CFA - Ethics

Research Objectivity Standards: Objectives

1. prepare research, make recommendations, take investment actions, and develop policies, procedures, and disclosures that put client interests before employees' and the firm's interests 2. facilitate full, fair, meaningful, and specific disclosures to clients and prospects of possible and actual conflicts of interest of the firm and its employees 3. promote the use of effective policies and procedures that maximize possible conflicts that may adversely affect independence and objectivity of research 4. support self-regulation by adhering to specific, measurable standards to promote objective and independent research 5. provide a work environment conducive to ethical behavior and adherence to the Code of Standards

Standard #7 Responsibilities as CFA Institute Member

A - Conduct as Participants in CFAI Programs - members must not engage in any conduct the compromises the reputation or integrity of CFAI or the CFA designation or the integrity, validity, or security of CFAI programs. B - Reference to CFAI, the CFA Designation, and the CFA program - members must not misrepresent or exaggerate the meaning or implications of CFA membership *may only refer to by stating facts and should not cite expected date of certification *Chartered Financial Analyst and CFA must always be used after a charterholders name or as an adjective (never a noun) *Designation should not be given more prominence than name - larger font, bold *This information should be disseminated to firms legal, compliance, PR, and marketing departments

Standard #5 Investment Analysis, Recommendations, and Actions

A - Diligence and Reasonable Basis - must exercise diligence, independence, and thoroughness in analyzing investments, making recommendations, and taking actions. Must have a reasonable and adequate basis, supported by appropriate research for any investment analysis, recommendation, or action B - Communication with Clients and Prospective Clients - must disclose basic format and principles of the investment process used for analysis, security selection, and construction of portfolios. Must disclose significant limitations and risks associated with investment process. Must reasonably identify which factors are important to their investment analysis, recommendations, or actions, and include these in communication. Must distinguish between fact and opinion in presenting investment analysis and recommendations C - Record Retention - must develop and maintain appropriate records to support their investment analysis, recommendations, actions and other investment related communications with clients. *Records are property of the firm. *In absence of guidance, CFA says 7 years. *Emails, texts, blog posts should all be included.

Standard #6 Conflicts of Interest

A - Disclosure of Conflicts - must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with duties to clients. Must ensure that disclosures are prominent, delivered in plain language and communicate relevant information effectively B - Priority of Transactions - transactions for clients and employers must have priority over personal transactions. Personal investing is ok as long as... client is not disadvantaged by trade, member does not personally benefit from trades undertaken by client, and there is compliance with applicable regulatory requirements. *Establish reporting compliance requirements C - Referral Fees - members must disclose to employer, clients, and prospective clients any compensation, consideration, or benefit received from or paid to others for the recommendation of products and services.

Standard #1 Professionalism

A - Knowledge of the Law - members must understand and comply with all applicable laws, rules, and regulations of any organization governing their professional activities. In the event of conflict, members must comply with the more strict law, rule, or regulation B - Independence and Objectivity - must use reasonable care and judgment to achieve and maintain independence and objectivity in professional activities. Must not solicit, offer, or accept any gift, benefit, or compensation/consideration that reasonably could be expected to compromise their own or another individual's objectivity. C - Misrepresentation - must not knowingly make any misrepresentation relating to investment analysis, recommendations, actions, and other professional activities. D - Misconduct - must not engage in any professional conduct involving dishonesty, fraud, or deceit, or commit any act that reflects adversely on their professional reputation, integrity, or competence.

Standard #4 Duties to Employers

A - Loyalty - must act for the benefit of their employer and not deprive employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to employer. *member cannot contact/solicit clients when planning to leave an employer until the resignation paper is signed. B - Additional Compensation Agreements - must not accept gifts, benefits, compensation, or consideration that competes with or might reasonably be expected to create a conflict of interest with their employers' interests unless they obtain written consent from all parties involved C - Responsibilities of Supervisors - must make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations, and the code and standards. *adequate compliance procedures

Standard #3 Duties to Clients

A - Loyalty, prudence, and care - members have a duty to their clients and must act with reasonable care and exercise prudent judgment. Must act for the benefits of their clients and place their client's interests before their employers' or their own interests B - Fair Dealing - members must deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities C - Suitability - members in an advisory relationship with client must... 1. make reasonable inquiry into client's investment experience, risk and return objectives, mandates, and constraints prior to making any recommendations 2. determine that an investment is suitable to client's situation and consistent with the objectives, mandates, and constraints before taking action or making recommendation 3. judge the suitability of investments in context of client's portfolio *investment policy statement D - Performance Presentation - when communicating investment performance, members must make reasonable efforts to ensure that it is fair, accurate, and complete. *Should apply GIPS standards E - Preservation of Confidentiality - members must keep information about current, former, and prospective clients unless: information concerns illegal activities on the part of the client, disclosure is required by law, or client permits disclosure of information

Standard #2 Integrity of Capital Markets

A - Material Nonpublic Information - members who possess material nonpublic information that could affect the value of an investment must not act or cause others to act on the information. *Mosaic Theory - material information discovered by analyst on his own using public information is not a violation - research led to useful information B - Market Manipulation - members must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants

After a firm presents a minimum required number of years of GIPS- compliant performance, the firm must present an additional year of performance each year, building up to a minimum of:

After a firm presents a minimum of five years of GIPS-compliant performance, the firm must present an additional year of performance each year, building up to a minimum of 10 years of GIPS-compliant performance.

Which of the following groups is most likely responsible for maintaining oversight and responsibility for the CFA Institute Professional Conduct Program (PCP)?

CFA Institute Board of Governors

Local Laws

CFA prohibits insider trading even if it is allowed in local location

GIPS Provisions

Fundamentals of compliance Input data Calculation methodology Composite construction Disclosure Presentation and reporting Real estate Private equity Wrap fee/SMA portfolios

GIPS

Global Performance Investment Standards - provides a valid comparison of investment performance, common methodology, and seeks to avoid misrepresentations

GIPS in countries where laws/regulations already exist

In the event of conflict, firms are required to comply with laws and regulations and make full disclosure

Litigation Rules

Members and candidates must self-disclose on the annual Professional Conduct Statement all matters that question their professional conduct, such as involvement in civil litigation or criminal investigations or being the subject of a written complaint.

Code of ethics #4

Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession

6.0 Relationships with Subject Companies

Requirements: - analysts must not allow the subject company, prior to publication, to see any part of the research report that might signal the analysts' recommendation or rating, or make any promises concerning a specific recommendation or rating Recommended Procedures: - firms should have policies and procedures that govern analyst/subject company relationship - should be efforts made to check facts contained in the research report before publication - compliance and legal departments should receive a report draft before is is shared with the subject company.

5.0 Research Analyst Compensation

Requirements: - compensation for research analysts should be directly related to the quality of the research and recommendations provided by the analyst and not directly linked to investment banking or corporate financing activities Recommended Procedures: - compensation systems should be based on measurable criteria consistently applied to all research analysts - ideally should be no link between analyst compensation and investment banking and corporate finance activities, but firms should disclose to what extent analyst compensation depends upon investment banking revenue

2.0 Public Appearances

Requirements: - covered employees who make public appearances to discuss research or investment recommendations must disclose any personal and firm conflicts of interest Recommended Procedures: - be sure audience can make informed judgments that they consider the investment in the context of their entire portfolio - covered employees making public appearances should always be prepared to discuss all conflicts - firms should require covered employees to disclose all investment banking relationships or whether the analyst has participated in marketing activities for the subject company - all supporting research reports should be provided at a reasonable cost

1.0 Research and Objectivity Policy

Requirements: - firm must have a formal written independence and objectivity of research policy that it distributes to clients, prospective clients, and employees - supervisory procedures must be in place to make sure employees comply with the policy - a senior officer who attests annually to clients and prospective clients that the firm has complied with the policy. Recommended Procedures: - identify and describe covered employees - specify whether covered employees are subject to a code of ethics and standards of professional conduct and fully disclose any conflicts of interest - any policy should clearly identify the factors on which research analysts' compensation is based - policy should also include terms regarding how research reports may be purchased by clients

11.0 Rating System

Requirements: - firm must have a rating system the investors find useful for investment decisions and provides investors with information they can use to determine the suitability of specific investments for their own portfolio. *avoid one dimensional rating systems

9.0 Compliance and Enforcement

Requirements: - firms must enforce their policies and compliance procedures, assess disciplinary sanctions on employees who violate the policies, monitor the effectiveness of the compliance procedures, and maintain records of any internal audits of the policies

7.0 Personal Investments and Trading

Requirements: - firms must institute policies that: - address personal trading of covered employees - ensure that covered employees do not share information with anyone who could use info to trade ahead - ensure covered employees and immediate family members cannot trade ahead - prohibit covered employees and immediate family members from trading contrary to firm's recommendations, except under cases of extreme financial hardship - prevent covered employees and immediate family members from buying or receiving shares of subject companies or companies in the industry the employee covers prior to an IPO

8.0 Timeliness of Research Reports and Recommendations

Requirements: - regularly issue research reports on subject companies on a timely basis

3.0 Reasonable and Adequate Basis

Requirements: - research reports and investment recommendations must have a reasonable and adequate basis. Either a single employee or a committee must be charged with reviewing and approving all research reports and investment recommendations Recommended Procedures: - firms must provide guidance on what constitutes a reasonable and adequate basis for a specific recommendation - offer to provide supporting data to clients and disclose the current market price of the security

4.0 Investment Banking

Requirements: - separate research analysts from the investment banking department - make sure analysts don't report to, and are not supervised by, investment banking personnel - prevent the investment banking department from reviewing, revising, or approving research reports and investment recommendations Recommended Procedures: - prior to publication, no analyst recommendation reports should be shared with the investment banking group - investment banking/corporate finance personnel may review reports only to verify factual info or to identify possible conflicts of interest - firms should have quiet periods for IPO's and secondary offerings - analysts should not be allowed to participate in marketing "road shows"

10.0 Disclosure

Requirements: - the firm must disclose conflicts of interests related to covered employees or the firm as a whole

Who most likely determines whether a violation of the CFA Institute Code of Ethics and Standards of Professional Conduct or testing policies has occurred and what sanction should be imposed?

The Professional Conduct staff and the Disciplinary Review Committee

Code of Ethics #1

act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues, and other participants in global markets

GIPS Composites

aggregation of one more more portfolios managed according to a similar investment mandate, objective, or strategy *Composite must include all actual, fee paying, discretionary portfolios managed in accordance with the same investment mandate, objective, or strategy *Determination of which portfolios to include in a specific composite should be done according to pre established criteria

Who can Claim Compliance with GIPS

complying is voluntary only investment mgmt firms that actually manage assets applied firm wide (cannot select specific products) must comply completely to disclose as complying

Key terms for Research Objectivity and Standards

covered employee - firm employee who conducts research, writes reports, and/or makes investment recommendations. Firm employee who takes investment action on the client's behalf or is involved in the decision-making process. Firm employee who may benefit, either personally or professionally, from his/her ability to influence research reports or investment recommendations

GIPS Verification

firms self regulate their claim of compliance - must be performed by an independent third party *Tests: compliance with composite construction requirements and whether a firm's policies and procedures are designed to calculate and present performance in compliance with GIPS standards

Code of Ethics #6

maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals

When there is disagreement between analyst and employer recommendation

member should NOT issue a new report as this would harm employer

Code of Ethics #2

place integrity of the investment profession and interests of clients above own personal interests

Trade Allocation: Fair Dealing and Disclosure

problems can occur with ad-hoc trade allocations and can cause allocations based on compensation arrangements or client relationships. - get advanced indication of client interest regarding any new issues - distribute new issues by client, not by portfolio manager - have in place a fair and objective method for trade allocation, such as pro rata or a similar system - be fair to clients regarding both execution of trades and price - execute orders in a timely and efficient manner - keep records and periodically review them to ensure that all clients are being treated equitably

Code of Ethics #5

promote integrity of, and uphold the rules, of governing capital markets

Which of the following is most likely required to comply with the GIPS standards regarding input data? Portfolio valuations must:

use accrual accounting for all interest-earning investments.

Code of Ethics #3

use reasonable care and exercise independent judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities

In order to provide investors with a more comprehensive view of a firm's performance, the current GIPS standards includes new provisions related to:

various measures of risk