Ethical and Professional Standards

Professional Conduct Inquiries

1. Members and candidates self-disclose on annual professional conduct statement 2. written complaints can lead to investigation 3. aware of questionable conduct by member of candidate through media or public sources 4. monitored by proctors who may violate rules on exam day 5. analyses of scores and exam materials after the exam, and monitor online and social media to detect disclosure of confidential exam information

7 Standards of Professional Conduct

1. Professionalism (a. Knowledge of Law, b. Independence and Objectivity, c. Misrepresentation, Misconduct) 2. Integrity of Capital Market (a. Material Nonpublic Information, b. Market Manipulation) 3. Duties to Clients (a. Loyalty, Prudence and Care, b. Fair Dealing, c. Suitability, d. Performance Presentation [fair, accurate, and complete], e. Preservation of Confidentiality) 4. Duties to Employers (a. Loyalty, b. Additional Compensation Arrangements, c. Responsibilities of Supervisors) 5. Investment Analysis, Recommendations, and Actions (a Diligence and Reasonable Basis, b. Communication with Clients and Prospective Clients, c. Record Retention) 6. Conflicts of Interest( a. Disclosure of Conflicts, b. Priority of Transactions, c. Referral Fees) 7. Responsibilities as a CFA Institute Member or CFA Candidate (a. Conduct as Participants in CFA Institute Programs, b. Reference to CFA Institute, the CFA Designation, and the CFA Program)

Which of the following statements best describes how professionals use their specialized knowledge and skills? Professionals use their specialized knowledge and skills: a. in service to others. b. to advance their career. c. for the exclusive benefit of their employers.

A is correct. Professionals use specialized knowledge and skills in service to others. Their career and employer may benefit, but those results are not the primary focus of a professional's use of his or her specialized knowledge and skills.

Which of the following statements is most accurate? Investment professionals have a special responsibility to act ethically because: a. the industry is heavily regulated. b. they are entrusted to protect clients' assets. c. the profession requires compliance with its code of ethics.

B is correct. Investment professionals have a special responsibility because clients entrust them to protect the clients' assets.

Which of the following statements is most accurate? a. All legal behavior is ethical behavior. b. Some ethical behavior may be illegal. c. Legal standards represent the highest standard.

B is correct. Some ethical behavior may be illegal. Civil disobedience is an example of what may be illegal behavior that some consider to be ethical. Legal and ethical behavior often coincide but not always. Standards of conduct based on ethical principles may represent a higher standard of behavior than the behavior required by law.

Which of the following statements is most accurate? Ethics can be described as: a. a commitment to upholding the law. b. an individual's personal opinion about right and wrong. c. a set of moral principles that provide guidance for our behavior.

C is correct. Ethics can be described as a set of moral principles that provide guidance for our behavior; these may be moral principles shared by a community or societal group.

Which of the following statements is most accurate? a. Increased regulations are the most useful means to reduce unethical behavior by market participants. b. Regulators quickly design and implement laws and regulations to address practices that adversely affect the fairness and efficiency of markets. c. New laws designed to reduce or eliminate conduct that adversely affects the markets can create opportunities for different, but similarly problematic, conduct.

C is correct. New laws designed to reduce or eliminate conduct that adversely affects the markets can create opportunities for different, but similarly problematic, conduct.

Which of the following statements is most accurate? a. Large financial rewards, such as bonuses, are the most powerful situational influences. b. When decision making focuses on short-term factors, the likelihood of ethical conduct increases. c. Situational influences can motivate individuals to act in their short-term self-interests without recognizing the long-term risks or consequences for themselves and others.

C is correct. Situational influences can motivate individuals to act in their short-term self-interests without recognizing the long-term risks or consequences for themselves and others. Large financial rewards are powerful situational influences, but in some situations, other situational influences, such as loyalty to colleagues, may be even more powerful.

Which of the following will most likely determine whether an individual will behave unethically? a. The person's character b. The person's internal traits and intrinsic motivation c. External factors, such as environmental or cultural elements

C is correct. Social psychologists have shown that even good people may behave unethically in difficult situations. Situational influences, which are external factors (e.g., environmental or cultural elements), can shape our thinking, decision making, and behavior and are more likely to lead to unethical behavior than internal traits or character.

Which of the following statements is most accurate? Standards of conduct: a. are a necessary component of any code of ethics. b. serve as a general guide regarding proper conduct by members of a group. c. serve as benchmarks for the minimally acceptable behavior required of members of a group.

C is correct. Standards of conduct serve as benchmarks for the minimally acceptable behavior required of members of a group. Some organizations will adopt only a code of ethics, which communicates the organization's values and overall expectations regarding member behavior. Others may adopt both a code of ethics and standards of conduct. Standards of conduct identify specific behavior required of community members and serve as benchmarks for the minimally acceptable behavior of community members.

Which of the following statements is most accurate? A profession's code of ethics: a. includes standards of conduct or specific benchmarks for behavior. b. ensures that all members of a profession will act ethically at all times. c. publicly communicates the shared principles and expected behaviors of a profession's members.

C. A profession's code of ethics publicly communicates the shared principles and expected behaviors of a profession's members. The existence of a code of ethics does not ensure that all members will behave in a manner consistent with the code and act ethically at all times. A profession will often establish a disciplinary process to address alleged violations of the code of ethics. A profession may adopt standards of conduct to enhance and clarify the code of ethics.

Professional Conduct Division

Enforcing testing policies of other CFA Institute education programs and professional conduct of Certificate in Investment Performance Measurement certificants

Learning Outcome

Explain the need for high ethical standards in investment industry Ethical Responsibilities required by the CFA Institute Explain ethics Describe the role of a code of ethics in defining a profession Identify challenges to ethical behavior Describe the need for high ethical standards in the investment industry Distinguish between ethical and legal standards Describe and apply a framework for ethical decision making

Difference between Job, occupation, profession

Job: something someone does to earn a living Vocation: job or occupation to which someone is particularly well suited and is very dedicated Profession: is the ultimate evolution of an occupation, resulting from the efforts of members practicing the occupation at a high level and creating a set of ethics and standards of conduct for the entire group.

When unethical behavior erodes trust in an investment firm, that firm is more likely to experience: lower revenues only. higher expenses only. lower revenues and higher expenses.

Lower revenues and higher expenses

CFA Institute Board of Governors

Maintains oversight and responsibility for the Professional Conduct Program (PCP), which, in conjunction with the Disciplinary Review Committee (DRC), is responsible for enforcement of the Code and Standards.

Conduct as Participants in CFA Institute Programs

Members and Candidates must not engage in any conduct that compromises the reputation or integrity of CFA Institute or the CFA designation or the integrity, validity, or security of CFA Institute programs.

New standard regarding responsibilities of supervisors

Members and candidates must make reasonable efforts to detect and prevent violations of applicable laws, rules, regulations, and the code and standards by anyone subject to their supervision or authority to Members and Candidates 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.

The Code of ethics (6)

Members of CFA Institute (including CFA charterholders) and candidates for the CFA designation ("Members and Candidates") must: 1. Act with integrity, competence, diligence, and 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 clients above their own personal interests. 3. Use reasonable care and exercise independent professional judgment 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.

Which of the following best identifies an internal trait that may lead to poor ethical decision making? Overconfidence Loyalty to employer Promise of money or prestige

Overconfidence

Unethical behavior can be caused by

Overconfidence Situational Influences

CFA Institute Mission

To lead the investment profession globally by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society

Which is an example of an activity that may be legal but that CFA Institute considers unethical? Making legally required disclosures in marketing materials Trading while in possession of material nonpublic information Disclosure by an employee of his or her own company's dishonest activity

Trading while in possession of material nonpublic information

Disciplinary Review Committee

Volunteer committee of CFA charter holders who serve on panels to review conduct and partner with professional conduct staff to establish and review professional conduct policies.

Good ethical judgement

actively considering the interests of stakeholders and trying to benefit multiple stakeholders while minimizing risks, including reputational risks

Profession

based on specialized knowledge and skills. based on service to others. practiced by members who share and agree to adhere to a common code of ethics.

CFA Institute Bylaws and Rules of Procedure for Professional conduct

basic structure for enforcing the Code and Standards

Situational influences

external factors that shape our thinking, decision making, and behavior ex: money and prestige, loyalty

CFA Institute Code of Ethics (Code) and Standards of Professional Conduct (Standards)

foundation supporting the organization's quest to uphold the industry's highest standards of individual and corporate practice and to help serve the greater good. The Code is a set of principles that define the overarching conduct CFA Institute expects from its members and CFA Program candidates. The Code works in tandem with the Standards, which outline professional conduct that constitutes fair and ethical business practices.

An ethical decision-making framework will most likely: include a pre-determined, uniform sequence. focus exclusively on confirmable facts and relationships. help avoid a decision that has unanticipated ethical consequences.

help avoid a decision that has unanticipated consequences

Ethical Decision-making framework

identify: Relevant facts, stakeholders and duties owerd, ethical principles, confliects of interest Consider: Situational influences, additional guidance, alternative actions Decide and Act Reflect: Was the outcome as anticipated? Why or why not?

Ethical Decision making frameworks

increase ability and motivation of market participants Adopting a code Exercise ethical decision making skills

Situational influences in decision making will most likely be minimized if: strong compliance programs are in place. longer-term consequences are considered. individuals believe they are truthful and honest.

longer-term consequences are considered.

Decision makers who use a compliance approach are most likely to: avoid situational influences. oversimplify decision making. consider more factors than when using an ethical decision-making approach.

oversimplify decision making.

Benchmarks for minimally acceptable behaviors of community members are: a code of ethics. laws and regulations. standards of conduct.

standards of conduct: applied to specific communities or societal groups and identify specific behaviors required of community members.

judgement

the ability to make considered decisions or come to sensible conclusions.

stakeholders

the individuals or groups of individuals who could be affected either directly or indirectly by a decision and thus have an interest, or stake, in the decision.

Code of ethics

written sets of principles

Moral Principles or Ethical Principles

Beliefs regarding what is good, acceptable, or obligatory behavior and what is bad, unacceptable, or forbidden behavior

Standards of conduct

Benchmarks for minimally acceptable behavior of community members that can help clarify the code of ethics

Additional Requirement under the Standard for Communication with Clients and Prospective Clients

Disclose to clients and prospective clients significant limitations and risks associated with the investment process.

Specialized knowledge and skills, a commitment to serve others, and a shared code of ethics best characterize a(n): vocation. profession. occupation.

Profession

Updated Code of Ethics Principle

Promote the integrity of and uphold the rules governing capital markets to promote the integrity and viability of the global capital markets for the ultimate benefit of society

Ethics vs. Legality

Some things that are ethical may not be legal and some things that are legal may not be ethical ex: civil disobedience and peaceful protests, differences in codes of ethics among countries, whistleblowing

Ethics

Study of moral principles