Guidance for Standards

After completing this reading, you should be able to:

• demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations involving issues of professional integrity
• recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct
• identify conduct that conforms to the Code and Standards and conduct that violates the Code and Standards

I. Professionalism

Standard I: Professionalism establishes expectations for ethical and professional behavior. It requires members and candidates to act in a manner that protects the integrity of the investment profession, follows applicable requirements, maintains independence, communicates accurately, avoids misconduct, and preserves the knowledge and skills necessary to perform professional responsibilities effectively.

Standard I(A)- Knowledge of the Law

Standard I(A) – Knowledge of the Law requires investment professionals to understand and comply with the laws, regulations, and professional requirements that apply to their activities. When different requirements apply, professionals must determine which applicable requirement imposes the stricter standard and follow it.

Standard I(A) Guidance

Relationship Between the Code, Standards, and Law

Investment professionals may work in countries or markets where local laws differ from the CFA Institute Code and Standards. In these situations, the professional must identify all applicable requirements and follow the stricter one when there is a conflict.

Applicable law depends on the circumstances of the professional activity. A professional should therefore consider the laws and regulations that govern the activity, the location in which the activity takes place, and any other jurisdiction whose requirements apply.

For example, if local regulations do not require disclosure of a referral fee but an applicable professional requirement does, the professional must make the required disclosure.

Key principles include:

• Professionals must comply with the laws, regulations, and professional requirements applicable to their activities.
• They must not use the absence of a legal prohibition as justification for conduct that violates the Code and Standards.
• Where the Code and Standards establish a higher ethical requirement than applicable local law, the higher standard must be followed.
• When requirements are unclear, professionals should seek appropriate guidance from compliance personnel or legal counsel.

Legal compliance represents a minimum requirement. Ethical professional conduct may require members and candidates to take additional steps to protect clients, maintain professional integrity, and avoid conduct that could undermine confidence in the investment profession.

CFA Institute members are subject to the Code of Ethics, Standards of Professional Conduct, Rules of Procedure, and applicable membership requirements. Candidates are also subject to the obligations applicable to participation in the CFA Program, including the Candidate Agreement and examination-related requirements.

Responsibility for Others’ Misconduct

Members and candidates can violate Standard I(A) when they knowingly participate in, assist with, or remain involved in conduct that violates applicable law or professional requirements when they know, or reasonably should know, about the violation.

Professionals are not expected to know every fact or legal requirement in every situation. However, once they become aware of conduct that may be illegal or unethical, they should take reasonable steps to avoid participating in or remaining associated with that conduct.

Depending on the circumstances, appropriate steps may include:

• Raising the concern with a supervisor.
• Contacting the firm’s compliance or legal department.
• Removing one’s name from a report or recommendation.
• Refusing to perform a particular assignment.
• Ending involvement with the activity or client.
• Resigning from the position when no reasonable alternative exists.

Reporting suspected misconduct may be appropriate, but failure to report does not automatically constitute a violation of Standard I(A). A reporting obligation may arise when applicable law, regulation, or another professional requirement requires it.

Investment Products and Cross-Border Compliance

Professionals involved in creating, managing, distributing, or recommending investment products may be subject to requirements in more than one jurisdiction. They should identify the applicable legal and regulatory framework before undertaking the activity.

Cross-border activities can create uncertainty because the laws of the professional’s home jurisdiction, the client’s jurisdiction, the jurisdiction where the transaction occurs, or another relevant jurisdiction may apply.

When the applicable requirements are unclear or potentially conflicting, members and candidates should consult appropriate compliance or legal professionals.

Global Application

When professionals operate across multiple jurisdictions, they should determine which laws and professional standards apply to the specific activity.

Generally:

• If no applicable local law addresses the conduct, the CFA Institute Code and Standards continue to apply to members and candidates.
• If applicable law is less restrictive than the Code and Standards, the stricter professional requirement applies.
• If applicable law is more restrictive than the Code and Standards, the law must be followed.
• If multiple jurisdictions have applicable requirements, the professional must determine which requirements govern the activity and follow the stricter applicable requirement where appropriate.

Standard I(A) Compliance 

Members and candidates should take reasonable steps to understand and comply with the laws, rules, and regulations that apply to their professional activities. They should remain informed about changes in applicable requirements and avoid assuming that the laws of their home jurisdiction are the only requirements that apply.

When providing investment services across borders, members and candidates should identify the jurisdictions relevant to their activities and determine which legal and regulatory requirements apply. They should maintain access to current and reliable regulatory information and use appropriate resources, including continuing education and information provided by their employer, to remain informed of relevant changes.

When they are uncertain about the appropriate course of action, members and candidates should seek guidance from their firm’s compliance personnel or legal counsel. If they become aware of a potential violation of applicable requirements or the Code and Standards, they should take appropriate steps to address the matter and, when necessary, dissociate themselves from the activity. Documenting the circumstances may also be appropriate when separating from a violation.

Example 1: Conflicting Cross-Border Regulations

Chen, a portfolio manager for a global investment firm based in London, manages accounts for clients in both the United Kingdom and a smaller emerging market, Karibia. Karibia’s securities laws do not prohibit trading on material nonpublic information. While on a research trip, Chen overhears a Karibia-based corporate director discussing a confidential, impending merger that will significantly increase the target company’s stock price. After returning to London, Chen purchases shares of the target company for his clients’ accounts because he believes that Karibia’s rules do not prohibit the transaction.

Comment: Chen violated Standard I(A) – Knowledge of the Law. The absence of an insider-trading prohibition in Karibia does not permit Chen to ignore stricter requirements that apply to his professional activity. Because the information is material and nonpublic and the applicable requirements prohibit trading on such information, Chen must not trade on the information and should dissociate himself from the activity.

Violation

A violation of Standard I(A) may occur when a member or candidate knowingly participates in or assists with conduct that breaches applicable law, regulation, or the CFA Institute Code and Standards.

Professionals are not automatically responsible for every violation committed by another person. The circumstances, the individual’s knowledge, and whether the individual knowingly participated in or remained associated with the misconduct are important in determining whether Standard I(A) has been violated.

Members and candidates should seek legal or compliance advice when they are uncertain about the requirements that apply. Where reporting is legally required, they must comply with that reporting obligation.

Question

His U.S. employer has offered McIntyre a temporary investment analyst assignment in Singapore. John is well-versed in investment regulations within the United States, knowing that in most cases, these laws are more stringent than the CFA Code and Standards. When he arrives in Singapore, he is surprised to learn that the financial industry’s laws are stricter than those in his home office. To what level of regulation must McIntyre hold his professional conduct?

1. United States laws and regulations
2. Singapore laws and regulations
3. Code and Standards

Solution

The correct answer is B.

McIntyre must comply with the stricter applicable requirements. Because the Singaporean laws governing his professional activity are stricter than the relevant requirements of his home office, he must comply with the Singaporean requirements.

Standard I(B)- Independence and Objectivity

Standard I(B) – Independence and Objectivity requires members and candidates to maintain impartial professional judgment. They must avoid relationships, benefits, or pressures that could compromise—or reasonably appear to compromise—their objectivity when performing investment-related responsibilities.

Standard I(B) Guidance

CFA members and candidates should ensure that their investment analysis, recommendations, and actions reflect their independent professional judgment rather than the interests of an issuer, employer, client, broker, or other outside party.

• Personal responsibility: Analysts and other investment professionals must ensure that their conclusions and recommendations represent their genuine professional judgment.
• External pressures: Issuers, corporations, brokers, investment bankers, and other parties may attempt to influence professionals through gifts, entertainment, favors, or other benefits. Professionals should refuse benefits that could reasonably affect their independence or objectivity.
• Client gifts: Benefits received from clients may represent additional compensation. Such benefits should be disclosed to the employer so that the employer can determine whether the benefit creates a conflict or could affect professional judgment.

Investment Banking Relationships

Investment professionals may face pressure to issue favorable research about companies that are current or potential investment-banking clients. Analysts must separate research judgments from commercial interests and should not allow the firm’s desire to obtain or retain business to influence their recommendations.

Research analysts may communicate with investment bankers when evaluating companies or prospective business relationships. However, appropriate safeguards should be maintained so that investment-banking considerations do not influence the analyst’s independent conclusions.

Where an unavoidable conflict exists, it should be addressed and disclosed in accordance with the applicable conflict-of-interest requirements.

Performance Measurement and Attribution

Professionals involved in performance measurement may face pressure to change benchmarks, calculations, or attribution methods in order to make investment results appear more favorable.

They must resist such pressure and ensure that performance calculations and analysis are objective, accurate, and supported by appropriate methodology.

Public Companies

Companies may attempt to influence analysts by providing selective access to management, threatening to withdraw access, or applying other forms of pressure when analysts issue unfavorable views.

Analysts must remain independent and should base their research on reliable and relevant information. Sources may include company filings, management discussions, competitors, customers, industry information, and other appropriate research materials.

Analysts should not soften or change their conclusions simply because an issuer disagrees with their analysis.

Credit Rating Agencies

Credit-rating professionals may encounter conflicts when the entities being rated also have commercial relationships with the rating organization.

Appropriate policies and controls should be used to protect the independence of ratings and prevent commercial considerations from influencing analytical judgments.

Professionals should remain alert to conflicts that could affect the credibility of ratings or other analytical opinions.

Influence on Manager Selection

Members and candidates involved in selecting investment managers or seeking investment mandates must maintain independence and objectivity.

Individuals responsible for selecting managers should not solicit personal benefits from prospective managers. Likewise, investment managers seeking mandates should not provide benefits intended to influence the selection process.

Improper benefits may include direct gifts or less obvious benefits, such as contributions to organizations or causes associated with individuals responsible for investment decisions, when those contributions are intended to influence the decision.

Issuer-Paid Research

Companies may pay investment professionals to prepare research reports about their securities. This arrangement can create an actual or perceived conflict because the issuer is paying for the research.

Professionals involved in issuer-sponsored research should maintain independent analytical judgment, clearly understand the compensation arrangement, and disclose relevant conflicts. Compensation structures that depend on the conclusions of the research may create greater pressure and should be avoided.

Travel Funding

Company-paid travel can create concerns about independence and objectivity, particularly when the travel involves luxury transportation, expensive accommodations, or entertainment.

As a general practice, professionals should use ordinary commercial transportation and have their employer pay reasonable travel expenses. However, company-paid transportation may be acceptable when commercial transportation is unavailable or impractical and the trip has a legitimate professional purpose.

The key consideration is whether the arrangement could reasonably compromise or appear to compromise the professional’s objectivity.

Example: Vendor-Provided Technology Analysis

Vaughn, a technology sector analyst at a mid-sized investment firm, is evaluating a new software company, CloudNine. CloudNine’s management offers to fly Vaughn and his spouse on a private jet to their headquarters, provide a five-star hotel for three nights, and give them tickets to a major league sporting event. CloudNine states that the arrangement is intended to give Vaughn an “uninterrupted, in-depth look” at its operations, including access to senior engineers. Vaughn accepts the package because he believes the access will improve his research report.

Comment: Vaughn violated Standard I(B) – Independence and Objectivity. The private jet, luxury accommodation, entertainment, and inclusion of his spouse create benefits that are excessive and could reasonably be perceived as influencing his objectivity. Vaughn should decline the unnecessary benefits and use a more ordinary travel arrangement consistent with his firm’s policies.

Violation

To reduce the risk of violating Standard I(B), firms should establish policies designed to protect independent judgment.

Useful controls may include:

• Restricting or monitoring gifts and entertainment.
• Establishing procedures for reviewing issuer-sponsored research.
• Controlling third-party travel arrangements.
• Restricting employee participation in transactions that could create conflicts.
• Maintaining written independence and objectivity policies.
• Providing compliance oversight for situations that could create conflicts.

Question

Grey Gordon, CFA, is a securities analyst assigned to K-Trail Flatbeds, a major producer of trailers for the trucking industry. K-Trail’s headquarters are located in Meadow Lake, Saskatchewan, approximately four hours by automobile from the nearest airport. Gordon contacts K-Trail’s management to gather information for a report he is preparing. The chief financial officer invites Gordon to meet the management team at K-Trail and offers to send the company’s private jet to fly Gordon to Meadow Lake and return him home the same day.

There are currently no commercial flights between Gordon’s current location and Meadow Lake, Saskatchewan. If Gordon accepts the offer and makes the trip to K-Trail’s headquarters on the corporate jet, Gordon:

1. Has not violated Standard I(B) – Independence and Objectivity.
2. Has violated Standard I(B) – Independence and Objectivity unless he discloses the trip and the payment of his travel expenses in his report on K-Trail.
3. Has violated Standard I(B) – Independence and Objectivity unless he reimburses K-Trail for the cost of the trip.

Solution

The correct answer is A.

Standard I(B) requires independence and objectivity, but not every company-paid travel arrangement automatically creates a violation. When reasonable commercial transportation is unavailable and the company aircraft is necessary for a legitimate business purpose, accepting the transportation may be appropriate.

Standard I(C)- Misrepresentation

Standard I(C) – Misrepresentation requires members and candidates to communicate honestly and not knowingly provide false, misleading, or materially incomplete information in connection with their professional activities.

Standard I(C) Guidance

Misrepresentation may occur when a professional makes a false statement, omits important information, presents information in a misleading manner, or creates an inaccurate impression about an investment, service, firm, qualification, or professional result. The requirement applies to written, verbal, electronic, digital, and social-media communications. Professionals should ensure that communications are accurate, understandable, and sufficiently complete for their intended purpose.

Members and candidates should not promise or guarantee investment results unless the investment structure or a legally enforceable arrangement genuinely provides such a guarantee.

Professionals must also accurately represent:

• Their education, qualifications, experience, and professional credentials.
• Their firm’s services and capabilities.
• Investment performance and historical results.
• The characteristics and risks of investment products.
• Their professional experience with particular investment strategies.

Professionals should also take care when communicating through social media or other online platforms. The informal or anonymous nature of a platform does not remove professional responsibilities regarding truthful communication.

When using research, statistics, analysis, or other material developed by another person or organization, appropriate attribution should be provided. Presenting another person’s work as one’s own can constitute plagiarism and misrepresentation.

Example: Cherry-Picking Social Media Testimonials

Delgado, a wealth manager, has a new client who is concerned about investment risk. To reassure the client, Delgado states, “All my clients have been extremely satisfied with my risk management, and none of them have ever lost money in a down market.” On his firm’s social media page, Delgado posts a graphic stating “100% Client Satisfaction & Capital Preservation Rate.” The graphic is based on a survey of only his three largest, most conservative clients, who experienced no losses during a recent minor market decline. Delgado ignores the fact that 15 other clients lost money during the same period.

Comment: Delgado violated Standard I(C) – Misrepresentation. His statements create a misleading impression because they present results from a small and selectively chosen group as though they represent all of his clients. The omission of the unfavorable information makes the communication materially misleading.

Violation

A professional may violate Standard I(C) when he or she knowingly communicates information that is false or materially misleading, including information that the professional knows, or reasonably should know, could create a false impression.

To reduce the risk of misrepresentation, professionals should:

• Verify important information before communicating it.
• Clearly distinguish facts from opinions or estimates.
• Provide appropriate context for performance statistics.
• Avoid exaggerating qualifications or experience.
• Ensure that marketing and public communications remain accurate.
• Correct material errors promptly when they are discovered.
• Use appropriate attribution when relying on another person’s work.

Firms should also establish appropriate policies governing external communications, public statements, social-media activity, and the use of third-party research.

Question

Anna Roy, a CFA member and investment analyst, attends a client lunch where a portfolio manager professes, “You can be sure we’ll outperform the Real Estate index this year due to our fine research analysts.” Roy recognizes this statement as:

1. A violation of plagiarism policy under Standard I(C) – Misrepresentation.
2. A violation concerning the prohibition of guaranteeing returns under Standard I(C) – Misrepresentation.
3. Flattering and appropriate as a marketing technique.

Solution

The correct answer is B.

The statement communicates an assurance of future investment performance. A professional should not present uncertain investment outcomes as guaranteed results. The statement therefore raises a Standard I(C) concern because it creates a misleading impression about expected investment performance.

Standard I(D)- Misconduct

Standard I(D) – Misconduct requires members and candidates to avoid professional conduct involving dishonesty, fraud, or deceit and conduct that reflects adversely on their professional reputation, integrity, or competence.

Standard I(D) is broader than simply complying with financial laws. Conduct may raise concerns under this standard even when the behavior is not directly related to an investment transaction.

Compliance

Professional integrity requires members and candidates to behave honestly and responsibly in circumstances that could affect their professional reputation, integrity, or competence.

However, Standard I(D) is not intended to regulate every aspect of a person’s private life. Personal conduct becomes relevant when it involves dishonesty, fraud, deceit, or otherwise reflects adversely on the individual’s professional reputation, integrity, or competence.

Examples of conduct that may raise concerns include:

• Falsifying expense reports.
• Submitting fraudulent reimbursement claims.
• Misrepresenting information to an employer or client.
• Engaging in dishonest or deceptive professional conduct.
• Knowingly making false statements that damage another person’s professional reputation.
• Other conduct that materially undermines the professional’s reputation, integrity, or competence.

Example 4: Extracurricular Activity Damaging Professional Reputation

Okafor, a CFA charterholder and senior fixed-income analyst at a pension fund, is an active participant in online financial forums under a pseudonym. During a heated debate about emerging-market debt, he becomes angry with another user. Okafor knowingly publishes false and malicious information about the other person’s professional history, accusing the person of fraud and incompetence. The exchange is later connected to Okafor’s real identity and receives significant public attention.

Comment: Okafor violated Standard I(D) – Misconduct. His conduct involved knowingly communicating false and malicious information and therefore involved dishonesty and deceit. The fact that the conduct occurred outside his workplace does not eliminate the professional implications when the conduct is connected to his professional reputation and integrity.

Violation

Standard I(D) requires more than simply avoiding technical violations of financial regulations. Members and candidates must also maintain professional integrity and avoid dishonest, fraudulent, or deceptive conduct.

A common example involves falsifying professional expenses. An employee who deliberately increases expense receipts for client meetings, travel, or other reimbursable costs is engaging in deceptive conduct and may violate Standard I(D).

However, not every personal or nonprofessional action automatically constitutes misconduct. The connection between the conduct and professional reputation, integrity, or competence must be considered.

Question

Which of the following is least likely to be a violation of Standard I(D) – Misconduct?

1. Being intoxicated at the office.
2. Being convicted of a misdemeanor public nuisance over a holiday weekend.

1. I only
2. II only
3. None of the above

Solution

The correct answer is B.

A misdemeanor public nuisance conviction arising from personal conduct is not automatically a violation of Standard I(D). The relevant question is whether the conduct involves dishonesty, fraud, deceit, or otherwise reflects adversely on the individual’s professional reputation, integrity, or competence.

By contrast, intoxication at the workplace may raise professional-conduct concerns depending on the circumstances and its effect on the individual’s professional responsibilities and reputation.

Standard I(E)- Competence

Standard I(E) stipulates that members and candidates must maintain the knowledge and skills necessary to perform their professional responsibilities effectively.

Standard I(E) Guidance

Standard I(E) – Competence requires members and candidates to possess and maintain the knowledge, skills, and abilities needed for their particular professional responsibilities.

Competence is role-specific. A professional may be highly competent in one area of finance while lacking the knowledge or skills necessary to perform a different role effectively.

• Knowledge: The information and understanding needed to perform professional tasks and make informed decisions.
• Skills: The practical capabilities required to perform role-specific activities.
• Abilities: The capacity to apply knowledge and skills effectively in professional situations.

Competence does not mean that every investment decision must produce a successful outcome. Investment decisions involve uncertainty, and losses or errors can occur even when the professional has acted competently and diligently.

Competence is also not determined solely by academic qualifications. Relevant experience, technical knowledge, professional judgment, and the requirements of the particular role are important.

For example, an investment professional with extensive auditing experience may not automatically possess the expertise required to perform complex portfolio-management activities. Similarly, an experienced equity analyst may need additional knowledge before taking responsibility for a specialized asset class.

Because professional responsibilities and financial markets change over time, members and candidates should continually maintain and develop their professional capabilities.

Standard I(E) Compliance Practices:

To maintain professional competence, members and candidates should:

• Participate in continuing education and professional development.
• Pursue relevant certifications or professional qualifications when appropriate.
• Attend seminars, conferences, workshops, or training programs.
• Conduct self-study through reading, research, and other learning activities.
• Participate in professional organizations and networks.
• Acquire additional knowledge and skills when professional responsibilities change.
• Seek assistance from appropriately qualified professionals when specialized expertise is required.

Example: Supervising a New Asset Class

Shibata, a portfolio manager, has successfully managed large-cap equity portfolios for a decade. Her firm asks her to take over management of a new and complex cryptocurrency fund. Shibata understands blockchain technology only superficially but believes her general investment experience is sufficient. She does not undertake training in cryptocurrency valuation, risk management, or custody and does not seek assistance from specialists. She immediately begins managing the digital-asset portfolio using strategies developed for traditional equities.

Comment: Shibata violated Standard I(E) – Competence. Her new responsibilities require specialized knowledge that she does not yet possess. Before taking responsibility for the fund, she should develop the necessary expertise, obtain appropriate training, consult qualified specialists, or ensure that suitably qualified personnel support the activity.

Violation

A member or candidate may violate Standard I(E) when he or she accepts or performs professional responsibilities without maintaining the knowledge, skills, and abilities necessary to perform those responsibilities appropriately.

Examples of potential violations include:

• Failing to maintain professional knowledge as the field develops.
• Ignoring important changes affecting one’s area of professional responsibility.
• Accepting expanded responsibilities without preparing for the new requirements.
• Representing oneself as capable of performing a task without possessing the necessary expertise.
• Failing to obtain appropriate assistance when specialized knowledge is required.

Question

Emma Clark, CFA, a senior manager in the treasury department, has recently been promoted to oversee her firm’s alternative investments division. She does not have much prior experience with private equity or hedge funds, but she believes her treasury experience and prior achievements are sufficient. She immediately begins advising clients on alternative investment products without additional training or professional development.

Which of the following options is Emma most likely in violation of Standard I(E) – Competence?

1. She would violate Standard I(E) – Competence by overstating her ability without the necessary skills.
2. She would violate Standard I(E) – Competence by engaging in misrepresentation.
3. No violation would occur.

Solution

The correct answer is A.

Emma has accepted responsibilities in an area where she lacks the necessary knowledge and experience and has not taken reasonable steps to develop the required expertise. Her failure to prepare for the expanded responsibilities creates a competence issue under Standard I(E).

The key issue is not simply that Emma lacks previous experience with alternative investments. The concern is that she has assumed responsibility for the area without taking reasonable steps to acquire the knowledge and skills necessary to perform the new role competently.