Insurance Dimes

Research and insights, backed by data

Research and insights, backed by data

📕 Code of Ethics and Standards of Professional Conduct

Candidates should be able to:

  • describe the structure of the CFA Institute Professional Conduct Program and the process for the enforcement of the Code and Standards

There is a book called ‘Standards of Practice Handbook (aka the Handbook) which provides guidance to the people who grapple with real ethical dilemmas in the investment profession on a daily basis.

Handbook intersects theory and practice. Meant for a global audience.

Events in global financial markets test the ethical mettle of financial market participants.

Handbook provides guidance for understanding the principles of the code of ethics and standards of professional conduct (basically, handbook serves code of ethics and code of standards).

Handbook

➡️ Code of Ethics

  • Code contains high level aspirational ethical principles that drive members and candidates to create a positive and reputable investment.

⬇️ Standards of Professional Conduct.

  • Standards contain practical ethical principles of conduct that members and candidates must follow to achieve the broader industry expectations.

Applying the principles individually may not capture the complexity of ethical requirements related to the investment industry.

Examples in the ‘Applications of the Standard’ sections are meant to illustrate how the standard applies to hypothetical but factual situations.

(maybe good for revision)

Summary of the 2023 Revisions to the Code and Standards

  1. Within Standard I: Professionalism, the Board approved a new standard requiring members to act with and maintain the competence necessary to fulfill their professional responsibilities, thus reinforcing the principle set forth in the Code of Ethics.
  2. Within Standard V: Investment Analysis, Recommendations, and Actions, the Board revised Standard V(B) Communication with Clients and Prospective Clients to require disclosures about the nature of the services provided by members and candidates and the costs to the client associated with those services.
  3. Within Standard VI: Conflicts of Interest, the Board changed the name of Standard VI(A) to “Standard VI(A) Avoid or Disclose Conflicts” and revised the standard to require members and candidates to either avoid conflicts of interest or disclose those conflicts. Previously, there was no mention of avoiding conflicts of interest in the standard.

Ethics and the Investment Industry

Society benefits from efficient markets where capital can freely flow to the most productive or innovative destination.

In order for capital markets to be efficient, investors must be able to trust that the markets are fair and transparent and offer them the opportunity to be rewardd for the risk they chose to take.

Laws, regulations, and enforcement, play a role, but are INSUFFICIENT.

This is where ethics comes into the picture→

Moral principles or rules of conduct that provide guidance for our behavior when it affects others.

Fundamental ethical principles →

  • Honesty
  • Fairness
  • Diligence
  • Care and respect for others

Ethical conduct → balance both self-interest and ethical principles.

Compliance with regulation alone is insufficient to fully earn investor trust.

Individuals and firms must develop a culture of integrity that promotes ethical practices.

CFA Institute Code of Ethics and Standards of Professional Conduct

Learning Outcomes

  • identify the six components of the Code of Ethics and the seven Standards of Professional Conduct
  • explain the ethical responsibilities required by the Code and Standards, including the sub-sections of each Standard

The code of ethics

  1. Act with integrity, competence, diligence, and respect and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets
  2. Place the integrity of the investment profession and the interests of clients above their own personal interests
  3. Use reasonable care and exercise independent professional judgement when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.
  4. Practice an encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.
  5. Promote the integrity and viability of the global capital markets for the ultimate benefit of society
  6. Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.

Standards of professional conduct

  1. Professionalism
    1. Knowledge of the law → understand and comply with the laws
    2. Independence and objectivity → maintain independence and objectivity in professional activities. Do not accept/offer/solicit any gift, benefit, compensation.
    3. Misrepresentation → do not make misrepresentations relating to investment analysis, recommendations, actions, or other professional activities.
    4. Misconduct → no dishonesty, fraud, deceit. don’t do anything that will harm your professional reputation, integrity, or competence.
    5. Competence → be competant.
  2. Integrity of capital markets
    1. Material nonpublic info → if you have material non-public info, don’t act on it or ask others to act on it. (insider trading typa thing)
    2. Market manipulation → don’t artificially inflate prices or trading volume with the intent to mislead other market participants.
  3. Duties to clients
    1. Loyalty, Prudence, and Care → Be loyal to clients. always act in client’s benefit
    2. Fair dealing → deal fairly and objectively with all clients
    3. Suitability
      1. CFA Members in an advisory relationship with a client must →
        1. ask client their investment experience, risk and return objectives, financial constraints, BEFORE making any investment recommendation or taking investment action. REASSESS and update this info regularly.
        2. 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.
        3. Judge suitability of investments in the context of the client’s total portfolio.
      2. CFA members responsible for managing portfolio to a specific mandate or style → ONLY make investment recommendations or take investment actions with the stated objectives and constraints of the portfolio (even if there is a ‘better opportunity’ don’t get cocky and do something that is different from the portfolio’s objectives).
    4. Performance presentation → ensure that the investment performance is fair, accurate, and complete.
    5. Preservation and confidentiality → keep info about current, prospective, and former clients confidential UNLESS
      1. info concerns illegal activities on the part of the client or prospective client
      2. disclosure required by the law
      3. consent and permission is obtained from the client to disclose their info
  4. Duties to employers
    1. Loyalty → act in the benefit of the employer, not deprive them of their advantage of their skills, abilities, divulge confidential information, or cause harm to the employer
    2. Additional compensation arrangements → DO NOT accept gifts, benefits, compensation, or consideration that creates a conflict of interest with the employer’s interest unless written consent is obtained (ppl outside the company/firm offering money to leak info/ cause conflict of interest)
    3. Responsibilities of supervisors → make reasonable efforts to ensure that anyone in my supervision or under my authority complies with applicable laws, rules, regulations, and the code of standards. (sirf tum hi nahi, dusre log bhi rule aur ethic stuff follow kare, ye ensure karna hai)
  5. Investment analysis, recommendations, and actions
    1. Diligence and reasonable basis. WE MUST→
      1. exercise diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions
      2. for any investment analysis, recommendation, or action, have a reasonable and adequate basis backed by research and investigation. (do actual research and recommend. don’t just bluff)
    2. Communication with clients and prospective clients. WE MUST →
      1. Disclose the nature of services provided and costs to the client of those services
      2. Disclose the basic format and general principles or the investment processes used to analyze investments, select securities, and construct portfolios. disclose any changes to the client that might materially affect those processes.
      3. Disclose significant limitations and risks associated with the investment process.
      4. Use judgement to identify which factors are important for the client for their investment analyses, recommendations, or actions. include these factors in the communication with clients and prospective clients.
      5. distinguish between fact and opinion when presenting the investment analysis and recommendations to the clients (VERY IMP IMO)
    3. Record retention → Keep records to support investment analyses, recommendations, actions, and other investment related communications iwth clients and prospective clients.
  6. Conflicts of Interest
    1. Avoid or disclose conflicts → make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity and interfere with duties to clients, prospective clients, and employer. Disclosures should be delivered in plain language.
    2. Priority of transactions → Investment transactions for clients and employers must have priority over investment transactions made by the CFA member or candidate.
    3. Referral fees → Any benefit/ compensation received from the recommendation of product or services to clients must be disclosed by the CFA member or candidate.
  7. Responsibilities as CFA member or CFA candidate
    1. Conduct as participants of CFA institute programs → Don’t behave in a way that will compromise the reputation / integrity of CFA.
    2. Reference to CFA institute, CFA designation, and CFA program → Don’t misrepresent or exaggerate the meaning or implications of membership in CFA institute, holding the CFA designation, or candidancy in the CFA program.