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Summary CFA LEVEL 1 - ETHICS & PROFESSIONAL STANDARDS
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  • Course
  • CFA LEVEL 1
  • Institution
  • RMIT University (RMIT )
  • Book
  • CFA Program Curriculum 2018 Level I

I create this summary of knowledge related to CFA level 1 for my 2017 December exam. I got into the top 10% with this. Hope this can help you. (This does not guarantee for your pass, which requires dedication, hardwork and consistency. In case having trouble with any part, please refer to CFA note...

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  • No
  • Ethics and professional standards
  • October 26, 2018
  • 4
  • 2017/2018
  • Summary

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  • cfa
  • ethics
  • standards
  • cfa ethics

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  • RMIT University (RMIT )
  • CFA LEVEL 1
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Concepts Description
Ethics and Trust in the Investment Profession
Ethics Ethics : a set of shared beliefs about what is good/acceptale behaviour, and what is bad/unacceptable behaviour

Code of ethics Code of ethics : written set of moral principles that can guide behaviour by dexcribing what is considered acceptable behaviour
Profession : group of people with specialised skills and knowledge who serve others and agree to be have in accordance with a code of ethics
Role of code of ethics in defining a profession : a way to communicate to the public that its members will use their knowledfe and skills to serve their clients in an honest and ethical
manner

Code of ethics for members of CFA Institute :
‐ Act with integrity, competence, dilligence, respect and in ethical manner with the public, clients, employees, colleagues in the investment profession, and other participants in the
global capital markets
‐ Place the integrity of the investment professional and the interest of clients above their own personal interests
‐ Use reasonable care and exercise independent professional judgement when conducting investment analysis, making investment recommendations, taking investment actions,
and engaging in other professional activities
‐ Practice and encourage other to practice in a professional and ethical manner
‐ Promote the integrity and viability of the global capital markets for the benefit of society
‐ Maintain and improve their professional competence and other investment professionals

Challenge to ethical behaviour ‐ Individuals tend to overrate the ethical quality of their behaviour on a relative basis, and overemphasize the importance of their own personal traits in determining the ethical quality
of their behaviour
‐ Situational influences (loyal to employer, supervisor, organisation, etc.) could cause individuals to act unethical ways, as they place more importance of their self‐interest and short‐
term result than long‐term result and ethical quality of their decisions and behaviour

Need for high ethical standards Responsibility of investment professionals : use their specialised knowledge and skills to protect and grow client assets. Investment advice and management are intangible products→
trust in investment professionals is very important
Consequence of ethical failure :
‐ Damage client wealth ; impede the success of investment firms and investment professionals
‐ Lack of trust in financial advisors → reduce funds entrusted to the financial advisors → ↑ cost of raising capital for
‐ Misallocation of capital → reduce the growth of the economy and the well‐being of its people
Ethical versus legal standards Not all unethical actions are illegal, and vice versa.
Laws are more specific, and often address prior unethical behaviour
Ethical behaviour requires more judgement

Framework for ethical decision Framework for ethical decision making : to lead to better decisions. The framework is as follows:
making ‐ Identify : relevant facts, affected stakeholders and duties owed, ethical principles and conflict of interest among them
‐ Consider : Situational influences, additional guidance, alternative actions
‐ Decide and act
‐ Reflect : was the outcome as anticipated? why or why not?

,Concepts Description
Standard of Professional Conduct 1 ‐ 7
1. Professionalism 1. Knowledge of the law : understand and comply with all applicable laws, rules and regulations (must comply with the more strict law, rule and regulation)

2. Independence and Objectivity : must use reasonable care and judgement to achieve and maintain independence and objectivity on their professional activities (cannot accept gifts
that are expected to influence independence and objectivity. Client's gifts are acceptable, but must be disclosed to employer)

3. Misrepresentation : Must not knowingly make any misrepresentation relating to investment analysis, actions, etc. Violations include :
‐ Do not cite the source of 3rd party researches, except from recognised financial and statistical reporting services
‐ Guarantee specific return on securities that have no explicit guarantee from government body or financial situation
‐ Select valuation service because it has the highest value on untraded security holding
‐ Select irrelevant performance benchmark
‐ Present performance data / attribution analysis that omits accounts or relevant variables
‐ Offer false / misleading info about capability of analyst or firm
‐ Using misleading 3rd party marketing materials

4. Misconduct : Must not engage in any professional conduct involving dishonesty, fraud, or deceit ; must not commit any act that reflect adversely on their professional reputation,
integrity or competence

2. Integrity of Capital market 1. Material non‐public information : individuals who possess material non‐public information that could affect the value of an investment must not act / cause others to act on the
information
* Mosaic theory : combine public information vs non‐material non‐public information → not viola on

2. Market manipulation : Must not engage in practices that distort prices / artificially inflate trading volume with the intent to mislead market participants

3. Duties to clients 1. Loyalty, prudence and care : have a duty of loyalty to clients, must act with reasonable care and exercise prudnet judgement

2. Fair dealing : deal fairly and objectively with all clients.
‐ Different service levels are acceptable
‐ Should not take advantage of their position in the industry to disadvantage clients

3. Suitability :
‐ In advisory relationship
+ Make reasonable inquiry into client's investment experience, risk and return objectives, financial constraints prior to making any investment recommendation / taking
investment action. This information must be reassessed and updated regularly
+ Determine that an investment is suitable to the client's financial situation, and consistent with the written objectives, mandates and constraints prior to making any investment
recommendation / taking investment action
+ Judge the suitability of investments in context of the client's total portfolio
‐ In managing a portfolio : only make recommendations / actions that are consistent with the stated objectives and constraints of the portfolio. In case receive a request from client
to purchase an unsuitable security :
+ Minimal effect on the risk/return profile of the portfolio : follow the firm's policy, and communicate with the client on the reason for unsuitableness
+ Material effect on the risk/return profile of the portfolio : Update the Investment Policy Statement (IPS); or make a separate client‐directed account

4. Performance presentation : must make reasonable efforst to ensure the investment performance communicated to client is fair, accurate and complete

5. Preservations of Confidentiality : must keep client's information confidential, unless (1) the information converns illegal activities; (2) require by law; or (3) permit from client


4. Duties to employers 1. Loyalty : must act for the benefit of their employer. Not deprive their employer of the advantage of their skills, ability, divulge confidential information. Not cause harm to the
employer.

2. Additional compensation arrangements : must not accept gifts, benefits, compensations, or consideration that create a conflict of interest with the employer, unless they obtain
written consent from all parties involved
‐ Client's bonus depdends on future performance : written consent are required in advance
‐ Client's bonus based on past performance : Disclosure to employer is required

3. Responsibilities of supervisors : ensure anyone under supervision comply with applicable laws, rules, regulations and the Code of Standards

5. Investment analysis, 1. Diligence and reasonable basis :
recommendations and actions ‐ Exercise diligence, independence, thoroughness in investment analysis, recommendation and actions
‐ Have reasonable, adequate, well‐supported basis for any investment analysis, recommendation and actions
‐ List of factors need to be considered include:
+ Global and national econ conditions
+ Firm's financial result, operating history and cycle stage
+ Fees and historical result of funds
+ Limitations of any quantitative models used
+ Determination whether peer group comparisons for valuation are appropriate

2. Communication with Clients :
‐ Disclose basic format, general principles, and significant changes of the investment processes
‐ Disclose the limitations and risks related to the investment process
‐ Identify important factors and communicate with clients
‐ Distinguish between fact and opinion in the presentation

3. Record retention : maintain record to support investment analysis, recommendations and actions (minimum 7 years as in the Standard)

, 6. Conflict of interest 1. Disclosure of Conflicts : must make full and fair diclosure all matters expected to affect the independence and objectivity, or affect their duties to clients and employer (e.g.: actual
ownership of stock that the member recommends or that client hold ; compensation/bonus structure).

2. Priority of transactions : Priority of investment transactions for clients and employers > Priority of self‐investment transactions
‐ Personal transactions could only br undertaken after client and employer have adequate opprtunity to act on a recommendation
‐ Family member accounts that are client accounts should be treated as any other client account

3. Referral fees : must disclose to employer and clients any referrals fees paid for, or received from others for product recommendation

7. Responsibilities as a CFA 1. Conduct as participants in CFA Institute programs : must not engage in any conduct that affect the reputation and integrity of CFA Institute, includes:
Institute member ‐ Cheat on CFA exam or any exam
‐ Reveal information about topic tested, content of the exam questions, formulas used/not used in the exam
‐ Not following rules and policies of CFA program
‐ Give confidential information on the CFA Program to candidates or public
‐ Improperly using the title ro further personal and professional goals
‐ Misrepresent information on the Professional Conduct Statement (PSC) or the CFA Institute Professional Development Program

2. Reference to CFA Institute : must not misrepresent / exaggerate the meaning or implications of membership of CFA Institute, holding CFA designition or candidacy in CFA program
‐ Sign the PCS annually
‐ Pay CFA Institute membership dues annually
‐ Do not misrepresent / exaggerate the meaning of CFA designation. There is no partial CFA designition

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