Introduction to the study of the Code of Ethics and Standards of Professional Conduct

Many CFA program candidates find the Code of Ethics and Standards of Professional Conduct challenging, especially if English is their second language, as the exam is always in English. The language in the code and standards can seem complex. Below are two sections from the curriculum.

While knowing the code and standards is a good start, the guidance for the standards, which is covered in the next reading, is even more crucial. It involves applying the code and standards in real-world scenarios. This improves with practice. However, simply memorizing the code and standards won’t be enough for a good score on the exam. Candidates should practice reading hypothetical scenarios from various sources and correctly applying the ethical decision-making process outlined in the curriculum. Both the Code of Ethics and Standards of Professional Conduct are concise and easy to memorize, but the emphasis should be on application rather than mere memorization.

Code of Ethics

Below is the complete CFA Institute Code of Ethics from the 2022 curriculum:

CFA Institute Members (including CFA charter holders) and CFA designation candidates (“Members and Candidates”) must:

• Act with integrity, competence, diligence, and respect in an ethical manner towards the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets.
• Prioritize the integrity of the investment profession and the interests of clients over their personal interests.
• Exercise reasonable care and independent professional judgment when conducting investment analysis, making recommendations, taking investment actions, and participating in other professional activities.
• Promote and engage in professional and ethical practices that bring credit to themselves and the profession.
• Foster the integrity and sustainability of the global capital markets for the ultimate benefit of society.
• Continually enhance their professional competence and support the ongoing development of competence among other investment professionals.

Standards of Professional Conduct

The following is the full and complete CFA Standards of Professional Conduct, as of the 2022 curriculum:

1. PROFESSIONALISM
   1. Knowledge of the Law

      Members and Candidates are required to have a thorough understanding of and adhere to all applicable laws, rules, and regulations governing their professional activities. This includes compliance with the CFA Institute Code of Ethics and Standards of Professional Conduct. In situations where there is a conflict between various laws, rules, or regulations, Members and Candidates must prioritize compliance with the most stringent requirement.

      Furthermore, Members and Candidates must not knowingly engage in or assist with any violations of these laws, rules, or regulations. They are obligated to dissociate themselves from any activities or individuals involved in such violations. This commitment to legal and ethical conduct is essential to maintaining the integrity and reputation of the investment profession and the global capital markets for the benefit of society.

   2. Independence and Objectivity

      Members and Candidates must always exercise sound judgment to ensure their independence and objectivity in professional activities. They are strictly prohibited from engaging in actions such as offering, seeking, or accepting gifts, benefits, compensation, or any form of consideration that might reasonably undermine their independence or objectivity. This rule helps maintain the integrity of their professional roles and safeguards against conflicts of interest that could harm the interests of clients, employers, or the public.

   3. Misrepresentation

      Members and Candidates are strictly prohibited from making any false or misleading statements in connection with investment analysis, recommendations, actions, or any professional activities. This rule emphasizes the importance of honesty and integrity in all aspects of their work, ensuring that clients and the public can trust their professional judgments and advice.

   4. Misconduct

      Members and Candidates are strictly prohibited from engaging in any professional conduct that involves dishonesty, fraud, or deceit. Additionally, they must not commit any act that would harm their professional reputation, integrity, or competence. This rule emphasizes the importance of maintaining high ethical standards and integrity in all professional activities. It ensures that members and candidates uphold the trust and confidence of clients and the public.

2. INTEGRITY OF CAPITAL MARKETS
   1. Material Nonpublic Information

      Members and Candidates are prohibited from using material nonpublic information that could impact the value of an investment. This means they cannot take actions based on such information or influence others to do so. This rule aims to prevent insider trading and maintain fairness and integrity in the financial markets. It emphasizes the importance of equal access to information for all market participants.

   2. 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.

3. DUTIES TO CLIENTS
   1. Loyalty, Prudence, and Care

      Members and Candidates must prioritize their clients’ interests and act diligently and prudently on their behalf. They have a duty of loyalty to clients, which means they must always act in the best interests of their clients and put these interests ahead of their own or their employer’s interests. This ensures that clients receive fair and ethical treatment in all financial dealings.

   2. Fair Dealing

      Members and Candidates must treat all clients fairly and impartially in all aspects of their professional work, including investment analysis, recommendations, actions, and other activities. This ensures that every client receives equitable treatment and that there is no favoritism or bias in their financial dealings.

   3. Suitability
      1. In an advisory role, Members and Candidates must:
         1. Conduct a reasonable assessment of a client’s investment experience, risk tolerance, and financial limitations before offering any investment advice or taking investment actions. This information should be periodically reviewed and updated.
         2. Ensure that recommended investments align with the client’s financial circumstances and are in line with their documented goals, mandates, and constraints.
         3. Evaluate the suitability of investments within the broader context of the client’s entire portfolio.

      2. When managing a portfolio with specific objectives, strategy, or style, Members and Candidates must adhere to the portfolio’s stated goals and limitations when making investment recommendations or taking investment actions.

   4. Performance Presentation

      When conveying investment performance data, Members and Candidates should take reasonable steps to ensure it is fair, accurate, and comprehensive.

   5. Preservation of Confidentiality

      Members and Candidates must maintain the confidentiality of information regarding current, former, and potential clients unless:

      • The information pertains to unlawful actions by the client or potential client,
      • Disclosure is mandated by legal requirements, or
      • The client or potential client consents to the release of the information.
4. DUTIES TO EMPLOYERS
   1. Loyalty

      In employment-related matters, Members and Candidates must prioritize the interests of their employer. They should not misuse their skills, disclose confidential information, or harm their employer in any way.

   2. Additional Compensation Arrangements

      Members and Candidates should not receive gifts, benefits, compensation, or anything else that could create a conflict of interest with their employer’s interests unless all parties involved provide written consent.

   3. Responsibilities of Supervisors

      Members and Candidates must take reasonable steps to ensure that those under their supervision or authority adhere to relevant laws, rules, regulations, and the Code and Standards.

5. INVESTMENT ANALYSIS, RECOMMENDATIONS, AND ACTIONS
   1. Diligence and Reasonable Basis

      Members and Candidates must:

      1. Be diligent, independent, and thorough in their investment analysis, recommendations, and actions.
      2. Ensure their investment analyses, recommendations, or actions are based on reasonable and adequate grounds, supported by proper research and investigation.
   2. Communication with Clients and Prospective Clients

      Members and Candidates must:

      1. Explain the fundamental structure and key principles of their investment procedures for evaluating investments, choosing securities, and building portfolios for clients and potential clients. They should also promptly inform them of any significant changes that could substantially impact these processes.
      2. Clearly communicate to clients and potential clients the notable limitations and risks linked to the investment process.
      3. Exercise reasonable judgment in determining the essential factors for their investment analyses, recommendations, or actions, and include these factors in their communications with clients and prospective clients.
      4. Differentiate between factual information and opinions when presenting investment analysis and recommendations.
   3. Record Retention

      Members and Candidates are required to establish and retain relevant records to substantiate their investment analyses, recommendations, actions, and all other investment-related communications with clients and prospective clients.

6. CONFLICTS OF INTEREST
   1. Disclosure of Conflicts

      Members and Candidates must fully and transparently disclose any matters that could reasonably affect their impartiality or disrupt their obligations to clients, prospective clients, and employers. These disclosures should be clear, easily understood, and effectively communicate the pertinent information.

   2. Priority of Transactions

      Investment transactions on behalf of clients and employers should take precedence over transactions where a member or Candidate has a personal interest.

   3. Referral Fees

      Members and Candidates should inform their employer, clients, and prospective clients, when applicable, about any compensation, benefits, or considerations received from or provided to others for recommending specific products or services.

7. RESPONSIBILITIES AS A CFA INSTITUTE MEMBER OR CFA CANDIDATE
   1. Conduct in CFA Institute Programs

      Members and Candidates should avoid any actions that could harm the reputation or credibility of CFA Institute, the CFA designation, or the security of CFA Institute programs.

   2. Mentioning CFA Institute, the CFA Designation, and the CFA Program

      When discussing CFA Institute, CFA Institute membership, the CFA designation, or participation in the CFA Program, Members and Candidates should refrain from distorting or overstating the significance or consequences of CFA Institute membership, CFA designation, or CFA Program candidacy.

Question

“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.” Is a subsection of which of the Standards?

1. VII. Responsibilities as a CFA Institute Member or CFA Candidate.
2. II. Integrity of Capital Markets.
3. V. Investment Analysis, Recommendations, And Actions.

Solution:

The correct answer is B.

Standard II: Integrity of Capital Markets deals with the behavior of CFA Institute members and candidates in relation to the financial markets. It includes guidance on the use of material nonpublic information to maintain the integrity and fairness of capital markets.

A is incorrect. Standard VII primarily addresses the responsibilities of CFA Institute members or candidates to their clients and employer, including the duty to communicate with clients and maintain independence and objectivity. It does not specifically pertain to the use of material nonpublic information.

C is incorrect. Standard V primarily focuses on the responsibilities of CFA Institute members and candidates when conducting investment analysis, making recommendations, and taking investment actions. It does not directly address the use of material nonpublic information or market integrity.

Reading 29: Code of Ethics and Standards of Professional Conduct

Los 29 (b) Explain the ethical responsibilities required by the Code and Standards, including the sub-sections of each standard.