Ethics – CFA 2005 Level 1 Exam www.finSageReview.

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The following table summarizes the Standards of Professional Conduct as laid out by the CFA®
Institute, based on the Standards of Practice Handbook, 1999. Each candidate should obtain a
copy of the Handbook and study it in detail, in addition to their Review Notes. While the
summary is written for Level 1 candidates, it applies to Level 2 and 3 candidates also. This
material is available as a FREE download on our web site:

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Summary of the Standards of Professional Conduct

The following table summarizes the five standards and lists their key requirements. Use the table
to continuously review the ethics portion of the study materials. Do not use the table as a
substitute for reading the Handbook. Ethics represents 15% of the Level 1 exam.

BRIEF SUMMARY OF STANDARDS OF PROFESSIONAL CONDUCT

Standard
I. Fundamental Responsibilities
(A) Knowledge & compliance
(B) Do not violate
II. Responsibilities to Profession
(A) Professional designation
(B) Professional misconduct
(C) Prohibition against plagiarism
III. Responsibilities to Employer
(A) Inform employer of Code &
Standards
(B) Duty to employer
Key Requirements
Maintain knowledge and
comply with laws, rules &
regulations including the Code
& Standards.
Not knowingly violate laws and
Code & Standards or assist in
such violations.
CFA mark can only be used by
dues paying active
charterholders.
Desist from conduct involving
dishonesty, fraud, deceit &
misrepresentation.
Do not copy or use others’
original material without
attribution.
Inform employer through
immediate supervisor of
adherence to code and
standards in writing.
Do not compete with employer.
Loyalty should be to employer.
Comments
Includes laws of governments, governmental
agencies & CFA Institute's code & standards.
Apply the stricter of Code & Standards and
local law rule.
Dissociate from situations that infringe upon
laws and Code & Standards. If legal violations
occur, bring to counsel’s attention. No
obligation to report to legal authorities.
Use it as an adjective, not a noun. Candidates
status is only for those registered to take the
exam.
Conviction on a felony, misdemeanor involving
moral turpitude, and repeated disrespect for law
are grounds for dismissal as a member.
Applies to written reports, electronic and oral
communications. Acknowledge original author
if quoted verbatim. Minor changes to wording
are not acceptable. Exception: use of publicly
available information from reporting services.
Deliver a copy of the code and standards if
necessary. This is a common violation. If asked
by employer to do something violating the code
and standards, member should decline.
If an employee has an independent practice on
the side, get employer’s and client’s written

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Ethics – CFA 2005 Level 1 Exam
(C) Disclosure of conflicts
(D) Disclosure of additional
compensation
(E) Responsibilities of supervisors
IV. Responsibilities to Clients
(A) Investment process
1 Reasonable basis & presentations
2 Research reports
3 Independence & objectivity
(B) Interactions with clients
1 Fiduciary duties
2 Recommendations & investment
actions
3 Fair dealing
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Disclose beneficial ownerships
that interfere with unbiased &
objective analysis.
Disclose in writing all outside
compensation (monetary and
otherwise).
Supervisors are responsible for
violations of laws and code &
standards by employees
working under them.
Exercise diligence and
thoroughness. Have reasonable
and adequate basis. Avoid
material misrepresentation, and
maintain records.
Reasonable judgment
concerning inclusion and
exclusion of factors and
disclose basic characteristics of
the investment.
Use care and judgment for
maintaining independence and
objectivity.
Care to determine fiduciary
duty and comply. Place clients’
interests before their own and
their firm’s.
Know client’s financial
situation & objectives.
Suitability of investments for
client’s portfolio. Distinguish
between facts & opinions.
Disclose investment process
and educate client.
Deal fairly and objectively with
all clients regarding
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consent. Actual receipt of compensation not
required. Do not misappropriate trade secrets,
confidential information, cause mass
resignations, solicit employer’s clients before
leaving firm, use client lists. Preparing to
compete before leaving firm is okay.
Members should disclose conflicts of interest
Due to ownership of securities. Comply with
internal directives.
Disclose terms – nature, duration & amount of
compensation agreement with a third party.
Supervisors need to train, inform and ensure
that employees are aware of firm policies, and
requirements under law and code & standards.
Focus should be on prevention and detection of
violations. Must have documented compliance
procedures in place. Member should decline
supervisory responsibility if procedures and
training is lacking.
Can use research from a third party who
exercised diligence. Depend on reliable source
inside and outside the firm. Have a thorough
understanding of sector & industry. Inaccurate
information should be ignored. Identify country
differences and do not fail to inform about risks.
Distinguish between opinions and facts. Report
may be written, oral or electronic. Disclose
limitations of research procedures and
methodologies. Maintain records. Assure
reliability, accuracy & appropriateness of data.
Avoid situations that cause independence &
objectivity to be compromised. Even
appearance of compromise or conflict should be
avoid to be conservative. Resist pressures from
corporate finance clients to write positive
reports. Gifts and perks up to $100 are okay,
anything greater should be disclosed to
employer. Follow internal guidelines. Social
activities funded by companies may also
generate conflicts. Watch personal trading.
Fiduciary duty is a position of trust & stronger
than other business relationships. Undivided
loyalty to clients. Know client’s objectives,
facts and circumstances. Duty differs between
individual and institutional clients. Custody or
control over client’s assets heightens fiduciary
duty. Complex competing interests may arise.
Use of client brokerage for soft dollar research
services must benefit client.
Understand client’s finances, investment
objectives, risk tolerance, tax status & income
needs for individuals. For pension plans, know
their characteristics, and funded status.
Beneficiaries are plan participants, not
corporate sponsors. Emphasize diversification
when appropriate. Distinguish between stand-
alone risk and risk of a portfolio. Do not ignore
proxy votes on behalf of clients.
Conflicts arise in regard to trade allocations for
block trades, new issues, price and execution, &
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Ethics – CFA 2005 Level 1 Exam
4 Priority of transactions
5 Confidentiality
6 Prohibition against misrepresentation
7 Disclosure of conflicts to clients
8 Disclosure of referral fees
V. Responsibilities to Investing Public
(A) Use of material nonpublic
information
(B) Performance presentation
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recommendations and
investment action.
Client and firm transactions
take priority. Give clients and
employer adequate opportunity
to act on recommendations &
changes before executing
personal trades. Know
definition of beneficial owner.
Information provided by
clients, prospects & employer
relevant in the course of work
based relationship to be held in
confidence and not disclosed.
Knowledge of illegal activities
an exception.
Do not misrepresent services
and qualifications of self and
the firm, as well as academic
credentials. Do not guarantees
investment performance, except
facts, information and issuer’s
obligations.
Disclose all conflicts, including
beneficial ownerships, to
clients. Investments that have
potential to impair a member’s
objectivity and cause a bias
should also be disclosed.
Disclosures to take place prior
to recommendations.
Disclose compensations and
consideration paid to others for
referring clients to the firm.
Applies to all services availed
by the client.
Do not trade on material
nonpublic information received
under breach of fiduciary duty,
misappropriation or if related to
a tender offer. Material
nonpublic information received
as part of fiduciary duty is also
non-tradable.
Do not misrepresent past
performance of the firm and
make all reasonable efforts to
ensure that such information is
fair, accurate and complete.
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quality and timing of services. Clients needs
differ. Standard calls for fair not equal
treatment. Insist on simultaneous transmission
of information to all clients.
Member should not trade on her own account
before clients and employer. Follow internal
guidelines prohibiting certain trades. Treat all
clients fairly, even accounts of family in whom
there is no beneficial ownership. Limit number
of access persons within the firm.
Members not to sign settlement agreements
preventing access of confidential information to
Professional Conduct Program (PCP)
committee for disciplinary action. Transmission
to PCP is not a violation as confidentiality is
maintained by definition.
This applies to advertisements, brochures and
other marketing communications, including
Web sites. Never guarantee investment returns.
Statements about guaranteed investment
contracts by insurance companies and Treasury
issues should be factual.
Effectively communicate in plain language all
conflicts of interest to clients. Disclose special
relationships such as underwriting, investment
banking with corporations whose securities may
be followed. Directorships of companies may
lead to: conflicting fiduciary obligations; receipt
of securities and options; and, receipt of
material nonpublic information. Create a
firewall between such persons and analysts.
Disclose performance based compensation that
may affect investment actions.
Disclose estimated dollar value and duration of
arrangement and whether one time or
continuous. Include non-cash benefits and soft
dollars.
Information is material if its knowledge would
impact an investment decision significantly.
Prohibition applies to persons who not directly
or indirectly associated with the firm about
whom information is received. Fiduciary duty,
where none existed before, cannot be imposed
by passing of confidential information. If
information is disclosed in breach of duty,
member to make efforts at public dissemination.
Present information about all fee-paying
discretionary portfolios. Create composites by
investment objective and style. Do not cherry
pick accounts to create positive bias. Minimum
10 (PPS) or 5 (GIPS) years’ record for
compliance. Performance belongs to the firm,
not the manager – not portable. Adherence to
GIPS or PPS is not mandatory for complying
with this standard. Emphasis is on calculation
methodology, creation of composites, input
data, presentation or performance and
disclosures, as well as record keeping.
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Ethics – CFA 2005 Level 1 Exam www.finSageReview.com

NOTE: The following discussion is a summary of the procedures and sanctions imposed on
covered persons for violations of the Code and Standards of Practice.

A Covered Person (CP) is one who is covered by AIMR’s Bylaws. It includes CFA
charterholders, AIMR/CFA Institute members, and candidates who are bound by the Code and
Standards.

Introduction: A Covered Person (CP) can be censured or deprived of his or her right to use the
CFA designation and may be suspended from the CFA Institute’s membership and its
professional examination process in two ways: (a) as a result of a violation other than that
triggering a summary suspension, or (b) by a summary suspension for violations belonging to
categories A, B, C or D. These four categories are described in detail later. The diagrams below
show the relevant stages under both methods, i.e., censure and summary suspension.

(a) Violation by a Covered Person (CP) not triggering a Summary Suspension

Complaint

AIMR’s DRS
(Disciplinary Covered Private
Review Person Censure STOP
Subcommittee)

Sanctions:
1. Private Censure
HEARING Stipulation 2. Public Censure
NO PANEL Agreement 3. Timed Suspension-
S of Membership
A 4. Timed Suspension of
N Use of CFA mark
5. Revocation of
C
Membership
T 6. Revocation of Use of
I Sanctions CFA Designation
O STOP 7. Suspension or
N Revocation from
S CFA examination

Review Panel Sanctions

(Hearing Panel (Decision STOP
Determination)
Final)

Explanation: Upon receipt of a complaint, the DRS contacts the CP & conducts an investigation. It may
issue a private censure for a minor violation, and a higher sanction for others. The CP may accept the
higher sanction via a stipulation agreement. Otherwise (s)he may request a Hearing Panel for review. If
sanctioned, the CP may agree, or request a Review Panel. The decision of the Review Panel is final.

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Ethics – CFA 2005 Level 1 Exam www.finSageReview.com

(b) Summary Suspension of a Covered Person (CP)

Category A, B,

C or D violation
AIMR’s DRS
(Disciplinary Covered Summary
Review Person Suspension STOP
Subcommittee)

Cat. A, B, C, D violation: Summary Suspension:

A. Conviction for felony,
1. Removal from AIMR
or imprisonment for
and affiliate
NO more than one year
organization
S B. Barred permanently or
memberships
A indefinitely from
2. Removal from
N securities industry
membership in Member
C. Failure to cooperate
C Societies
with an AIMR
T 3. Denial of right to use
investigation
I the CFA designation
D. Failure to complete &
O 4. Removal from
sign AIMR’s annual
participation in the CFA
N professional conduct
program
S statement

Summary
Review Panel Suspension
(Summary
(Decision
STOP
Suspension)
Final)

Explanation: Upon a category A, B, C or D violation, the DRS automatically issues a summary

suspension after giving the CP an opportunity to respond. The CP can accept the sanction or request a
Review Panel to appeal the sanction on grounds of inequitable punishment. If the sanction is upheld,
the decision of the Review Panel is final. (Note: Summary suspension is the eighth sanction.)

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