Session 1 Ethics

Soft dollars-general

"Soft dollars" (or "client brokerage") refers to investment research, products and services, and cash credits given to the investment manager by brokers in return for client business. Research benefits reimbursed to the client, or the clients manager by the broker in exchange for directing trades to the broker

Code of Ethics

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. Place the integrity of the investment profession and the interests of clients above their own personal interests. Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities. Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession. Promote the integrity of, and uphold the rules governing, capital markets. Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.

Standards of professional conduct IV. Duty to employer B. additional compensation arrangements

Additional Compensation Arrangements Members and Candidates must not accept gifts, benefits, compensation, or consideration that competes with, or might reasonably be expected to create a conflict of interest with, their employer's interest unless they obtain written consent from all parties involved.

Standards of professional conduct VI. Conflicts of interest A. Disclosure of conflicts

Another common source of conflicts of interest is a member's compensation/bonus structure, which can potentially create incentives to take actions that produce immediate gains for the member with little or no concern for longer-term returns for the client. Such conflicts must be disclosed when the member is acting in an advisory capacity and must be updated in the case of significant change in compensation structure. Disclosure of Conflicts to Employers Members must give the employer enough information to judge the impact of the conflict. Take reasonable steps to avoid conflicts, and report them promptly if they occur. Recommended Procedures for Compliance Any special compensation arrangements, bonus programs, commissions, and incentives should be disclosed

Soft dollar- client directed brokerage

Brokerage is an asset of the client, so the practice of client-directed brokerage does not violate the investment manager's duty. Required: Do not use brokerage from another client to pay for products or services purchased under any client-directed brokerage agreement. Recommended: The investment manager should disclose the duty to seek best execution. Disclose to the client that the arrangement may adversely affect the manager's ability to obtain best execution and receive adequate research for the client. The investment managers should structure the arrangements so that they do not require the commitment of a certain portion of client brokerage to a single broker. The arrangement should ensure that commissions are negotiated and that there is an emphasis on best execution

Standards of professional conduct IV. Duty to employer C. Responsibility of supervisors

Compliance Procedures Understand that an adequate compliance system must meet industry standards, regulatory requirements, and the requirements of the Code and Standards. Members with supervisory responsibilities have an obligation to bring an inadequate compliance system to the attention of firm's management and recommend corrective action. While investigating a possible breach of compliance procedures, it is appropriate to limit the suspected employee's activities. A member or candidate faced with no compliance procedures or with procedures he believes are inadequate must decline supervisory responsibility in writing until adequate procedures are adopted by the firm

Standards of professional conduct VI. Conflicts of interest A. Disclosure of conflicts

Disclosure of Conflicts Members and Candidates must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients, and employer. Members and Candidates must ensure that such disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively.

Standards of professional conduct IV. Duty to employer A. Loyalty

Employer Responsibility Members are encouraged to give their employer a copy of the Code and Standards. Employers should not have incentive and compensation systems that encourage unethical behavior. Independent Practice Independent practice for compensation is allowed if a notification is provided to the employer fully describing all aspects of the services, including compensation, duration, and the nature of the activities and if the employer consents to all terms of the proposed independent practice before it begins.

Standards of professional conduct V. Investment analyst, recommendations, and actions A. Diligence and reasonable basis

Examples of criteria to use in judging quality are: Review assumptions used. Determine how rigorous the analysis was. Identify how timely how the research is. Evaluate objectivity and independence of the recommendations. Quantitative Research Members must be able to explain the basic nature of the quantitative research and how it is used to make investment decisions. Members should consider scenarios outside those typically used to assess downside risk and the time horizon of the data used for model evaluation to ensure that both positive and negative cycle results have been considered.

Standards of professional conduct V. Investment analyst, recommendations, and actions A. Diligence and reasonable basis

External Advisers Members should make sure their firms have procedures in place to review any external advisers they use or promote to ensure that, among other things, the advisers: Have adequate compliance and internal controls. Present returns information that is correct. Do not deviate from their stated strategies. Group Research and Decision Making Even if a member does not agree with the independent and objective view of the group, he does not necessarily have to decline to be identified with the report, as long as there is a reasonable and adequate basis.

Standards of professional conduct III. Duty to clients B. fair dealing

Fair Dealing Members and Candidates must deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities.

Standards of professional conduct I.professionalism A. Knowledge of the law

Firms Members should encourage their firms to: Develop and/or adopt a code of ethics. Make available to employees information that highlights applicable laws and regulations. Establish written procedures for reporting suspected violation of laws, regulations, or company policies. Members who supervise the creation and maintenance of investment services and products should be aware of and comply with the regulations and laws regarding such services and products both in their country of origin and the countries where they will be sold

Standards of professional conduct I.professionalism B. independence and objectivity

Fund Manager Relationships Members responsible for selecting outside managers should not accept gifts, entertainment, or travel that might be perceived as impairing their objectivity. Credit Rating Agencies Members employed by credit rating firms should make sure that procedures prevent undue influence by the firm issuing the securities. Members who use credit ratings should be aware of this potential conflict of interest and consider whether independent analysis is warranted. Issuer-Paid Research Remember that this type of research is fraught with potential conflicts. Analysts' compensation for preparing such research should be limited, and the preference is for a flat fee, without regard to conclusions or the report's recommendations. Travel Best practice is for analysts to pay for their own commercial travel when attending information events or tours sponsored by the firm being analyzed.

Standards of professional conduct III. Duty to clients B. fair dealing

General Guidance Do not discriminate against any clients when disseminating recommendations or taking investment action. Fairly does not mean equally. In the normal course of business, there will be differences in the time e-mails, faxes, etc., are received by different clients. Different service levels are okay, but they must not negatively affect or disadvantage any clients. Disclose the different service levels to all clients and prospects, and make premium levels of service available to all who wish to pay for them.

Standards of professional conduct II. Integrity of the capital markets A. Material nonpublic information

General Guidance Information is "material" if its disclosure would impact the price of a security or if reasonable investors would want the information before making an investment decision. Ambiguous information, as far as its likely effect on price, may not be considered material. Information is "nonpublic" until it has been made available to the marketplace. An analyst conference call is not public disclosure. Selectively disclosing information by corporations creates the potential for insider-trading violations. The prohibition against acting on material nonpublic information extends to mutual funds containing the subject securities as well as related swaps and options contracts

Standards of professional conduct VI. Conflicts of interest A. Disclosure of conflicts

General Guidance Members must fully disclose to clients, prospects, and their employers all actual and potential conflicts of interest in order to protect investors and employers. These disclosures must be clearly stated. Disclosure to Clients The requirement that all potential areas of conflict be disclosed allows clients and prospects to judge motives and potential biases for themselves. Disclosure of broker/dealer market-making activities would be included here. Board service is another area of potential conflict. The most common conflict which requires disclosure is actual ownership of stock in companies that the member recommends or that clients hold

Standards of professional conduct IV. Duty to employer A. Loyalty

General Guidance Members must not engage in any activities which would injure the firm, deprive it of profit, or deprive it of the advantage of employees' skills and abilities. Members should always place client interests above interests of their employer but consider the effects of their actions on firm integrity and sustainability. There is no requirement that the employee put employer interests ahead of family and other personal obligations; it is expected that employers and employees will discuss such matters and balance these obligations with work obligations.

Standards of professional conduct VII. Responsibilities of CFA member and candidate B. reference to CFA institute, the CFA designation, and the CFA program

General Guidance Members must not make promotional promises or guarantees tied to the CFA designation. Do not: Over-promise individual competence. Over-promise investment results in the future (i.e., higher performance, less risk, etc.). CFA Institute Membership

Standards of professional conduct IV. Duty to employer C. Responsibility of supervisors

General Guidance Members must take steps to prevent employees from violating laws, rules, regulations, or the Code and Standards, as well as make reasonable efforts to detect violations. Members with supervisory responsibility should enforce firm policies regarding investment or non-investment behavior (e.g., mandatory vacations) equally.

Standards of professional conduct V. Investment analyst, recommendations, and actions A. Diligence and reasonable basis

General Guidance The application of this Standard depends on the investment philosophy adhered to, members' and candidates' roles in the investment decision-making process, and the resources and support provided by employers. These factors dictate the degree of diligence, thoroughness of research, and the proper level of investigation required.

Soft dollars-general

General Principles of the Soft Dollar Standards The two key principles of the Soft Dollar Standards are: Brokerage is the property of the client. Investment managers have a duty to obtain best execution, minimize transactions costs, and use client brokerage to benefit clients. Purpose of Soft Dollar Standards CFA Institute Soft Dollar Standards are intended to ensure: Complete disclosure of the investment manager's use of soft dollars and client brokerage. Consistent presentation of data so all parties can clearly understand brokerage practices. Uniform disclosure and record keeping so the client clearly understands how the investment manager is using client brokerage. Consistently high ethical industry standards.

Standards of professional conduct III. Duty to clients A. Loyalty, prudence, and care

Guidance Client interests always come first. Exercise the prudence, care, skill, and diligence under the circumstances that a person acting in a like capacity and familiar with such matters would use. Manage pools of client assets in accordance with the terms of the governing documents, such as trust documents or investment management agreements. Make investment decisions in the context of the total portfolio. Vote proxies in an informed and responsible manner. Due to cost benefit considerations, it may not be necessary to vote all proxies. Client brokerage, or "soft dollars" or "soft commissions" must be used to benefit the client. The "client" may be the investing public as a whole rather than a specific entity or person. Recommended Procedures for Compliance

Standards of professional conduct VI. Conflicts of interest B. priority of transactions

Guidance Client transactions take priority over personal transactions and over transactions made on behalf of the member's firm. Personal transactions include situations where the member is a "beneficial owner." Personal transactions may be undertaken only after clients and the member's employer have had an adequate opportunity to act on a recommendation. Note that family member accounts that are client accounts should be treated just like any client account; they should not be disadvantaged. Information about pending trades should not be acted on for personal gain. The overriding considerations with respect to personal trades are that they do not disadvantage any clients.

Standards of professional conduct IV. Duty to employer B. additional compensation arrangements

Guidance Compensation includes direct and indirect compensation from a client and other benefits received from third parties. Written consent from a member's employer includes e-mail communication. Recommended Procedures for Compliance Make an immediate written report to employer detailing any proposed compensation and services, if additional to that provided by employer. Details including any performance incentives should be verified by the offering party

Standards of professional conduct I.professionalism B. independence and objectivity

Guidance Do not let the investment process be influenced by any external sources. Modest gifts are permitted. Allocation of shares in oversubscribed IPOs to personal accounts is NOT permitted. Distinguish between gifts from clients and gifts from entities seeking influence to the detriment of the client. Gifts must be disclosed to the member's employer in any case, either prior to acceptance if possible, or subsequently.

Standards of professional conduct III. Duty to clients C. Suitability

Guidance In advisory relationships, be sure to gather client information at the beginning of the relationship, in the form of an investment policy statement (IPS). Consider clients' needs and circumstances and thus their risk tolerance. Consider whether or not the use of leverage is suitable for the client. If a member is responsible for managing a fund to an index or other stated mandate, be sure investments are consistent with the stated mandate.

Standards of professional conduct III. Duty to clients D. Performance presentation

Guidance Members must avoid misstating performance or misleading clients/prospects about investment performance of themselves or their firms, should not misrepresent past performance or reasonably expected performance, and should not state or imply the ability to achieve a rate of return similar to that achieved in the past. For brief presentations, members must make detailed information available on request and indicate that the presentation has offered limited information.

Standards of professional conduct VI. Conflicts of interest C. Referral fees

Guidance Members must inform employers, clients, and prospects of any benefit received for referrals of customers and clients, allowing them to evaluate the full cost of the service as well as any potential impartiality. All types of consideration must be disclosed. Recommended Procedures for Compliance Members should encourage their firms to adopt clear procedures regarding compensation for referrals. Firms that do not prohibit such fees should have clear procedures for approval, and members should provide their employers with updates at least quarterly regarding the nature and value of referral compensation received

Standards of professional conduct V. Investment analyst, recommendations, and actions C. Record retention

Guidance Members must maintain research records that support the reasons for the analyst's conclusions and any investment actions taken. Such records are the property of the firm. If no other regulatory standards are in place, CFA Institute recommends at least a 7-year holding period. A member who changes firms must recreate the analysis documentation supporting her recommendation using publicly available information or information obtained from the company and must not rely on memory or materials created at her previous firm. Recommended Procedures for Compliance This record-keeping requirement generally is the firm's responsibility

Standards of professional conduct VII. Responsibilities of CFA member and candidate A. Conduct as members and candidates in the CFA program

Guidance Members must not engage in any activity that undermines the integrity of the CFA charter. This Standard applies to conduct which includes: Cheating on the CFA exam or any exam. Revealing anything about either broad or specific topics tested, content of exam questions, or formulas required or not required on the exam. Not following rules and policies of the CFA program. Giving confidential information on the CFA program to candidates or the public. Improperly using the designation to further personal and professional goals. Misrepresenting information on the Professional Conduct Statement (PCS) or the CFA Institute Professional Development Program.

Standards of professional conduct V. Investment analyst, recommendations, and actions B. communication with clients and prospective clients

Guidance Proper communication with clients is critical to provide quality financial services. Members must distinguish between opinions and facts and always include the basic characteristics of the security being analyzed in a research report. Members must illustrate to clients and prospects the investment decision-making process utilized. All means of communication are included here, not just research reports. In preparing recommendations for structured securities, allocation strategies, or any other nontraditional investment, members should communicate those risk factors specific to such investments. In all cases, members should communicate the potential gains and losses on the investment clearly in terms of total returns. When using projections from quantitative models and analysis, members may violate the Standard by not explaining the limitations of the model, which provide a context for judging the uncertainty regarding the estimated investment result.

Standards of professional conduct II. Integrity of the capital markets B. market manipulation

Guidance This Standard applies to transactions that deceive the market by distorting the price-setting mechanism of financial instruments or by securing a controlling position to manipulate the price of a related derivative and/or the asset itself. Spreading false rumors is also prohibited

Standards of professional conduct I.professionalism C. misrepresentation

Guidance Trust is a foundation in the investment profession. Do not make any misrepresentations or give false impressions. This includes oral and electronic communications. Misrepresentations include guaranteeing investment performance and plagiarism. Plagiarism encompasses using someone else's work (reports, forecasts, models, ideas, charts, graphs, and spreadsheet models) without giving them credit. Knowingly omitting information that could affect an investment decision is considered misrepresentation. Models and analysis developed by others at a member's firm are the property of the firm and can be used without attribution. A report written by another analyst employed by the firm cannot be released as another analyst's work.

Standards of professional conduct I.professionalism D. misconduct

Guidance CFA Institute discourages unethical behavior in all aspects of members' and candidates' lives. Do not abuse CFA Institute's Professional Conduct Program by seeking enforcement of this Standard to settle personal, political, or other disputes that are not related to professional ethics. Recommended Procedures for Compliance Firms are encouraged to adopt these policies and procedures: Develop and adopt a code of ethics and make clear that unethical behavior will not be tolerated. Give employees a list of potential violations and sanctions, including dismissal Check references of potential employees.

Soft dollars-general

I. General Required: Soft dollar practices must benefit the client and must place the clients' interests above the investment manager's interests. Allocation of client brokerage should not be based on the amount of client referrals the investment manager receives from a broker

Soft dollars- relationships with clients

II. Relationships with Clients Required: Disclose to the client that the manager may participate in soft dollar arrangements involving the client's account prior to participating in such arrangements. Recommended: It is permissible to use client brokerage from agency trades to obtain research which may not directly benefit the client. Over time, however, the client should receive a benefit from the research. As long as no fiduciary regulations apply, it is permissible to use client brokerage obtained from principal trades to benefit other client accounts, as long as this is disclosed to the client and prior consent is received

Soft dollar- selection of brokers

III. Selection of Brokers Proper broker selection is a key area where the investment manager can add value for the client. Failure to obtain best execution will hurt performance. Required: Consider trade execution capabilities when selecting brokers. Recommended: When evaluating best execution, consider the broker's financial responsibility, responsiveness, brokerage rate or spread involved, and range of services provided

Soft dollar- evaluation of research

IV. Evaluation of Research Required: To be able to use client brokerage to pay for research, these criteria must be followed: Research must meet the definition. Research is defined as services and products provided by a broker whose primary use directly assists the investment manager in the investment decision-making process, and not in the management of the firm. Research must benefit the client. The basis for the determination must be documented. In the case of principal trades not subject to other fiduciary regulations, the research may benefit other client accounts, as long as disclosure is made to the client and prior permission is received. If the criteria regarding client brokerage associated with principal trades is not met, the investment manager must pay for the research. In the case of mixed use research, make a reasonable allocation of the cost of the research based on its expected usage. Only portions that are used by the investment manager in the investment decision-making process can be paid with client brokerage. Mixed use research allocation must be reevaluated annually

Standards of professional conduct I.professionalism B. independence and objectivity

Independence and Objectivity Members and Candidates must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities. Members and Candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another's independence and objectivity.

Standards of professional conduct I.professionalism B. independence and objectivity

Investment Banking Relationships Do not be pressured by sell-side firms to issue favorable research on current or prospective investment-banking clients. It is appropriate to have analysts work with investment bankers in "road shows" only when the conflicts are adequately and effectively managed and disclosed. Be sure there are effective "firewalls" between research/investment management and investment banking activities. Public Companies Analysts should not be pressured to issue favorable research by the companies they follow. Do not confine research to discussions with company management, but rather use a variety of sources, including suppliers, customers, and competitors. Buy-Side Clients Buy-side clients may try to pressure sell-side analysts. Portfolio managers may have large positions in a particular security, and a rating downgrade may have an effect on the portfolio performance. As a portfolio manager, there is a responsibility to respect and foster intellectual honesty of sell-side research.

Soft dollars-general

Investment Manager Considerations The investment manager should consider that: The manager is a fiduciary and as such must disclose all details relating to benefits received through a client's brokerage. Third-party and proprietary research are to be treated similarly when examining soft dollar arrangements because the research received is paid for with client brokerage. Any research purchased with client brokerage must directly assist the investment manager in the investment process and not in the overall management of the firm. If there is ever any question as to whether the research assists in the investment process, it should be paid for with investment manager assets.

Standards of professional conduct III. Duty to clients B. fair dealing

Investment Recommendations and Actions Give all clients a fair opportunity to act upon every recommendation. Clients who are unaware of a change in a recommendation should be advised before the order is accepted. Treat clients fairly in light of their investment objectives and circumstances. Treat both individual and institutional clients in a fair and impartial manner. Members and candidates should not take advantage of their position in the industry to disadvantage clients (e.g., in the context of IPOs).

Standards of professional conduct IV. Duty to employer A. Loyalty

Leaving an Employer Members must continue to act in their employer's best interests until resignation is effective. Activities which may constitute a violation include: Misappropriation of trade secrets. Misuse of confidential information. Soliciting employer's clients prior to leaving. Self-dealing. Misappropriation of client lists. Employer records on any medium (e.g., home computer, PDA, cell phone) are the property of the firm. Once an employee has left a firm, simple knowledge of names and existence of former clients is generally not confidential. There is also no prohibition on the use of experience or knowledge gained while with a former employer.

Standards of professional conduct IV. Duty to employer A. Loyalty

Loyalty In matters related to their employment, Members and Candidates must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer.

Standards of professional conduct III. Duty to clients A. Loyalty, prudence, and care

Loyalty, Prudence, and Care Members and Candidates have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment. Members and Candidates must act for the benefit of their clients and place their clients' interests before their employer's or their own interests.

Standards of professional conduct II. Integrity of the capital markets B. market manipulation

Market Manipulation Members and Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.

Standards of professional conduct II. Integrity of the capital markets A. Material nonpublic information

Material Nonpublic Information Members and Candidates who possess material nonpublic information that could affect the value of an investment must not act or cause others to act on the information.

Standards of professional conduct I.professionalism A. Knowledge of the law

Members Members should have procedures to keep up with changes in applicable laws, rules, and regulations. Compliance procedures should be reviewed on an ongoing basis to assure that they address current law, CFAI Standards, and regulations. Members should maintain current reference materials for employees to access in order to keep up to date on laws, rules, and regulations. Members should seek advice of counsel or their compliance department when in doubt. Members should document any violations when they disassociate themselves from prohibited activity and encourage their employers to bring an end to such activity. There is no requirement under the Standards to report violations to governmental authorities, but this may be advisable in some circumstances and required by law in others. Members are strongly encouraged to report other members' violations of the Code and Standards.

Standards of professional conduct VII. Responsibilities of CFA member and candidate A. Conduct as members and candidates in the CFA program

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 the CFA examinations. Professor's Note: The Standard is intended to cover conduct such as cheating on the CFA exam or otherwise violating rules of CFA Institute or the CFA program. It is not intended to prevent anyone from expressing any opinions or beliefs concerning CFA Institute or the CFA program.

Standards of professional conduct I.professionalism A. Knowledge of the law

Members and Candidates must understand and comply with all applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct) of any government, regulatory organization, licensing agency, or professional association governing their professional activities. In the event of conflict, Members and Candidates must comply with the more strict law, rule, or regulation. Members and Candidates must not knowingly participate or assist in any violation of laws, rules, or regulations and must disassociate themselves from any such violation.

Standards of professional conduct V. Investment analyst, recommendations, and actions B. communication with clients and prospective clients

Members and Candidates must: Disclose to clients and prospective clients the basic format and general principles of the investment processes used to analyze investments, select securities, and construct portfolios and must promptly disclose any changes that might materially affect those processes. Use reasonable judgment in identifying which factors are important to their investment analyses, recommendations, or actions and include those factors in communications with clients and prospective clients. Distinguish between fact and opinion in the presentation of investment analysis and recommendations.

Standards of professional conduct V. Investment analyst, recommendations, and actions A. Diligence and reasonable basis

Members and Candidates must: Exercise diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions. Have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action.

Standards of professional conduct VII. Responsibilities of CFA member and candidate A. Conduct as members and candidates in the CFA program

Members and candidates are not precluded from expressing their opinions regarding the exam program or CFA Institute but must not reveal confidential information about the CFA program. Candidates who violate any of the CFA exam policies (calculator, personal belongings, Candidate Pledge) have violated Standard VII(A). Members who volunteer in the CFA program may not solicit or reveal information about questions considered for or included on a CFA exam, about the grading process, or about scoring of questions

Standards of professional conduct VII. Responsibilities of CFA member and candidate B. reference to CFA institute, the CFA designation, and the CFA program

Members must satisfy these requirements to maintain membership: Sign PCS annually. Pay CFA Institute membership dues annually. If they fail to do this, they are no longer active members. Using the CFA Designation Do not misrepresent or exaggerate the meaning of the designation. Referencing Candidacy in the CFA Program There is no partial designation. It is acceptable to state that a candidate successfully completed the program in three years, if in fact he did, but claiming superior ability because of this is not permitted.

Standards of professional conduct I.professionalism D. misconduct

Misconduct Members and Candidates 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.

Standards of professional conduct I.professionalism C. misrepresentation

Misrepresentation Members and Candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities.

Standards of professional conduct II. Integrity of the capital markets A. Material nonpublic information

Mosaic Theory There is no violation when a perceptive analyst reaches an investment conclusion about a corporate action or event through an analysis of public information together with items of nonmaterial nonpublic information.

Standards of professional conduct IV. Duty to employer C. Responsibility of supervisors

Once the compliance program is instituted, the supervisor should: Distribute it to the proper personnel. Update it as needed. Continually educate staff regarding procedures. Issue reminders as necessary. Require professional conduct evaluations. Review employee actions to monitor compliance and identify violations. Enforce procedures once a violation occurs. If there is a violation, respond promptly and conduct a thorough investigation while placing limitations on the wrongdoer's activities

Standards of professional conduct I.professionalism A. Knowledge of the law

Participation or Association With Violations by Others Members should dissociate, or separate themselves, from any ongoing client or employee activity that is illegal or unethical, even if it involves leaving an employer (an extreme case). While a member may confront the involved individual first, he must approach his supervisor or compliance department. Inaction with continued association may be construed as knowing participation.

Soft dollars-record keeping

Preservation of Confidentiality Members and Candidates must keep information about current, former, and prospective clients confidential unless: The information concerns illegal activities on the part of the client or prospective client, Disclosure is required by law, or The client or prospective client permits disclosure of the information. Guidance If illegal activities by a client are involved, members may have an obligation to report the activities to authorities. The confidentiality Standard extends to former clients as well. The requirements of this Standard are not intended to prevent Members and Candidates from cooperating with a CFA Institute Professional Conduct Program (PCP) investigation. Recommended Procedures for Compliance Members should avoid disclosing information received from a client except to authorized co-workers who are also working for the client. Members should follow firm procedures for storage of electronic data and recommend adoption of such procedures if they are not in place.

Standards of professional conduct VI. Conflicts of interest B. priority of transactions

Priority of Transactions Investment transactions for clients and employers must have priority over investment transactions in which a Member or Candidate is the beneficial owner.

Standards of professional conduct VII. Responsibilities of CFA member and candidate B. reference to CFA institute, the CFA designation, and the CFA program

Proper Usage of the CFA Marks The Chartered Financial Analyst and CFA marks must always be used either after a charter holder's name or as adjectives, but not as nouns, in written and oral communications. Recommended Procedures for Compliance Make sure that members' and candidates' firms are aware of the proper references to a member's CFA designation or candidacy, as this is a common err

Standards of professional conduct V. Investment analyst, recommendations, and actions A. Diligence and reasonable basis

Reasonable Basis The level of research required to satisfy the requirement for due diligence will differ depending on the product or service offered. A list of some things that should be considered prior to making a recommendation or taking investment action includes: A firm's financial results, operating history, and business cycle stage. Fees and historical results for a mutual fund. Limitations of any quantitative models used. A determination of whether peer group comparisons for valuation are appropriate. Using Secondary or Third-Party Research Members should encourage their firms to adopt a policy for periodic review of the quality of third-party research, if they have not.

Standards of professional conduct I.professionalism C. misrepresentation

Recommended Procedures for Compliance A good way to avoid misrepresentation is for firms to provide employees who deal with clients or prospects a written list of the firm's available services and a description of the firm's qualifications. Employee qualifications should be accurately presented as well. To avoid plagiarism, maintain records of all materials used to generate reports or other firm products and properly cite sources (quotes and summaries) in work products. Information from recognized financial and statistical reporting services need not be cited. Members should encourage their firms to establish procedures for verifying marketing claims of third parties whose information the firm provides to clients

Standards of professional conduct IV. Duty to employer C. Responsibility of supervisors

Recommended Procedures for Compliance A member should recommend that his employer adopt a code of ethics. Employers should not commingle compliance procedures with the firm's code of ethics—this can dilute the goal of reinforcing one's ethical obligations. Members should encourage employers to provide their code of ethics to clients. Adequate compliance procedures should: Be clearly written. Be easy to understand. Designate a compliance officer with authority clearly defined. Have a system of checks and balances. Outline the scope of procedures. Outline what conduct is permitted. Contain procedures for reporting violations and sanctions.

Standards of professional conduct VI. Conflicts of interest B. priority of transactions

Recommended Procedures for Compliance All firms should have in place basic procedures that address conflicts created by personal investing. The following areas should be included: Limited participation in equity IPOs. Members can avoid these conflicts by not participating in IPOs. Restrictions on private placements. Strict limits should be placed on employee acquisition of these securities and proper supervisory procedures should be in place. Participation in these investments raises conflict of interest issues, similar to IPOs. Establish blackout/restricted periods. Employees involved in investment decision-making should have blackout periods prior to trading for clients — no "front running" (i.e., purchase or sale of securities in advance of anticipated client or employer purchases and sales). The size of the firm and the type of security should help dictate how severe the blackout requirement should be. Reporting requirements. Supervisors should establish reporting procedures, including duplicate trade confirmations, disclosure of personal holdings/beneficial ownership positions, and preclearance procedures. Disclosure of policies. When requested, members must fully disclose to investors their firm's personal trading policies. Members should encourage their firms to adopt such procedures if they have not

Standards of professional conduct III. Duty to clients D. Performance presentation

Recommended Procedures for Compliance Encourage firms to adhere to Global Investment Performance Standards. Obligations under this Standard may also be met by: Considering the sophistication of the audience to whom a performance presentation is addressed. Presenting performance of weighted composite of similar portfolios rather than a single account. Including terminated accounts as part of historical performance and clearly stating when they were terminated. Including all appropriate disclosures to fully explain results (e.g., model results included, gross or net of fees, etc.

Standards of professional conduct III. Duty to clients B. fair dealing

Recommended Procedures for Compliance Encourage firms to establish compliance procedures requiring proper dissemination of investment recommendations and fair treatment of all customers and clients. Consider these points when establishing fair dealing compliance procedures: Limit the number of people who are aware that a change in recommendation will be made. Shorten the time frame between decision and dissemination. Publish personnel guidelines for pre-dissemination—have in place guidelines prohibiting personnel who have prior knowledge of a recommendation from discussing it or taking action on the pending recommendation. Simultaneous dissemination of new or changed recommendations to all candidates who have expressed an interest or for whom an investment is suitable. Maintain list of clients and holdings—use to ensure that all holders are treated fairly. Develop written trade allocation procedures—ensure fairness to clients, timely and efficient order execution, and accuracy of client positions. Disclose trade allocation procedures. Establish systematic account review—ensure that no client is given preferred treatment and that investment actions are consistent with the account's objectives

Standards of professional conduct II. Integrity of the capital markets A. Material nonpublic information

Recommended Procedures for Compliance Make reasonable efforts to achieve public dissemination of the information. Encourage firms to adopt procedures to prevent misuse of material nonpublic information. Use a "firewall" within the firm, with elements including: Substantial control of relevant interdepartmental communications, through a clearance area such as the compliance or legal department. Review employee trades—maintain "watch," "restricted," and "rumor" lists. Monitor and restrict proprietary trading while a firm is in possession of material nonpublic information. Prohibition of all proprietary trading while a firm is in possession of material nonpublic information may be inappropriate because it may send a signal to the market. In these cases, firms should take the contra side of only unsolicited customer trades

Standards of professional conduct V. Investment analyst, recommendations, and actions A. Diligence and reasonable basis

Recommended Procedures for Compliance Members should encourage their firms to consider these policies and procedures supporting this Standard: Have a policy requiring that research reports and recommendations have a basis that can be substantiated as reasonable and adequate. Have detailed, written guidance for proper research and due diligence. Have measurable criteria for judging the quality of research, and base analyst compensation on such criteria. Have written procedures that provide a minimum acceptable level of scenario testing for computer-based models and include standards for the range of scenarios, model accuracy over time, and a measure of the sensitivity of cash flows to model assumptions and inputs. Have a policy for evaluating outside providers of information that addresses the reasonableness and accuracy of the information provided and establishes how often the evaluations should be repeated

Standards of professional conduct III. Duty to clients C. Suitability

Recommended Procedures for Compliance Members should: Put the needs and circumstances of each client and the client's investment objectives into a written IPS for each client. Consider the type of client and whether there are separate beneficiaries, investor objectives (return and risk), investor constraints (liquidity needs, expected cash flows, time, tax, and regulatory and legal circumstances), and performance measurement benchmarks. Review investor's objectives and constraints periodically to reflect any changes in client circumstances

Standards of professional conduct I.professionalism B. independence and objectivity

Recommended Procedures for Compliance Protect the integrity of opinions—make sure they are unbiased. Create a restricted list and distribute only factual information about companies on the list. Restrict special cost arrangements—pay for one's own commercial transportation and hotel; limit use of corporate aircraft to cases in which commercial transportation is not available. Limit gifts—token items only. Customary, business-related entertainment is okay as long as its purpose is not to influence a member's professional independence or objectivity. Firms should impose clear value limits on gifts. Restrict employee investments in equity IPOs and private placements. Require pre-approval of IPO purchases. Review procedures—have effective supervisory and review procedures. Firms should have formal written policies on independence and objectivity of research. Firms should appoint a compliance officer and provide clear procedures for employee reporting of unethical behavior and violations of applicable regulations

Standards of professional conduct V. Investment analyst, recommendations, and actions B. communication with clients and prospective clients

Recommended Procedures for Compliance Selection of relevant factors in a report can be a judgment call, so be sure to maintain records indicating the nature of the research, and be able to supply additional information if it is requested by the client or other users of the report

Standards of professional conduct V. Investment analyst, recommendations, and actions C. Record retention

Record Retention Members and Candidates must develop and maintain appropriate records to support their investment analysis, recommendations, actions, and other investment-related communications with clients and prospective clients.

Standards of professional conduct VI. Conflicts of interest C. Referral fees

Referral Fees Members and Candidates must disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received by, or paid to, others for the recommendation of products or services.

Soft dollar- disclosure

Required: Investment managers must disclose in plain language their soft dollar policies. Principal trades must be addressed. Investment managers must disclose the types of research received through proprietary or third-party research, the extent of its use, and whether an affiliated broker is involved. To claim compliance with Soft Dollar Standards, the client must receive a statement that soft dollar practices conform to these standards, and the statement must be provided at least annually. Investment managers must disclose to clients, prominently and in writing, that more information concerning soft dollar arrangements is available on request. Additional information provided upon request may include a description of what the firm obtained through its soft dollar arrangements, the brokers who provided services, and total commissions generated for the client's account. Recommended: When requested by the client: Provide a description of the product or service obtained through client brokerage generated by the client's account. Provide the total amount of brokerage paid from all accounts over which the investment manager has discretion

Soft dollars-record keeping

Required: The investment manager must maintain records that: Meet legal and regulatory requirements. Are needed to supply timely information to clients consistent with the disclosure requirements. Document any arrangements that obligate the investment manager to generate a specific amount of brokerage. Document arrangements with clients regarding soft dollar or client-directed brokerage. Document any broker arrangements. Document the basis for allocations when using client brokerage for mixed use services and products. Show how services and products obtained via soft dollars assist the investment manager in the investment decision-making process. Show compliance with the CFA Institute Soft Dollar Standards and identify the personnel responsible. Include copies of client disclosures and authorizations. Research that can be Purchased with Client Brokerage CFA Institute Soft Dollar Standards set forth a 3-level analysis to assist the investment manager in the determination of whether a product or service is permissible research that can be purchased with client brokerage. Level I—Define the Product/Service: Define it in detail, including multiple components. Answer the question: What is paid for with soft dollars? Level II—Determine Usage: Determine the primary use of the product or service. For example, does the Bloomberg service received directly assist in the investment decision-making process, or is it there just to provide an "overall benefit to the firm"? Level III—Mixed Use Analysis: This step must be completed only if the product or service is classified as "research" based on the Level I and Level II analysis above. This Level III analysis is the investment manager's allocation of the portion of the product or service which directly assists in the investment decision-making process. For example, if the Bloomberg service is used 50% of the time to "determine market and industry trends as part of the investment manager's investment decision-making process," then half of the expense can be paid from client brokerage

Standards of professional conduct IV. Duty to employer C. Responsibility of supervisors

Responsibility 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.

Soft dollars-general

Soft Dollar Standards CFA Institute has set forth seven Soft Dollar Standards, as well as requirements recommendations for each. They are categorized as follows: General Relationships with Clients Selections of Brokers Evaluation of Research Client-Directed Brokerage Disclosure Record Keeping The following pages detail the requirements and recommendations for each of these standards.

Soft dollars-general

Soft Dollar practices- use of brokerage by investment manager to obtain products/services to aid manager in investment decision making process

Standards of professional conduct III. Duty to clients A. Loyalty, prudence, and care

Submit to clients, at least quarterly, itemized statements showing all securities in custody and all debits, credits, and transactions. Encourage firms to address these topics when drafting policies and procedures regarding fiduciary duty: Follow applicable rules and laws. Establish investment objectives of client. Consider suitability of portfolio relative to client's needs and circumstances, the investment's basic characteristics, or the basic characteristics of the total portfolio. Diversify. Deal fairly with all clients in regards to investment actions. Disclose conflicts. Disclose compensation arrangements. Vote proxies in the best interest of clients and ultimate beneficiaries. Maintain confidentiality. Seek best execution. Place client interests first

Standards of professional conduct III. Duty to clients C. Suitability

When Members and Candidates are in an advisory relationship with a client, they must: Make a reasonable inquiry into a client's or prospective clients' investment experience, risk and return objectives, and financial constraints prior to making any investment recommendation or taking investment action and must reassess and update this information regularly. Determine that an investment is suitable to the client's financial situation and consistent with the client's written objectives, mandates, and constraints before making an investment recommendation or taking investment action. Judge the suitability of investments in the context of the client's total portfolio. When Members and Candidates are responsible for managing a portfolio to a specific mandate, strategy, or style, they must make only investment recommendations or take investment actions that are consistent with the stated objectives and constraints of the portfolio.

Standards of professional conduct III. Duty to clients D. Performance presentation

When communicating investment performance information, Members or Candidates must make reasonable efforts to ensure that it is fair, accurate, and complete.

Standards of professional conduct VII. Responsibilities of CFA member and candidate B. reference to CFA institute, the CFA designation, and the CFA program

When referring to CFA Institute, CFA Institute membership, the CFA® designation, or candidacy in the CFA Program, Members and Candidates must not misrepresent or exaggerate the meaning or implications of membership in CFA Institute, holding the CFA designation, or candidacy in the CFA Program.

Standards of professional conduct IV. Duty to employer A. Loyalty

Whistleblowing There may be isolated cases where a duty to one's employer may be violated in order to protect clients or the integrity of the market, and not for personal gain. Nature of Employment The applicability of this Standard is based on the nature of the employment—employee versus independent contractor. If Members and Candidates are independent contractors, they still have a duty to abide by the terms of the agreement