1、LOS1.a: Describe the structure of the CFA Institute Professional Conduct Program and the process of the enforcement of the Code and Standards.Several circumstances prompt an inquiry:1) self-disclosure by members or candidates on annual Professional Conduct Statement of involvement in civil litigatio
2、n or a criminal investigation, or that the member or candidate is the subject of a written complaint.2) written complaints about a member or candidates professional conduct that are received by the Professional Conduct Staff.3) Evidence of misconduct by a member or candidate that the Professional Co
3、nduct staff received through public sources4) A report by a CFA exam proctor of a possible violation during the examinationOnce an inquiry begins, may 1) request (in writing) an explanation from the subject member or candidate, 3) interview the complainant or other third parties; 4) collect document
4、s and records relevant to the investigation.Possible decision of Designated Officer: 1) no disciplinary sanctions are appropriate, 2) to issue a cautionary letter 3) to discipline the member or candidate = subject member or candidate can accept or reject the sanction, if reject, the matter will be r
5、eferred to a panel of CFA institute members for a hearing. Sanctions imposed may include condemnation by the members peers or suspension of candidates continued participation in the CFA Program.LOS1.b: State the six components of the Code of Ethics and the seven standards of Professional Conduct.Cod
6、e of Ethics1) Act with integrity, competence, diligence, 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 profe
7、ssion and the interests of clients above their own interests.3) Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities4) Practice and encourage
8、 others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.5) Promote the integrity of, and uphold the rules governing capital markets6) Maintain and improve their professional competence and strive to maintain and improve the competence of oth
9、er investment professionals. The Standards of Professional Conduct1) Professionalism2) Integrity of Capital Markets3) Duties to Clients4) Duties to Employers5) Investment Analysis, Recommendations, and Actions 6) Conflicts of Interest7) Responsibilities as a CFA Institute Member of CFA candidateLOS1
10、. c: Explain the ethical responsibilities required by the Code and Standards, including the sub-sections of each Standard.Professionalism:1) knowledge of the Law: Conflict? = comply with the more strict law2) independence and objectivity: use reasonable care and exercise independent professional jud
11、gment, no offer, solicit, accept any gift, benefit, compensation or consideration3) misrepresentation4) misconduct (dishonesty, fraud, deceit, commit )Integrity of capital markets1) Material Nonpublic Information2) Market Manipulation: distort prices or artificially inflate trading volume with the i
12、ntent to mislead market participants.Duties to clients1) Loyalty, prudence, and care.2) Fair dealing3) Suitability: i) advisory: 1inquiry into clients investment experience, risk and return objectives, and financial constraints prior to making any investment recommendation or taking investment actio
13、n and must reassess and update this info regularly. 2 determine the suitability of investment to clients financial situation and consistent with written objectives, mandates, and constraints 3 judge the suitability of investment in the context of clients total portfolio. ii) managing portfolio to a
14、specific mandate, strategy, or style4) Performance presentation: investment performance info must be fair, accurate and complete5) Preservation of Confidentiality unless: illegal activities on the part of client; disclosure is required by law; or client permits disclosure.Duties to employers 1) Loya
15、lty 2) Additional compensation arrangements (gifts, benefits, compensation, or consideration that competes with employer3) Responsibilities of supervisorsInvestment analysis, recommendations, and actions1) diligence and reasonable basis (e.g. research)2) communication with clients and prospective cl
16、ients: disclosure to clients the basic format and general principles of investment processes; identification of important factors for investment analyses; distinguish between fact and opinion in the presentation of investment analysis and recommendations3) Record retentionConflicts of interest1) dis
17、closure of conflicts2) Priority of Transactions3) Referral feesResponsibilities as a CFA institute member or candidate1) Conduct as members - materials recorded with sources cited; - establish procedures of verifying marketing claims of third parties whose info the firm provides to clients.* Descrip
18、tion of bank CD as “guaranteed“ is not a violation.* Even word-by-word definition of terms found online should cite sources * Cite both directly and indirectly referred sources or cite directly reference obtained from origin.Misconduct ( 关乎个人品行的 )Any act reflects adversely on professional reputation
19、, integrity or competence. e.g.: excessive drinking before investment decision.Integrity of Capital Markets (inside information)Material Nonpublic information: if affect the value of investment, cannot act or cause others to act on the info. Selectively disclosing info by corporations creates the po
20、tential for insider-trading violations.Info is “material“ if its disclosure would impact the price of a security or if reasonable investors would want the information before making an investment decision. Ambiguous info, as far as its likely effect on price, may not be considered material.- Guidance
21、 - Mosaic Theory: There is no violation when a perceptive analyst reaches an investment conclusion about a corporation or event through an analysis of public information together with items of nonmaterial nonpublic info (e.g. market opinion of products)- monitor and restrict proprietary trading whil
22、e a firm is in possession of material nonpublic information. Prohibition of all proprietary trading may be inappropriate because it may send a signal to the market. In these cases, firms should take the contra side of only unsolicited customer trades. ?* Trading stocks based on nonpublic info provid
23、ed by someone who has power to influence the stock price is a violation. * priority of transactions by front-running client tradeMarket manipulation (distort prices or artificially inflate trading volume with intent to mislead market participants)- distorting price-setting mechanism- securing a cont
24、rolling position to manipulate the price- spreading rumors* Formal liquidity on a market is determined by the obligations set on market makers, but the actual liquidity of a market is better estimated by the actual trading volume and bid-ask spreads.liquidity pumping strategy must be disclosed.Dutie
25、s to clients- loyalty, prudence and care to beneficiaries be represented.fair deal, best price and execution for clientscompliance: Submit to clients, at least quarterly, itemized statements showing all securities in custody and all debits, credits, and transactions.- fair dealing (fairly is not equ
26、ally, different service levels shall be disclosed, individual and institutional clients treated fairly, cannot take advantage of position in industry to disadvantage clients, e.g. IPO)do not discriminate against any clientA reason of minimum lot size to deviate from a strict pro rata allocation to c
27、lient is not violation of fair dealingSuitabilityclient information gathering: needs, circumstances, risk tolerance, use of leverage or not, consistent to stated mandateswritten in IPS(investment policy statement)focus characteristics of clients entire portfolio and give thorough explanations of inv
28、estment recommendation to clientsPerformance Presentation - members must make detailed information available on request and indicate that the presentation has offered limited info- considering the sophistication of audience to whom the presentation is addressed; presenting performance of weighted co
29、mposite of similar portfolios rather than a single account. - terminated accounts; all appropriate disclosures to fully explain results: model results, gross or net of fees, etc.)- maintaining data if fail, seek legal advice about any disclosure should be made to legal or regulatory authorities and
30、dissociate from any continuing association Duties to EmployersLoyalty- Always place clients interest above employers but consider the effects of their actions on firm integrity and sustainability- Not required that employee puts employer interest ahead of family and other personal obligations; its e
31、xpected that employer and employees discuss such matters and balance these obligations and work obligations.- Independent practice for compensation is allowed if a notification is provided to the employer fully describing all aspects of the services, including compensation, duration, and the nature
32、of the activities and if the employer consents to all terms of the proposed independent practice before it begins.- must continue to act in employers best interest until resignation is effective. violations: misappropriation of trade secrets; misuse of confidential info; soliciting employers clients
33、 prior to leaving; self-dealing; misappropriation of client list (once an employee leaves a firm, the simple knowledge of names and existence of former clients is generally not confidential, theres no prohibition on the use of experience or knowledge gained while with a former employer)?- employee v
34、s. independent contractor: still have a duty to abide by the agreement* Taking any employer records, even those the member or candidate prepared, violates standard* The Code and Standards do not prohibit former employees from contacting clients of their previous firm, absent a non-compete agreement.
35、* Employee-led buyout of employers business is not violation. Employer can decide how to respond to any buyout offer. If such a buyout takes place, clients should be informed of the nature of the changes in a timely manner.* Contractor: current employer has first right to act on contractors work* Fu
36、ll-time employee serving as mayor does not conflict with employers business interest, as long as the time commitment does not preclude performing his expected job functions well, theres no violation.Additional Compensation Arrangements- Written consent from employer includes e-mail communication. de
37、tails including any performance incentives should be verified by the offering party.Responsibilities of Supervisors- prevent employees from violating; detect violations; enforce firm policies regarding investment or non-investing behaviors equally- If there is violation, respond promptly and conduct
38、 a thorough investigation while placing limitations on the wrongdoers activities.* supervise reasonably and adequately the actions accountable to supervisors. e.g. disemmination of unpublished changes in recommendationInvestment Analysis, Recommendations, and Actions1) Diligence and Reasonable Basis
39、-depends on the investment philosophy adhered to , members and candidates roles in the investment decision-making process, and the resources and support provided by employers= degree of diligence, thoroughness of research, and the proper level of investigation required.-Reasonable basis: 1 a firms f
40、inancial results, operating history, and business cycle stage 2fees and historical results for a mutual funds 3limitations of any quantitative models used 4a determination of whether peer group comparisons for valuation are appropriate.- using secondary or third-party research, criteria: 1review ass
41、umptions used 2analysis rigorous? 3timely? 4objectivity and independence of the recommendations- quantitative research: able to explain the basic nature of quantitative research and how it is used to make investment decisions. consider scenarios outside those typically used to assess downside risk a
42、nd the time horizon of the data used for model evaluation to ensure both positive and negative cycle results have been considered.- external advisor: 2adequate compliance and internal controls? 2present returns info correct 3do not deviate from stated strategies- group research and decision making:
43、member who does not agree with view of group, not necessarily decline to be identified with the report.* Bad outcome of recommendation does not mean there has necessarily been a violation, as long as the member performs reasonable due diligence and discloses investment risk adequately.2) communicati
44、on with clients- disclose to clients the basic format and general principle of investment processes; identifying important factors in investment; distinguish between fact and opinion in the presentation of investment analysis and recommendations- maintain records of communication and be able to supp
45、ly additional info if requested- member should notify clients immediately of changes in the firms investment process, not notify only in annual reports3) record retentionrecords are property of firm, if no regulatory standards, CFAI recommends at least 7-year holding period.Conflicts of interest1) d
46、isclosure of conflicts - actual ownership of shares recommended; members compensation/bonus structure which can potentially create incentives to take actions that produce immediate gains for the member with little or no concern for long-term returns for the client; give the employer enough informati
47、on to judge the impact of the conflict. Take reasonable steps to avoid conflicts and report them promptly if occur.* purchase for own account? 2) Priority of transactions- investment transactions for clients and employer have priority over investment transactions in which a member or candidate is th
48、e beneficial owner. Note that family member accounts that are client accounts should be treated just like any client account; they should not be disadvantaged.- no “front running“, blackout period requirement, severity depends on the size of the firm and the type of security- disclosure of policies:
49、 when requested, members must fully disclose to investors their firms personal trading policies.3) Referral fees - inform employers, clients and prospects, allow them to evaluate the full cost of the services as well as any potential partiality.*This standard is meant to address instances where the investment advice provided by a member appears to be objective and independent but in fact is influenced by an unseen referral arrangement.* compensation/bonus by employer for finding new clients/business or acquiring new assets need not be dis
