Standard: Understand and comply with all applicable laws/rules. In conflict, follow the stricter law. Do not knowingly assist in violations; dissociate from them.
Guidance: * Relationship with Law: If local law is stricter than the Code/Standards, follow local law. If the Code/Standards are stricter, follow the Code/Standards. If no law exists, follow the Code/Standards. * Dissociation: If a member suspects illegal/unethical activity, they must dissociate. Steps: Report to supervisor/compliance -> excessive inaction may constitute participation -> resign if necessary. * Investment Products: Understand laws of country of origination and distribution.
Recommended Procedures: * Stay informed (CE, legal counsel). * Review firm compliance procedures regularly. * Maintain files of applicable statutes.
Application Examples: * Ex 1 (Notification): Reporting a violation to legal counsel is good, but relying on their advice doesn’t absolve you if the advice is to ignore a clear violation. * Ex 2 (Dissociating): If a prospectus is misleading, report to supervisor. If not fixed, refuse to participate (dissociate). * Ex 3 (Dissociating): Using inflated performance numbers knowingly is a violation. If the firm refuses to correct, the member must decline to use the materials and consider resigning. * Ex 4 (Highest Req): In a country with minimal laws (e.g., no insider trading ban), the member must still follow Standard II(A) (no insider trading). * Ex 5 (Highest Req): If local law bans IPO participation (stricter), the member must follow local law, even if the Code allows it with disclosure. * Ex 6 (Religious Tenets): Be aware of Sharia/religious law compliance if marketing to those groups. * Ex 7 (Reporting): Reporting potential unethical acts (broker kickbacks) to compliance/supervisors is appropriate. * Ex 8 (Social Media): Failure to know new regulations on social media communications is a violation.
Standard: Use reasonable care to maintain independence. Do not offer/accept gifts/compensation that compromise objectivity.
Guidance: * Buy-Side/Sell-Side Pressure: Analysts must not bow to pressure from buy-side clients (who want high ratings to protect portfolio values) or investment banking colleagues (who want to win deals). * Issuer-Paid Research: Must be strictly disclosed; flat fee preferred (not linked to conclusion). * Travel Funding: Best practice is for the analyst to pay for their own commercial travel. Accepting chartered flights/lavish lodging is generally prohibited unless commercial travel is impossible.
Recommended Procedures: * Create a “restricted list” for companies where the firm has investment banking relationships. * Strict limits on gifts (token items only). * Restrict employee IPO participation.
Application Examples: * Ex 1 (Travel): Accepting modest chartered travel to a remote mine (commercial unavailable) is acceptable. * Ex 2 (Research): Promising “research coverage” is fine; promising a “favorable rating” is a violation. * Ex 3-6 (Pressure): Analysts changing ratings due to pressure from Investment Banking, Corporate Management, or Sales teams violate the standard. * Ex 7 (Gifts - Related Party): Accepting World Cup tickets/limos from a broker in exchange for order flow is a violation. * Ex 8 (Gifts - Client): A bonus/gift from a client for good performance is acceptable if disclosed to the employer (Standard I(B) focus is on external influence; Client gifts are less corrosive but must be managed). * Ex 9 (Ext Manager Travel): A pension manager accepting an expense-paid “fact-finding” trip from a potential sub-manager creates a conflict. * Ex 10 (Comp Arrangements): A bonus tied to the success of an IPO promotion compromises research objectivity. * Ex 11 (Service Fees): Selecting funds based on service fees paid to the bank rather than client suitability violates objectivity. * Ex 12 (Objectivity): Standing firm on a negative outlook (e.g., subprime mortgages) despite market optimism is proper conduct. * Ex 13-14 (Manager Selection): Pay-to-play (donating to political campaigns or lavishly entertaining consultants to win mandates) is a violation. * Ex 15 (Relationships): Failing to report a composite change because the fund manager is a friend/VIP is a violation.
Standard: Do not knowingly make misrepresentations (untrue statements or omissions) regarding analysis, recommendations, or actions.
Guidance: * Scope: Covers oral, written, and digital communications. Includes guaranteeing returns (prohibited for volatile assets). * Plagiarism: Must acknowledge sources. (Exception: Can use internal firm research without attribution to specific analysts). * Omissions: Omitting relevant facts (like model inputs or negative outcomes) is misleading.
Recommended Procedures: * Verify outside information. * Maintain webpages regularly. * Plagiarism policy: Keep copies of source materials.
Application Examples: * Ex 1 (Issuer-Paid): Posting “independent” research without disclosing it is paid for by the issuer is a violation. * Ex 2 (Errors): Unintentional typos are not violations, but must be corrected and ceased once discovered. * Ex 3 (Known Errors): Using a bio with a false degree (knowing it is false) is a violation. * Ex 4, 7-10 (Plagiarism): Using another’s research, charts, or models without citation is a violation. (Note: Using a news report about a study? Cite the study, not just the news report). * Ex 5 (Guarantees): Selling “interest-only” strips as “government guaranteed” is a misrepresentation if only the underlying mortgages, not the strip, are guaranteed. * Ex 6 (Guarantees): Describing FDIC-insured deposits as “guaranteed” is acceptable if accurate. * Ex 11 (Misrep Info): Repackaging third-party research as your own is a violation. * Ex 13 (Avoiding): Refusing to invest in complex structured products the team doesn’t understand prevents misrepresentation of competence. * Ex 14 (Composite): Cherry-picking accounts for a composite is a violation. * Ex 16 (Overemphasis): Citing one winning fund to imply firm-wide success is misleading.
Standard: Do not engage in dishonesty, fraud, or deceit that reflects adversely on professional reputation/integrity.
Guidance: * Scope: Covers professional conduct. Personal misconduct (e.g., civil disobedience) generally doesn’t violate unless it reflects on professional integrity (e.g., fraud, theft). * Alcohol/Drugs: Excessive drinking during business hours that affects competence is a violation.
Application Examples: * Ex 1 (Professionalism): Intoxication at lunch leading to poor work in the afternoon is a violation. * Ex 2 (Fraud): Falsifying expense reports is a violation (reflects on honesty). * Ex 3 (Fraud): Taking a kickback/surcharge on a charitable purchase is a violation. * Ex 4 (Personal Actions): Arrest for civil disobedience (protest) does not typically violate I(D). * Ex 5 (Prof Misconduct): Being told to “stop asking questions” about a fund’s suspicious reporting implies misconduct; the member should report/dissociate.
Standard: Act with and maintain the competence necessary to fulfill professional responsibilities.
Guidance: * New Standard: Explicitly requires maintaining skills/knowledge. * Context: Competence varies by role. If you change roles, you must gain the necessary competence for the new role.
Application Examples: * Ex 1 (Maintaining): Studying new trade deals/consulting experts to write a report satisfies the standard. * Ex 2 (Improving): Hiring an ESG expert and getting training before launching ESG products is proper. * Ex 3 (Change in Role): Passing a licensing exam is not enough if you don’t actually learn the material/regulations required for the new role. * Ex 4 (Supervisory): Promoting a great analyst to manager requires them to learn management/supervisory skills, not just research skills. * Ex 5 (Choosing Investments): If research was thorough, a recommendation that goes bankrupt due to fraud is not necessarily incompetence. * Ex 6 (New Products): Investing in crypto without understanding it (just because clients asked) is a violation.
Standard: Do not act or cause others to act on material nonpublic information.
Guidance: * Material: Would it affect the price? Would a reasonable investor want to know? (e.g., earnings, mergers, new products). * Nonpublic: Not yet disseminated to the marketplace. * Mosaic Theory: Analysts can use nonmaterial nonpublic info + public info to reach a material conclusion. This is permitted. * Social Media: Info in a private group is nonpublic. Info posted to a public page is public.
Recommended Procedures: * Firewalls: Restrict flow between Investment Banking and Research/Trading. * Restricted Lists: Stop trading in companies where the firm has MNPI.
Application Examples: * Ex 1 (Acting): Family member tips broker on a tender offer -> Violation to trade. * Ex 2 (Controlling): Investment bankers allowing traders to overhear a conference call with MNPI -> Violation (failure to contain info). * Ex 3 (Selective Disclosure): Company discloses strike news to a few analysts -> Analysts cannot trade until it’s public. * Ex 4 (Materiality): A casual comment by a doctor (unreliable source) about a takeover is likely not material; trading allowed. * Ex 5-6, 9 (Mosaic): Piecing together public info + non-material snippets (e.g., supplier comments) to form a buy/sell view is legal (Mosaic Theory). * Ex 7 (Analyst Recs): An analyst’s own report is material. If a reporter trades before the report is published, it’s a violation. * Ex 10 (Materiality): “Market noise” or rumors from competitors are generally not MNPI. * Ex 11-12 (Expert Networks): Using experts is fine, but if an expert provides clear MNPI (e.g., failed drug trial results not yet public), you cannot trade.
Standard: Do not engage in practices that distort prices or artificially inflate volume with intent to mislead.
Guidance: * Information-Based: Spreading false rumors (pump and dump). * Transaction-Based: Wash trading (buying/selling same security to create volume), cornering the market.
Application Examples: * Ex 1 (Promotion): Promoting a stock via newsletter for a fee without disclosure + misleading info = Violation. * Ex 2 (Trading): Using multiple accounts to trade back and forth to create illusion of volume = Violation. * Ex 3, 6 (Artificial Volatility): Releasing a negative report specifically to drive price down for short positions = Violation. * Ex 4 (Volume): Trading between two internal funds solely to boost volume = Violation. * Ex 5 (Pump-Priming): An exchange guaranteeing minimum volume to attract users is a violation unless disclosed. * Ex 8 (Inputs): Manipulating model inputs to achieve a desired rating/price is a violation.
Standard: Duty of loyalty; act with reasonable care; place client interests first.
Guidance: * Fiduciary Duty: The standard sets a minimum benchmark. If legal fiduciary duty is stricter, follow law. * Soft Dollars: Must be used for the benefit of the client (research/execution), not firm overhead (rent/furniture). * Proxy Voting: Vote proxies in client’s best interest. (Cost-benefit analysis allowed).
Application Examples: * Ex 1 (Plan Participants): Buying company stock to stop a takeover (saving management’s jobs) violates duty to pension beneficiaries. * Ex 2 (Commissions): Using client commissions to pay firm rent is a violation. * Ex 3-4 (Brokerage): Directing trades to a broker in exchange for referrals or personal gain, without best execution for client, is a violation. * Ex 6 (Excessive Trading): Churning accounts to generate commissions is a violation. * Ex 7 (Family): Family accounts that are fee-paying client accounts should be treated equally (not disadvantaged) in IPOs. * Ex 11 (Execution-Only): If hired only to execute trades, duty is “best execution,” not investment advice.
Standard: Deal fairly and objectively with all clients (not equally, but fairly) regarding recommendations and actions.
Guidance: * Dissemination: Distribute recommendations simultaneously to all clients. * Allocation: Pro rata allocation for block trades/IPOs is best practice. * Service Levels: Can offer different service levels (e.g., premium) if disclosed and available to all willing to pay.
Application Examples: * Ex 1, 5 (Selective): Telling a few favorite clients about a rating change before the official release is a violation. * Ex 2 (Funds): Allocating hot IPOs only to the firm’s own commingled fund (to boost its record) and ignoring other accounts is a violation. * Ex 3 (IPO): Oversubscribed IPOs must be prorated. PM taking shares for personal account is a violation. * Ex 4 (Allocation): Allocating winning trades to a favored client and losers to others is a violation. * Ex 7 (Min Lot): Deviating from strict pro-rata to ensure clients get meaningful (minimum) lot sizes is acceptable. * Ex 9 (Social Media): Tweeting a “Buy” rec to followers before sending the formal report to clients is a violation.
Standard: Make reasonable inquiry (IPS), determine suitability, judge in context of total portfolio.
Guidance: * IPS: Must have a written Investment Policy Statement. Update at least annually. * Mandates: If managing a specific mandate (e.g., High Yield Fund), stick to the mandate. Suitability is judged against the mandate, not the individual investor in the fund. * Diversification: Generally required unless strictly contrary to objectives.
Application Examples: * Ex 1 (Risk Profile): Putting a low-risk client into high-risk small caps is a violation. * Ex 2 (Context): Using options (high risk) to hedge a portfolio (reducing risk) can be suitable. * Ex 3 (Update): If a client wins the lottery, their risk tolerance/needs change; update the IPS. * Ex 4 (Mandate): A high-income fund manager buying zero-dividend stock violates the mandate. * Ex 6 (Submanager): Selecting a submanager based solely on low fees (to maximize firm profit) without checking strategy fit is a violation. * Ex 8 (Unsolicited): If a client requests an unsuitable trade: Discuss -> If they insist, execute (if allowed) and document -> If it changes the risk profile materially, update IPS or reconsider relationship.
Standard: Ensure performance info is fair, accurate, and complete.
Guidance: * GIPS: Compliance is best practice but not required. * simulated Results: Must be disclosed as simulated. * Weighted Composite: Use weighted averages of similar portfolios, not a single “representative” account.
Application Examples: * Ex 1 (Time): Presenting performance for a short, selected winning period only is misleading. * Ex 3 (Prior Firm): Can use performance from a prior firm if the member was primarily responsible and keeps records (and discloses it was a prior firm). * Ex 4 (Simulated): Promoting simulated back-tested results as actual history is a violation. * Ex 5 (Selected Accts): Showing only the best accounts (“Cherry picking”) is a violation. * Ex 8 (Methodology): Frequently changing calculation dates to maximize reported return is a violation.
Standard: Keep client info confidential unless: Illegal activity, Required by law, or Client permits.
Guidance: * Scope: Applies to former clients too. * Detection: If client is doing something illegal (e.g., money laundering), confidentiality may be broken (consult counsel).
Application Examples: * Ex 1 (Possessing): Keeping client info confidential is the default. * Ex 2 (Disclosing): Disclosing client names to a charity without permission is a violation. * Ex 3 (Illegal): If a client may be involved in illegal activities, consult compliance/lawyer; disclosure to authorities may be required. * Ex 5 (Accidental): If a client posts confidential info on a group social media page, the member should remove it but is not liable for the client’s action.
Standard: Act for benefit of employer; do not deprive of skills/abilities; do not cause harm.
Guidance: * Independent Practice: Must have employer notification and consent before engaging in competitive independent practice. * Leaving: Can prepare to leave (register business) but cannot solicit clients or take trade secrets/client lists while employed. * Whistleblowing: Permitted if protecting client/market integrity (overrides loyalty to employer).
Application Examples: * Ex 1 (Former Clients): Soliciting former clients using a stolen client list is a violation. Using public info to contact them after leaving (and observing non-competes) is usually okay. * Ex 2 (Files): Taking code models or spreadsheets created at the firm is theft (firm property). * Ex 6, 10, 12 (Soliciting): Soliciting clients before resignation is effective is a violation. * Ex 9 (Outside Comp): Being a mayor (paid) requires disclosure if it takes time away from work. * Ex 11 (Whistleblowing): Reporting employer’s illegal act is not a violation of loyalty.
Standard: Do not accept gifts/comp competing with employer’s interest without written consent from all parties.
Guidance: * Direct conflict: Requires strict consent. * Notification: Material benefits must be disclosed.
Application Examples: * Ex 1 (Bonus): Client offers bonus for performance. Must obtain employer consent (email is fine). * Ex 2 (Outside): Serving on a board for pay requires employer consent.
Standard: Make reasonable efforts to ensure subordinates comply with laws/Standards.
Guidance: * System: Must have a compliance system (code of ethics, checks). * Detection: If a violation occurs, “I didn’t know” is not a defense if procedures were inadequate. * Investigation: If a violation is suspected, limit the employee’s activity pending investigation.
Application Examples: * Ex 1 (Research): Allowing info to leak before publication shows inadequate supervision. * Ex 3 (Trading): Failing to check employee personal trading against client trades is a violation. * Ex 6 (Procedures): Relying on an employee’s word that “I’m following the rules” without verification is inadequate. * Ex 7 (Inadequate): A supervisor ignoring red flags (e.g., high returns with low risk) violates the standard.
Standard: Exercise diligence/independence; have a reasonable basis supported by research.
Guidance: * Secondary Research: Can rely on firm’s research if reasonable. * Quant Models: Must understand parameters, assumptions, and limitations. * Group Research: Can put name on group report even if disagreeing with conclusion, provided the process was sound.
Application Examples: * Ex 1 (Due Diligence): Recommending a third-party fund without reading the prospectus or understanding the strategy is a violation. * Ex 2 (Scenarios): Using only the “best case” scenario to justify a price is a violation. * Ex 11 (Quant): Using a model without understanding its risks or testing it under stress is a violation. * Ex 12 (Failed): If due diligence was done, a bad outcome (loss) is not a violation. * Ex 13 (Quant): Changing a model based on a blog post without testing the impact is a violation.
Standard: Disclose format/principles of investment process. Disclose risks/limitations. Distinguish fact from opinion.
Guidance: * Fact vs. Opinion: “This stock will rise” is an opinion. “This stock P/E is 10” is a fact. * Changes: Disclose material changes in process (e.g., key manager left, strategy shift).
Application Examples: * Ex 1 (Costs): Failing to disclose referral fees or costs netted out of performance is a violation. * Ex 5 (Fact/Opinion): Stating “The company has 500k oz of gold” based on an estimate is presenting opinion as fact (Violation). * Ex 6 (Security Desc): Selling a complex structured product as a simple bond without explaining risks is a violation. * Ex 9 (Change): If a value manager starts using technical analysis (style drift), they must disclose it. * Ex 16 (Risks): Using VaR (Value at Risk) without explaining the model’s limitations/assumptions is a violation.
Standard: Maintain appropriate records to support analysis/actions.
Guidance: * Property: Records belong to the firm. * Retention: CFA Institute recommends 7 years (if local law is silent).
Application Examples: * Ex 1 (IPS): Must keep records of client meetings/IPS to prove suitability. * Ex 3 (Property): Taking member’s own research records to a new firm without permission is a violation.
Standard: Avoid or make full/fair disclosure of conflicts.
Guidance: * Disclosure: Must be prominent and plain language. * Stock Ownership: Disclose if you own stock in the company you are recommending.
Application Examples: * Ex 1 (Business): Broker recommending a fund managed by his own firm must disclose the affiliation. * Ex 3 (Personal Stock): Analyst writing a “Buy” report on a stock they hold personally must disclose ownership. * Ex 7 (Favors): Giving a favorable rating to a company in hopes of getting their pension business is a conflict; must be disclosed/avoided.
Standard: Clients > Employer > Member.
Guidance: * Front-Running: Buying for self before client is strictly prohibited. * Family: Family accounts (if fee-paying) are treated as client accounts, not personal accounts (unless beneficial ownership exists, then treat carefully).
Application Examples: * Ex 1 (Personal): Failing to execute client trades before personal trades is a violation. * Ex 5 (Front-running): A firm buying options for its own account minutes before releasing a “Sell” recommendation to clients is a violation.
Standard: Disclose any compensation received/paid for referrals.
Guidance: * Purpose: Client has a right to know if a recommendation is motivated by a fee. * Internal: Must disclose internal referral fees (e.g., bank department to brokerage department) too.
Application Examples: * Ex 1 (Outside): Referring a client to a broker in exchange for a fee without telling the client is a violation. * Ex 2 (Interdepartmental): Bank employee getting paid to refer customers to the investment arm must disclose the payment.
Standard: Do not compromise integrity of the Program (Cheating, Sharing exam info).
Guidance: * Confidentiality: Do not discuss specific exam questions or broad topics appearing on the exam. * Opinions: You can express opinions about the difficulty or the organization, but not content.
Application Examples: * Ex 1 (Questions): Proctor looking at exam and telling candidates topics is a violation. * Ex 2 (Written): Writing formulas on hand/desk is a violation. * Ex 3 (Time): Writing after “pencils down” is a violation. * Ex 4-6 (Sharing): Discussing specific questions on internet forums or with prep providers after the exam is a violation.
Standard: Do not misrepresent/exaggerate meaning of CFA.
Guidance: * Usage: No “CFA Level I”. Use “CFA charterholder” or “passed Level I”. * Exaggeration: Do not claim CFA guarantees superior returns. * Candidacy: Only a candidate if registered for exam.
Application Examples: * Ex 1 (Consecutive): Stating “Passed all 3 exams in 3 years” is a fact (Acceptable). * Ex 2 (Right to use): Using “CFA” after name is okay only if dues/PCS are current. * Ex 3 (Retired): Must not use “CFA” if retired/not paying dues (unless using “CFA (Retired)” status if permitted). * Ex 6 (Fictitious): Using a handle like “Expert CFA” online is a violation (improper reference).