttheuseoflimitedlistsofbrokers,notfor reducingcosts
buttoeffectvariousothergoalsorgeographicalconcentration.
Fiduciary:Anyentity,oranaturalperson,thathasdiscretionaryauthority for
themanagementofaclientsassetsorotherrelationshipsofspecialtrust.
InvestmentDecisionMakingProcess:quantitativeandqualitativeprocesses
andrelatedtoolsinrenderinginvestmentadvicetoitsClients.
Research:Proprietary(generatedbytheinhouse staffsofthebrokerage
firm)&Thirdpartyresearch(purchasedbythebroker)
Mustdirectlyassisttheinvestmentmanagerinitsinvestmentdecision
makingprocess,notinthemanagementoftheinvestmentfirmitself
Mixeduseresearch:researchcanbeusedforboththeinvestment
managementprocessandmanagement
ProvidedbyaBroker:
inProprietaryResearchArrangements,ResearchdevelopedbytheBroker
inThirdPartyResearchArrangements,Researchforwhichtheobligationto
payisbetweentheBrokerandThirdPartyResearchProvider,notbetween
theInvestmentManagerandThird PartyResearchProvider.
SoftDollarArrangementincludeProprietaryandThirdPartyResearch
ArrangementsbutdonotincludeClientDirected BrokerageArrangements.
sometimesreferredtoasInvestmentManagerDirectedBrokerage
Arrangements
Frameworkofsoftdollar
I.Principle
II.Relationshipwithclients
III.Selectionofbrokers
IV.Evaluationofresearch
V.ClientdirectedBrokerage
VI.Disclosure
VII.RecordKeeping
Appendix3A RecommendedpracticeforClientdirected
Brokerage
Appendix3B Permissibleresearchguidance
Appendix3C Casestudy
Los b. evaluate company soft- dollar practices and policies;
I. General
Principles:
applytoallProprietaryandThirdPartyResearchArrangements,withor
withoutCommissions,andrecognizetwofundamentalprinciples:
Brokerageisthepropertyoftheclient
Investmentmanagerhasanongoingdutytoensurethequalityof
transactionsonbehalfofitsclient,including
Seekingtoobtainbestexecution,
Minimizingtransactioncosts,
Usingclientbrokeragetobenefitclients.
I. General
Required:
Softdollarpracticesmustbenefittheclientandmustplacetheclients
interestsbefore theinvestmentmanagersinterests.
Allocationofclientbrokerageshouldnotbe basedontheamountofclient
referrals theinvestmentmanagerreceivesfromabroker.
Withrespecttomutualfunds,Clientisthefund.
Inthiscontext,thefundsboard,notthefund, shouldsetpolicies
regardingtheuseofcertainbrokers.
II. RelationshipsWithClients*
Required:
Mustdisclosetotheclient thatthemanagermayengageinsoftdollar
arrangementspriortoengaging insucharrangements.prior
disclosure
Recommended:
Foragencytrades:
permissible tousebrokeragefromagencytradestoobtainresearch
thatmaynotdirectlybenefitthatclient.
Overareasonableperiodoftime,theclientshouldreceivethe
benefitofresearchpurchasedwithotherclientbrokerage.Benefit
othersonlyifmutuallybenefit.
II. RelationshipsWithClients*
Recommended:
Forprincipaltrades:
Ifnotsubjecttofiduciaryrequirements,permissibletouseclient
brokeragefromprincipaltradestobenefitotherclientaccounts,as
longasdisclosedtotheclientandpriorconsentisreceived.
Ifsubjecttocertainfiduciaryrequirements,clientbrokeragemust
benefittheclientaccountonly;
Certainfiduciarystatutes (e.g.,ERISA,InvestmentCompanyAct
of1940)requirethatbrokeragederivedfromaPrincipalTrade
mustdirectlybenefit theClientaccountgeneratingtheTrade.
Insuchsituations,evenconsentbytheClientwillnotwaivethis
legalrequirement.complywithapplicablelaw
II. SelectionofBrokers
Principle:
SelectingBrokerstoexecutetransactionsisakeycomponentofthe
InvestmentManagersabilitytoaddvaluetoitsClientportfolios.
Failuretoobtainbestexecutionhurtperformancefortheclient.
Required:
Mustconsiderthecapabilities ofthebrokertoprovidebestexecution.
Recommended:
Inevaluatingcapabilityofbestexecution, shouldconsiderthebrokers
financialresponsibility,responsivenesstoinvestmentmanager,
commissionrateorspreadinvolved,andrangeofservicesprovided.
Notlowestcost,butmostfavorabletotalcostatthattime.
Notes:commissionisnotthefirstconsiderationwhenselectingbroker.
IV. EvaluationofResearch(Required)*
Whethertouseclientbrokeragetopayforresearch,considerfollowingcriteria:
Researchmustmeetthedefinition.
Researchmustbenefittheclient.
Thebasisforthedeterminationsmustbedocumented.
IfthePrincipalTradesarenotsubjecttocertainfiduciaryregulations(eg.
ERISA),theResearchmaybenefitotherClientaccountsiftheInvestment
ManagerhasmadedisclosureandobtainedpriorClientconsent.
Ifnotmeettheabovecriteria,cannotpayforResearchwithClientBrokerage.
Indeterminingtheportionofmixeduseresearch,theinvestmentmanager
must:
makeareasonable,justifiable,anddocumentable allocationofthecost of
theresearchbasedonitsexpectedusage.
paywithclientbrokerageonlytheportion oftheresearchthatisactually
usedintheinvestmentdecisionmakingprocess.
reevaluate themixeduseresearchallocationatleast annually.
V. ClientDirectedBrokerage*
Principle:
Clientdirectedbrokeragenotviolateanyinvestmentmanagerdutyperse.
Required:
Mustnotusebrokeragefromanotherclienttopayforproductsorservices
purchasedunderanyclientdirectedbrokerageagreement.
Recommended:
Theinvestmentmanagershoulddisclosetotheclient:
thedutytocontinuetoseekbestexecution.
thatarrangementsthatrequireinvestmentmanagertocommitcertain
%ofBrokeragemayaffecthisability to(i)obtainBestExecution and(ii)
obtainadequateResearch.
TheInvestmentManagershouldattempttostructuretheClientDirected
BrokerageArrangementinamannerthatcomportswithAppendix3A to
theSoftDollarStandards.
VI. Disclosure*(Required)
Investmentmanagermustdisclose inplainlanguage theirsoftdollarpolicies.
Toclientsandpotentialclients:
Whethercanusetheresearchtobenefitotherclients;
Whetherthetradesinvolvetransactionsonaprincipalbasis.
Toclients(shouldmakeadditionaldisclosureexcepttheabove):
typesofresearchreceived throughproprietaryorthirdpartyresearch;
theextentofuse;
whetheranyaffiliatedbroker isinvolved.
Disclosuresdonotcontemplateanunbundling ofProprietaryResearch
Arrangement.ButshouldprovideClientswiththeabilitytounderstandthetype
ofResearchinthedegreeofdetailappropriatetothesourceoftheResearch.
Investmentmanagermustprovidetheclientwith astatementthatanysoft$
practiceswithrespecttothatclientaccount comportwiththeSoftDollar
Standards,andthestatementmustbeprovidedatleastannually.
ThisstatementisrequiredonlyiftheInvestmentManagerisclaiming
compliancewiththeSoftDollarStandards.
AndisprovidedtotheindividualClienttowhichtheclaimisbeingmade.
VI. Disclosure*(Required)
Investmentmanagermustdiscloseinwriting thatmoreinformationisavailable
onrequest.
1. Onafirmwidebasis:Detailedbybroker,descriptionofproductsreceived
throughbothProprietaryand3rdPartyResearchArrangements.
2. Foraspecificclientaccount:
a. thetotalamountofCommissionsgeneratedforthatClientthrougha
SoftDollarArrangement,detailedbyBroker;and
b. thetotalamountofBrokeragedirectedbythatClientthroughDirected
BrokerageArrangements.
3. theaggregatepercentage oftheInvestmentManagersBrokeragederived
fromClientDirectedbrokeragearrangementsandtheamountofthat
ClientsDirectedBrokerageasapercentageofthataggregate,butnot
requiredtodisclosewhenClientDirectedBrokerage<10%ofthe
ManagersaggregateamountofClientDirectedBrokerage.
VI. Disclosure*(Recommended)
Onrequestofclients:
Provideadescriptionoftheproductorserviceobtainedthrough client
brokeragegeneratedbytheclientsaccount.
Providethetotalamountofbrokeragepaidfromallaccounts overwhich
themanagerhasinvestmentdiscretion.
VII. RecordKeeping(Required)
Theinvestmentmanagermustmaintainallrecordsthat:
requiredbyapplicablelaw;
Supplytimelyinformationtoclientsbydisclosurerequirements
arrangementsgeneratedspecificamountofbrokerage by
manager,oralorwritten.
arrangementsofsoftdollar orclientdirectedbrokerage
Document brokerarrangements
listofProprietaryorThirdPartyResearchproviders,and
descriptionoftheserviceorproduct
Basesofallocationofbrokeragetopayforamixeduse
serviceorproduct
Showhowservicesandproductsassistthemanagerintheinvestment
decisionmakingprocess
Compliancewith theCFAInstituteSoftDollarStandards,andidentify the
personnelresponsible
Copiesofclientdisclosuresandauthorizations
PermissibleResearchGuidanceThreelevelAnalysis
Los c. determine whether a product or service qualifies as permissible research
that can be purchased with client brokerage.
ThreelevelAnalysis
LevelI Research?
Yes
Directlyassistdecision? No Brokerage
LevelII
cannotbepaid
Yes
LevelIII Mixeduse?
Directlyassistpart=>Clientbrokeragepaid
PermissibleResearchGuidanceThreelevelAnalysis
research
Determinetheportionoftheresearchthat Decision
maybepaidforwithclientbrokerage making
Mixeduse
Aportionoftheresearchis Aportionoftheresearchisnot
usedtodirectlyassistthe usedtodirectlyassistthe
investmentmanagerinits investmentmanagerinits
investmentdecisionmaking investmentdecisionmaking
process Process
Researchcanbepaidfor Researchcannotbepaidfor
withclientbrokerage withclientbrokerage
APPENDIX3ARECOMMENDEDPRACTICESFOR
CLIENTDIRECTEDBROKERAGEARRANGEMENTS
Whendirectedbyafiduciary,shouldreceivewrittenassurancefromthe
fiduciary:thearrangementbenefitclientaccountonly.
Shouldattempttostructurethearrangements sothat:
arrangementsnotrequirecommitmentofaportionofBrokerageto asingle
Broker,and
Commissionsarenegotiated,seektoobtainBestExecutionisstillrelevant.
Shouldrequestfromitsclientinanyarrangementwritteninstructions that:
restatecontinuingresponsibilityforseekingtoobtainBestExecution,
listtheeligibleBrokers,
specifytheapproximatetargetpercentageordollaramountoftransactions
tobedirected,and
stateproceduresformonitoringtheArrangements.
Shouldregularlycommunicate withtheClientforthepurposeofjointly
evaluatingthe arrangement,including:
thepotentialforachievingBestExecution,
thelistofBrokersandtheirtradingskills,
thetarget%oftransactionstobedirectedtotheselectedBrokers,and
theInvestmentManagerstrading styleandliquidityneeds.
FrameworkofEthics
SoftDollarStandards
Casestudy
FrameworkofROS
Companypoliciesandpracticesrelatedtoresearchobjectivity
1.0Researchobjectivitypolicy
2.0PublicAppearance
3.0ReasonableandAdequateBasis
4.0InvestmentBanking
5.0ResearchAnalystCompensation
6.0RelationshipWithSubjectCompanies
7.0PersonalInvestmentsandTrading
8.0TimelinessofResearchReportsandRecommendations
9.0ComplianceandEnforcement
10.0Disclosure
11.0RatingSystem
ROS Overview
ROSareintendedtobespecific,measurablestandardsformanagingand
disclosingconflictsofinterest thatmayimpedearesearchanalystsabilityto
conductindependentresearchandmakeobjectiverecommendations.
FirmsthatadoptROSdemonstratecommitmenttomanageconflictsofinterest
effectivelyandtoprovidefullandfairdisclosureoftheseconflictstoall
investorswhohaveaccesstotheirresearch.
Fundamentalprinciple:
bestinterestsoftheinvestingclientmustalwaystakeprecedenceoverthe
interestsofinvestmentprofessionalsandtheiremployers.
AdoptionofROScannotensuretheaccuracyofresearchreportsand
recommendations.
ROS Overview
Los a. explain the objectives of the Research Objectivity Standards
Recommendthatfirmsworktoachievethefollowingobjectives:
A. Toprepareresearchreports,makeinvestmentrecommendations,and
takeinvestmentactions;anddeveloppolicies,procedures,anddisclosures
thatalwaysplacetheinterestsofinvestingclientsbeforetheiremployees
orthefirmsinterests.
B. Tofacilitatefull,fair,meaningful,andspecificdisclosuresofpotentialand
actualconflictsofinterestofthefirmoritsemployeestoitscurrentand
prospectiveclients.
C. Topromotethecreationandmaintenanceofeffectivepoliciesand
proceduresthatwouldminimizeandmanageconflictsofinterestthatmay
jeopardizetheindependenceandobjectivityofresearch.
D. Tosupportselfregulationthroughvoluntaryindustrydevelopmentof,and
adherenceto,specific,measurable,anddemonstrablestandards
E. Toprovideaworkenvironmentforallinvestmentprofessionalsthat
supports,encourages,andrewardsethicalbehavior.
ROS Definitions
Los b. evaluate company policies related to research objectivity, and distinguish
between changes required and recommended for compliance with ROS
Coveredemployee:
whoconductsresearch,writesresearchreports,and/ormakesinvestment
recommendations;orassistsintheresearchprocess;
takesinvestmentactiononbehalfofclientsorthefirm,orwho comesin
contactwithinvestmentrecommendationsordecisionsduringthedecision
makingprocess;
ormaybenefit,personallyorprofessionally,frominfluencingresearch
reportsorrecommendations.
Immediatefamily:Individual(s)whoseprincipalresidenceisthesameasthe
principalresidenceofthesubjectperson.
Investmentadvisoryrelationship:Assetmanagementrelationshipthatentails
entire,shared,orpartialinvestmentdiscretion overclientfunds.
Personalinvestmentsandtrading:Transactionsincludingmaintaininglong,
short,andotherderivativepositionswhereanindividualhasafinancialinterest.
Publicappearance:Participationinaseminar;openforum(includingan
interactiveelectronicforum);mediainterview;orotherpublicspeakingactivity
CFAInstituteResearchObjectivityStandards
1.0Researchobjectivitypolicy:
Formalwrittenpolicy:disseminatetoallemployees,availabletoallclients
Supervisoryproceduresensurethatthefirmandcoveredemployeescomply
withthepolicyandallapplicablelaws
Aseniorofficerattestsannuallytocomplywiththepolicy
2.0PublicAppearance:
Fullydisclosepersonalandfirmconflictsofinterests.
3.0ReasonableandAdequateBasis:
Researchreportsandrecommendationscanbesubstantiatedasreasonable
andadequate.
Anindividualoragroupmustbeappointedtoreviewandapprove all
researchreportsandrecommendations.
4.0InvestmentBanking:*
Inform:Segregateresearchanalystsfrominvestmentbankingdepartment.
Inessence:Objectivesofinvestmentbankingdonothavetheabilityto
influenceoraffectresearchorrecommendations.
5.0ResearchAnalystCompensation:
aligncompensationwiththequalityoftheresearchandtheaccuracyofthe
recommendationsovertime.
Donotdirectlylink compensationtoinvestmentbankingorcorporate
financeactivitiesonwhichtheanalystcollaborated.
6.0RelationshipswithsubjectCompanies:
Prohibitsharingorcommunicatingwiththesubjectcompany,priorto
publication,anysectionofaresearchreportconcerningrecommendation,
ratingorpricetarget.
Prohibitpromisingafavorablereportoraspecificpricetarget,orthreatening
tochangereports,recommendations,orpricetargets.
7.0PersonalinvestmentsandTrading:
Managepersonaltradingeffectively.
Donotshareinformationwithanyonetopreventfrontrunning.
Preventemployeesandimmediatefamilyfromtradingaheadofclients.
Prohibitemployeesandimmediatefamilyfromtradingcontrary tothefirms
currentlypublishedrecommendations,exceptinextremefinancial hardship.
Prohibitemployeesandimmediatefamilyfrompurchasingorreceiving
securitiesbeforeIPOs ofsubjectcompanies.
8.0TimelinessofResearchReportsandRecommendations:
Issueresearchreportsonatimelyandregularbasis.
9.0ComplianceandEnforcement:
Effectiveenforcementofpoliciesandprocedures.
Appropriatedisciplinarysanctions.
Monitorandaudittheeffectivenessofcomplianceprocedures.
Maintainrecordsoftheresultsofinternalaudits.
10.0Disclosure:*
Fullandfairdisclosureofallconflictsofinterest.
11.0Ratingsystem:
Usefulforinvestmentdecisions.
Provideinvestorswithinformationforassessingthesuitability ofthe
securitytotheirownuniquecircumstancesandconstraints.
1.0ResearchObjectivityPolicy: (Recommendation)
EffectivePolicyclearlyidentifythejobtitle,functionanddepartmentof
coveredemployees.Alsoidentifywhethercoveredemployeesarepersonally
subjecttoandprovideacodeofethics.
Coveredemployeesshouldberegularlytrainedandberequiredtoattest
annually inwritingtotheirunderstandingofandadheringtopolicy.
Fullydisclosureoftheconflictsofinterest about
Collaborationwithinvestmentbankingorcorporatefinance.
Participationinmarketingactivities.
Ongoingworkingrelationshipswithcorporateissuers.
Personalinvestmentandtrading.
Firminvestmentsandtrading.
Clearlydescribethefactors onwhichcompensationofresearchanalystsis
based.
Disclosehowresearch reportscanbepurchasedoracquiredbyclients.
Postthepolicyonwebsiteforeasyaccess.
2.0PublicAppearance:(Recommendation)
PublicAppearanceincludesparticipationinaseminar;forum;radio,
television,orothermediainterview;orpublicspeakingactivitywhenmaking
recommendation.
Provideaudienceswithsufficientinformationto:
Makejudgmentaboutobjectivityoftheresearchandrecommendation.
Assessthesuitabilityoftheinvestment.
Remindaudiencestojudgethesuitabilityoftheinvestment.
Discloseallconflictsofinterest
Whetherthesubjectcompanyisaninvestmentbankingorcorporate
financeclient.
Whetherresearchanalysthasparticipatedorparticipatinginmarketing
activitiesforthesubjectcompany.
Providefullresearchreportsatareasonableprice.
Shoulddisclosewhetherawrittenresearchisavailabletoaudiencewho
arenotclients,theapproximatecost,andhowtoacquirethereport.
Makecopiesofthefullresearchreportavailableforpurchaseorreview.
3.0ReasonableandAdequateBasis:(Recommendation)
Developdetailed,writtenguidance forjudgingwhetherornotthereisa
reasonableandadequatebasis.
Whenrecommendingorchangingrecommendation,shouldprovide
supportinginformationtoclientsanddisclosethecurrentmarketprice of
thesecurityinquestion.
4.0InvestmentBanking:*(Recommendation)
Communicationbetweentheresearchandinvestmentbankingpriorto
publication:
Prohibitsharinganypartofthereportconcerningrecommendation.
compliance/legaldepartmentasintermediary
InvestmentbankingorCorporatefinancepersonnelreviewareportonly
toverifyfactualinformationortoidentifypotentialconflicts ofinterest.
Allwrittenandoralcommunications bedocumentedandconductedwith
compliance/legaldepartmentasintermediary.
QuietPeriod forIPOs andsecondaryofferings:
Sufficientlength:IPOs:30days;Secondaryofferings:10days.
Firmsmayissueinformationonlyreportconcerningtheeffectsofa
significanteventifauthorizedbycomplianceorlegaldepartments
Prohibitanalystsfromparticipatinginmarketingactivities,includingroad
shows,
Ifpermit,shoulddiscloseparticipationinallinterviewsandpublic
appearances.
5.0ResearchAnalystcompensation:(Recommendation)
Althoughdirectlinkingofanalystscompensationwithinvestmentbanking
andcorporatefinanceactivitiesisprohibited,shoulddisclosetheextent to
whichresearchanalystcompensationingeneralisdependentupon the
firmsinvestmentbankingrevenues.
6.0Relationshipswithsubjectcompanies:(Recommendation)
Establishandimplementpoliciestogovernanalysts relationshipwith
subjectcompanies
Materialgifts,(haveaclear,writtendefinitionofwhatconstitutes
material.)
Companysponsoredandpaidtrips,
Communicationswithcompanymanagement.
Implementprocedurestoensurethatonlysectionsofthereportcontaining
factsthatcouldbereasonablyverifiedaresharedpriortopublication.
6.0Relationshipswithsubjectcompanies:(Recommendation)
Communicationbetweenresearchandinvestmentbanking
Complianceorlegaldepartment should
receiveadraftreportbeforeitissharedwithsubjectcompanies,
approveinadvance allchangesofrecommendationsthatresultfrom
subjectcompanyverification,andthattheresearchanalystprovide
writtenjustificationforanychangesthatoccurafterverificationbythe
subjectcompany.
Retainsupportingdocumentationincludingtheoriginalreport,thesections
sharedwiththesubjectcompany,andanysubsequentchangestothereportor
recommendation.
7.0PersonalInvestmentsandTrading:*(Recommendation)
Personaltrading:
Requirenotificationto,andapprovalbythecomplianceorlegal
departmentsbeforeallpersonaltrades.
Acompletelistofallpersonalinvestmentsonaregularbasis,atleast
annually.
AdequateprocedurestopreventFrontRunning .
Restrictedperiods:Atleast30daysbefore and5daysafter report
issuance.
withexceptionspermittedontheannouncementofsignificantnewsor
eventsbythesubjectcompanyifinvestingclientsaregivenadequate
noticeandtheabilitytotrade.
Restrictionsontradingnotapplytosecuritiesofadiversified investment
companyorotherinvestmentfundoverwhichtheemployeeshaveno
investmentdiscretionorcontrol.
7.0PersonalInvestmentsandTrading:(Recommendation)
Prohibitfromtradingcontrarytothepublishedrecommendations.
Exception:
Analystsinextremefinancialhardship
Firmsshouldhavecleardefinitionsofwhatconstitutesextreme
financialhardship andshouldrequireasignificantchangeinthe
employeespersonalfinancialcircumstances.
Advanceapprovalandappropriatedocumentationrequired.
Coveredemployeesshouldprovidetothefirmacompletelistofallpersonal
investmentsinwhichtheyorimmediatefamilieshaveafinancial interest.
Listshouldbeprovidedonaregularbasis,atleastannually
Preventshorttermtrading:holdsecuritiesforatleast60days,exceptin
extremefinancialhardship.
8.0TimelinessofResearchReportsandRecommendations:(Recommendation)
Updateonaregularbasis,issuedatleastquarterly,withadditional
updatesaftersignificantnewsorevents.
Ifcoverageisdiscontinued,shouldissueafinalreport includinga
recommendationandthefinalreportshouldclearlyexplainthereason for
discontinuingcoverage.
9.0ComplianceandEnforcement:(Recommendation)
Disseminatealistofviolationsandsanctionstoallemployeesandclients.
ProvidethisinformationandROSontheirwebsite.
10.0Disclosure:(Recommendation)*
DisclosureMethodscomprehensive,complete,plainlanguage,presented
prominentlywithsupportingdocumentsoronfirmswebsite.
Disclosewhetherthesubjectcompanyiscurrentlyaninvestmentbanking/
corporatefinanceclient ofthefirm.
Recommended:Discloseinresearchreportwhethertheyhavereceived
compensationduringtheprevious12monthsorexpecttoreceive
compensationinthenext3months.
Communicationsforms: advertisements,marketletters,researchreports,
salesliterature,electroniccommunicationsandcommunicationswithmedia.
Disclosureincommunicationwithclients:
Marketmakingactivities;
RecentmanageorcomanageIPOs orsecondaryofferings;
Analysts securitiesownershipthatmaybenefitfromrecommendation;
relationshipswithsubjectcompany(director,officer,advisoryboard
member)
Disclosureinresearchreportsofallsubjectcompanies:
Whetherthesubjectcompanyiscorporateclient;
Marketmakinginthesecuritiesofthesubjectcompany;
Whetherthefirmsstockownershipposition 1%asof5businessdays
beforereportissuance;
Whetherthefirmpermitstheauthororimmediatefamiliestotradein
thesecuritiesofthesubjectcompany;
Ownershiporbeneficiaryinterestsofemployeesandtheirimmediate
families;
Relationshipswiththesubjectcompany(director,officer,advisoryboard
member);
Materialgifts fromthesubjectcompanyinprevious12months.
Disclosureinreportsandwebsitesifthesubjectcompanyiscorporateclient:
Aboutthefirm
Thenatureofthecorporateclientrelationship(IPO,M&A);
Whethercompensationduringtheprevious12months orthenext3
months;
Abouttheauthor
Natureofsomenonresearchactivities(evaluationforacceptabilityas
acorporateclient,marketingactivities);andwhetherthereport
author(s)assistedthefirminnonresearchactivities
Whetherthecompensationoftheauthordependsoninvestment
bankingorcorporatefinance.
Firmsshouldprovide:
appropriatestatisticalorotherquantitativeandqualitative
presentationsofinformationabouttheirrecommendationsorratings.
distributionsofratingsbycategoryandhowtheseratingshavechanged
overtime.
informationaboutpricesofthesecuritiesofthesubjectcompany.
Priceinformationshouldbepresentedatleast3yearspriortothe
issuanceoftheresearchreport.
Pricechartsthatidentifiesratingsandthedatesofratingchanges.
Firmsshoulddisclosevaluationmethodsforpricetargetsanddescriptionof
anyriskfactors.
11.0RatingSystem:(Recommendation)
Avoidonedimensionalratingsystem.
Ratingsystemshouldincludethreeelements:
Recommendationorratingcategories,
Timehorizoncategories,
RiskCategories.
Communicationsofratingorrecommendationalwaysincludeallthree
elementsoftherating.
Recommendationorratingcategoriescanbe:
Absolute:buy,hold,sell
Relative:marketoutperform,neutral,underperforms(identifythe
relevantbenchmark,indexorobjective)
Clearlyidentifywhetherthetimehorizonmeasurestheperiodoverwhich
theexpectedpricetargetwouldbeachievedorsustained.
Prohibitemployees recommendationdifferentfrompublished
recommendation.
Provideacompletedescriptionofthefirmsratingsystemonrequest and
regularlyinformclientsandprospectiveclientstheavailabilityofthis
descriptionandhowtoacquire.
FrameworkofEthics
SoftDollarStandards
Casestudy
Los a. explain the basic principles of the new Prudent Investor Rule;
Prudenceisaprocess,atrusteemustactprudentlyinallhedoesfor
atrustanditsbeneficiaries(forafund)
Administrativeprudence
Investmentprudence
NotdelegateIndividualinvestment
PrudentMan
Riskaverse
PrudentInvestor DelegatePortfolioRisk&Return
Diversification
PrudentExpert ERISAPortfolioRisk&Return
Diversification
FivebasicprinciplesofNewRule
Diversification isfundamentaltoriskminimization;
Trusteesmustbaseaninvestmentsappropriatenessonitsrisk/return
profile:howitcontributestotheoverallrisk oftheportfolio;
Avoidexcessivetrading (churning)aswellasexcessivefees,costs and
otherexpenses;
BalanceofCurrentincome andgrowth
Trusteesareallowedtodelegate investmentauthority(adutyifthe
trusteedoesnothavetherequiredlevelofexpertise)
DefinitionofPrudence
Los b. explain the general fiduciary standards to which a trustee must adhere
Prudence:determinationatforesightnothindsight
Loyalty:actsolelyintheinterestsofbeneficiaries,andavoidconflictsof
interests
Impartiality: resolvethedivergentinterestsofdifferentbeneficiariesina
fairandreasonablemanner
Care: gatherpertinentinformationandseekadviceofotherstouseintheir
investmentdecisions
Skill: withouttherelevantinvestmentknowledge,thetrusteehasduty to
delegateinvestmentauthoritytoothers
Caution: bothsafetyofcapitalandsecuringareasonablereturn
ComparisonbetweenOldandNewRule
Los c. distinguish between the old Prudent Man Rule and the new Prudent Investor
Rule;
TheOldRule TheNewRule
(PrudentMan) (PrudentInvestor)
Preservethe
Return Totalreturn:incomeandcapitalgrowth
purchasingpower
Activeriskmanagement:
Risk Avoidallrisks
balancetheriskandreturn
Evaluation Avoidunduerisk Viewtheriskinaportfoliocontext

Riskytoolnotto
Restriction Nosecuritiesareofflimits
beincluded
Candelegate
Selecttheagent
Delegation Nodelegation
Establishthescopeandtermsofthedelegation
Periodicallyreviewtheagentsactions
Factorsnecessarilyconsidered
Los c. explain key factors that a trustee should consider when investing and
managing trust assets.
Factorsthatshouldbeconsideredwhenmakingrecommendation
Economicconditions
Effectsofinflationanddeflation
Impactoftax
Individualinvestmentcontribution
Expectedtotalreturnfromcapitalappreciationandincome
Beneficiaries otherresources
Uniquerequirement:suchasliquidity,regularityofincome
Relationshipwithanyassets

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2013CFA

work(applicable) live compliance

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