Chapter 2: Ethics and Investment Professionalism

CFA Institute Code of Ethics

1. Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession,and other participants in the global capital markets. 2. Place the integrity of the investment profession and the interests of the clients above their own personal interests. 3. Use reasonable care and exercise independent professional judgement when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities. 4. Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession. 5. Promote the integrity and viability of the global capital markets for the ultimate benefit of society. 6. Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.

CFA Institute Standards of Professional Conduct

1. Client Interests are Paramount - obligation to the client ahead of personal interest or employer interest. In some circumstances duty to maintain capital markets is paramount. 2. Exercise Diligence, Reasonable Care, and Prudent Judgement - work to the best of their ability to promote knowledge, skill, judgement, etc. 3. Act with Independence & Objectivity - encumbrances, biases, or gifts, etc. 4. Avoid or Disclose Conflicts of Interest 5. Make Full & Fair Disclosure 6. Engage in Fair Dealing 7. Protect Confidential Information

Why Ethical Behavior is Important?

1. Investor Confidence 2. Integrity of the Investment Profession 3. Integrity of Financial Markets 4. Clients' Investment Goals 5. Clients' Trust 6. Public Trust 7. Efficiency of Financial Markets 8. Fairness of Financial Markets 9. Success of the Investment Industry

Investor Obligations to Clients

1. Knowledge of the range of investment products available on the market. 2. Exercise independent judgement when identifying and advising on suitable investment products.

Why Laws & Regulations are Not Enough?

1. Laws and regulations may not extend to all areas of finance and can be vague or ambitious, making their interpretation a challenge. 2. Laws and regulations are often slow to catch up with market innovations. 3. Activities that occur in different jurisdictions can be complicated by inconsistencies in legal obligations in different countries. 4. Situations may arise in which no applicable law exists or the existing law is inconclusive. 5. The effectiveness of laws and regulations depends on how market participants interpret and comply with them.

Benefits of Ethical Conduct

1. Liquidity (<-- increased market participation) 2. Profitability 3. Efficiency (--> increased access to equity and debt funding) *TRUST

Investor Obligations to Employers

1. Providing services as agreed on in the employment contract. 2. Following or executing supervisory directives as required. 3. Maintaining professional conduct.

Ethical Standard Process

1. Set high standards and put them in writing. 2. Get adequate and ongoing training on professional and ethical standards. 3. Assess the integrity of individuals and groups you encounter. 4. Take action when breaches of integrity and ethical standard are observed.

Investor Obligations to Coworkers

1. Treat with fairness and respect. 2. Work competently and carefully. 3. Foster and support professional development. 4. (Supervisors) Executing responsibilities to insure compliance of ethical, legal, professional, organizational standards.

Identifying Obligations

1. What is my role in the company and in what way do I contribute to its success? 2. To whom do I owe a duty or an obligation? 3. What potential individual and organizational conflicts or interest should I be aware of? 4. What measures do I need to take to ensure I have sufficient competence to fulfill my role? 5. What supervision can I expect?

Ethics

A set of moral principles, or principles of conduct governing an individual or a group.

Conflict of Interest

Arises when either an employee's personal interest or employer's interest conflicts with that of the conflict.

Professional Standards

Based on a fundamental ethical principles to guide practices.

Ethical Standards

Professional standars, are based on principles that support and promote desired values and behaviours.

Ethical Dilemmas

Situations in which values, interests, and/or rules potentially conflict.

Loyalty

The expectation that the employees will work diligently on behalf of their employer; will place their employer's interests above their own; will not misappropriate company property.

Insider Trading

Trading while in possession of information that is not publicly available and that is likely to affect the price.