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10MinuteReviewofCFAEthics
andStandards
PostedonFebruary3,2015byjosephhogue

Follow@finquiz 181followers


EvenwiththechangetotopicareaweightsontheCFAexamsthisyear,Ethicsand
ProfessionalStandardsremainextremelyimportant.Itisalotofmaterialbutfortunately
doesntchangemuchfromyeartoyearandyouvegotarealopportunitytocarryover
somepointstoeachexamifyoulearnitearly.

BeforewegetintoaquickreviewofthekeypointsIwanttostressonething:DoNOT
underestimatethetopicareaandtheneedtoworkpracticeproblems!Thetopicis
worthbetween10%and15%ofyourtotalscoreoneachexam.Alotofcandidatesscan
thereadingsandthenneglectdoinganyrealstudyingorproblems.

TheproblemisthattheEthicalandProfessionalStandardsallseemprettyobvious.
Everyoneknowsyoushouldnttakeadvantageofclientsandtradeoninsideinformation.
Candidateslookatthematerialandthink,Imaprettyethicalperson.Idontlie,cheator
steal.Thecorrectanswerontheexamwillbeobvioustome.Thentheygettotheexam
andhaveaheartattack!

TheCFAInstituteissurprisinglygoodatdesigningquestionswheretwooftheanswer
choicesseempossible,eventosomeonewithagoodmoralcompass.Thatiswhyitis
absolutelyamusttoworkpracticeproblemsinthetopicarea.LearnhowtheInstitute
writesoutthevignetteandwhattolookforinthecorrectanswer.

TheProfessionalConductProgram(PCP)
ThePCPisnotusuallyabigfocusoftheexamsbutyoumightgetaquestion.Remember
wherethecomplaintcancomefrom:mediascrutiny,examproctors,writtennotesorself
disclosure.UnderstandthatwhileyoursubordinatesmightnotbeheldtotheCodeand
Standards,asupervisorwiththeCFAdesignationisstillresponsiblefortheiractions.

Afteraninquiryisstarted,informationiscollectedandoneofthreeoutcomesoccurs.
Theremaybenosanctionsrecommended,acautionarylettercouldbeissuedorthe
inquiryissenttothenextlevelforfurtherwork.Youcanacceptorcontesttheoutcome
andrequestthatitbeescalatedtoapanel.

ComponentsoftheCode

IvealwaysusedtheacronymSPAMEDtoremembercomponentsofthecode.Thetruth
isthatyouprobablywontgetaquestionononeofthesixcodesbutwillinsteadsee
questionsonapplicationoftheCodeandStandards.

Subordinatepersonalinterests
Promotetheintegrityofandupholdrulesgoverningcapitalmarkets
Actwithintegrity,competence,diligenceandrespect
Maintainandimproveprofessionalcompetence
Exercisereasonablecareandindependentjudgment
Demonstrateethicalpracticeandprofessionalism

Iverunthroughthestandardsbelow.Thisisaverybriefoverviewandhitsonjustthe
bulletpoints.Youstillwillneedtoreadthroughthecurriculumtogetthedetailandmake
suretoworkthoseproblems.

StandardIProfessionalism

Rememberthatyouareboundmythemoststrictlawbetweenthecodeandlocallaws.If
thelocallawallowssomethingthatthecodeandstandardsdonot,youmuststillfollow
thecodeandstandards.Ignoranceisnoexcuseeither.Ifyoushouldhaveknownthatan
actionwasbreakingthelaworwasunethical,thenyoucouldbepunishedforit.Thisisan
importantconceptinthesupervisorysection.

Knowtheprocedureforinformingsupervisor,firmandcomplianceaboutanyactivities.
Youarenotrequiredtoinformlawenforcement,unlessthelawrequiresit,butyoudo
needtodisassociatefromthefirmandactivitiesiftheyarenotcorrected.

Independence&Objectivity

Payyourownexpensetomeetingsandothertripswhenpossible.Donotaccept
anythingmorethanatokengiftfromathirdparty.TheInstitutedoesnotputadollar
valueonwhatisconsideredtokenbutanontokengiftontheexamwillprobablybe
somethingcostingmorethanafewhundreddollars.
Issuerpaidresearchmustbedisclosedandshouldonlybeonanupfrontfee.
Ratingscannotbetiedtothepaymentorpromisedinanyway.
Misrepresentation

Noreturnscaneverbeguaranteedunlesstheinvestmentisbackedbythe
governmentoraninstitutionbackslosses.
Informationalsourcesmustbedirectlycreditedandnotlistedgenericallyas
analystsorexperts

Misconduct

Youmustnotengageinsomething,evenifitislegal,thatmayreflectpoorlyonthe
CFAdesignationoronyourfirm.Drinkingalcoholisthemostoftenusedexample.
Youarelegallyabletodrinkbutifexcessivedrinkingleadstoalossofconfidence
thenitcouldbepunishableunderthecode.
Civildisobedienceisnotmisconduct,i.e.protesting

StandardIIIntegrityofCapitalMarkets

Useofmaterial,nonpublicinformation(insidertrading)isabigissueandyoucouldsee
questionsontheexam.RememberthattheinfomustbeBOTHmaterialandnonpublic.

Youcanusethemosaictheorytousenonpublic/nonmaterialinformationor
material/publicinformation
Youmustnotcauseotherstousematerial,nonpublicinformationeither,i.e.giving
someoneatipabouttheinfo.
Companyconferencecallsandmeetingsarenotapublicreleaseandshouldbe
madepublicatthesametime.

StandardIIIDutiestoClients

Rememberthechainofprioritiesforduties:Client,Firm,Self

FairDealing

Allclientsmustbetreatedfairlyandequally.Youcanofferdifferentservicelevels
buttheymustbedisclosedandavailabletoeveryone
Allocationsshouldbeonaproratabasisandonlytosuitableportfolios
Themethodofcommunicationisimportant.Youcannotsendatraditionalmail
updatetosomeandmakeapersonalphonecalltoothers.Contactmethodsmustbe
uniformacrossallclients.

SuitabilityUnderstandeachclientsrisktoleranceandreturnrequirements,alongwith
objectivesandconstraintstodeterminesuitability.Investmentsuitabilityshouldbejudged
inthewholeportfoliocontext.

PerformancePresentationmustbe(FACT)Fair,Accurate,CompleteandTimely

StandardIVDutiestoEmployers
Loyalty

Youmustnottakeanyrecords,filesorothercompanypropertywhenyourcontract
isterminatedwithanemployer.Besidesbeingpunishableunderthecode,youwill
alsolikelybecriminallyprosecuted.Youcanreconstructthematerialfrommemory
butcannotuseanytangiblerecords.
Anypreparationforanotherjoborinformationcanbemadebeforeleavingyour
currentemployerbutmustbedoneonyourowntime.

AdditionalCompensation

Youmustgetwrittenconsentfromallpartiesbeforetakingadditionalcompensation
thatcouldcreateaconflictwithyouremployer.Itmustbeinwritingandfrom
everyone(employerandotherthirdparty).

SupervisorResponsibilities

Thisisanotherbigoneontheexamsbutcanbeconfusing.Understandthat
supervisorsmusthaveproceduresinplacesotheyknowwhattheirsubordinatesare
doing.Again,notknowingisnotanexcuseifappropriatepolicieswouldhave
uncoveredtheactivity.
Youmustinformthecompanyinwritingofanyinsufficientcompliancepoliciesand
declineasupervisorypositionuntiltheproceduresareimproved.
Youareresponsible,underthecode,fortheactivitiesofnoncharterholder
subordinatesaswell

StandardVInvestmentAnalysis,RecommendationsandActions

Youmustnotrelyonoutsideinformationunlessitcanbeverifiedandyoutrustthe
reliabilityofthesource.
Youcanbeapartofagroupandnotagreewitharecommendationbutyoushould
documentyourdisagreement

CommunicationwithClients

Youmustdistinguishbetweenfactandopinionwhentalkingwithclientsorpotential
clients
Astatementofthebasicfactorsandprocessyouusedtoarriveata
recommendationmustbedisclosed

RecordRetention

Keepallrecordsandanalysisforsevenyears
Recordsarethepropertyofyouremployeranditsresponsibilityifyouleavethefirm

StandardVIConflictsofInterest
Youmustdiscloseanymaterialownershiporownershipofanyonelivinginyour
household.TheInstitutedoesnotputadollaramountonmaterialbutitwilllikelybe
morethanacouplethousanddollarsorasignificantcontroloverbusinessdecisions
Remember,disclosuresmustbemadeforanyactualorpotentialconflicts

PriorityofTransactions

Remembertheprioritylist:Client,FirmandthenSelf.Clientsshouldgetall
requested(ifsuitable)shares,followedbyFirmandyourselfonlyifthereisenough
leftover.
Familymembersnotlivinginyourhouseholdshouldbetreatedfairlyasclients.Only
thoselivingwithyouareconsideredrelatedpartiesandtreatedasyourself.
Oversubscribedinvestmentsshouldbedistributedonaproratabasisinpriorityorder
(clientsfirst)

ReferralFees

Anycompensationforreferralmustbedisclosed,includingnonmonetarybenefits

StandardVIIResponsibilitiesofcharterholdersandcandidates

TheCFAdesignationcanonlybeusedbyapersonandcannotbeusedoncompany
letterheadorattachedtothecompanyslogo.
Yourduesmustbeuptodateandyoumustsigntheannualstandardscompliance
tousethedesignation

MemorizingtheCodeandStandardsisnotenough.Youneedtounderstandtheintent
behindeachkeypointandbeabletoapplyitgivenasituationalproblem.Again,thebest
waytolearnthisisbydoingpracticeproblems.Itisnttoodifficultonceyouvelearned
howquestionsareaskedandthereasoningbehindthecorrectanswer.Thegreatpartis
thatifyoulearnthismaterialwhilestudyingfortheCFALevelIexam,youveprettymuch
got10%offreepointsontheothertwoexams.

tilnexttime,happystudyin
JosephHogue,CFA


Follow@finquiz 181followers

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