CFA Level 1 Revision Series Ethics

Summary

This script provides an in-depth overview of the CFA Institute's Code of Ethics and Standards, detailing the seven key standards and their substandards. It emphasizes the importance of adhering to the law, maintaining independence and objectivity, and avoiding misrepresentation. The speaker also covers topics such as handling gifts and bonuses, market manipulation, loyalty to clients and employers, record retention, and the prohibition of partial designations. Additionally, the script touches on the Global Investment Performance Standards (GIPS), explaining their optional nature and the benefits of compliance.

Takeaways

• 📘 There are seven standards in the CFA Institute Code of Ethics and Standards of Professional Conduct, each with its own substandards.
• 👮‍♂️ Standard One emphasizes the importance of knowledge of the law and the consequences of ignorance, requiring compliance with the strictest of either the law where one works or the CFA Institute standards.
• 🏦 Substandard B under Standard One addresses the need for independence and objectivity, including guidelines on accepting gifts and bonuses from clients.
• 🙅‍♂️ Substandard C of Standard One prohibits misrepresentation, including the incorrect presentation of performance and the false claim of CFA Charterholder status.
• 🤝 Standard Two discusses the handling of material non-public information and the prohibition of market manipulation, including the Mosaic Theory's allowance for using non-material, non-public information.
• 🤔 Standard Three, particularly Substandard A, focuses on loyalty, prudence, and care, mandating equal treatment and wise decision-making for clients.
• 👥 Substandard B of Standard Three requires fair dealing, ensuring that all clients are informed of any differential service levels and that recommendations are disseminated simultaneously.
• 🔍 Standard Four, Substandard A, discusses loyalty to employers, prohibiting the theft of trade secrets and client data, and outlines the proper conduct when leaving a firm.
• 🗂️ Standard Five, Substandard A, highlights the need for diligence and a reasonable basis for investment decisions, ensuring clients can trust the rationale behind recommendations.
• 🤝 Standard Six, Substandard A, requires the disclosure of conflicts of interest to both employers and clients to maintain transparency and avoid bias.
• 📝 Standard Seven, Substandard A, prohibits discussing CFA exam questions but allows for commentary on the exam's difficulty, while Substandard B addresses the proper use of the CFA designation.

Q & A

How many standards are there in the CFA Institute Code of Ethics?

There are seven standards in the CFA Institute Code of Ethics.

What is the primary rule regarding knowledge of the law as per Standard I?

The primary rule is that ignorance of the law is no excuse; CFA members must know and adhere to the law wherever they work or where their clients are situated, as well as the CFA Institute Code and Standards, whichever is the strictest.

Can CFA members accept gifts or bonuses from clients?

CFA members can accept gifts or bonuses, but they must inform their employer before accepting any gifts or bonuses related to performance. After performance has been delivered, they can accept gifts or bonuses but still need to inform their employer.

What is the Mosaic Theory as it relates to Standard II?

The Mosaic Theory allows CFA members to use non-material, non-public information in combination with public information for trading or investment decisions.

What constitutes misconduct according to Standard I?

Misconduct includes both civil and criminal offenses, whether related to personal or professional life. Misrepresentation, such as falsely claiming to be a CFA Charterholder, is also considered misconduct.

What is the importance of Standard III's substandard A regarding loyalty, prudence, and care?

Standard III's substandard A emphasizes that CFA members must treat their clients with loyalty, act prudently in investment decisions, and exercise care in managing client portfolios.

What does Standard III's substandard D require when presenting performance?

Substandard D requires CFA members to present performance accurately, including terminated accounts, and not to mislead the audience by excluding loss-making composites or presenting only profitable ones.

Under what conditions is it permissible to reveal a client's confidential information according to Standard III's substandard E?

Confidential information can be revealed if the client permits it, if the CFA member needs to defend themselves against false accusations by the client, or if a regulatory authority requests the information.

What is the rule regarding additional compensation arrangements as per Standard IV's substandard B?

CFA members can undertake additional work outside their primary employment, but they must seek prior consent from their employer, which is often referred to as 'moonlighting.'

What is the key principle behind Standard V's substandard A regarding diligence and reasonable basis?

The key principle is that CFA members must have a sufficient and reasonable basis for their investment decisions and be able to answer any client inquiries based on that basis, rather than on tips or hearsay.

What is the priority of transactions as per Standard VI's substandard B?

The priority of transactions is clients first, employer second, and the CFA member's own account last.