CFA Ethics

I. PROFESSIONALISMa. Knowledge of the law

i. When applicable law and codes of standard require different conduct, member must follow the more strict one. Even when operating in less developed country, as a Singapore

ii. If a member has reasonable grounds to believe that imminent or ongoing client or employer activities are illegal or unethical, the member or candidate must dissociate or separate from the activity. In extreme cases dissociation may means resignation. Steps to dissociate:

1. Attempt to stop by bringing it to attention of supervisor or compliance department

2. Consulting legal counsel. However, the reliance to advice from legal counsel do not absolve member of any liability. When in doubt, report to supervisor, seek independent legal opinion or notify the regulator.

3. write a complaint in writing to CFA4. Dissociation:

-removing name from written reports, recommendation-asking to be moved to different assignment-refuse to accept the client* inaction combined with continuing association may be construed as participation

iii. Stay informed of the current laws, regional law, cultural law (e.g. syariah law)

b. Independence and Objectivityi. Use reasonable care and judgment to achieve and maintain independence

and objectivity.ii. Do not offer, solicit or accept any gift, benefit, compensation that may

compromise their independence. Benefit includes luxury travel arrangement or accommodation. Opt for commercial plane and business accommodation.

iii. Fend yourself from:1. Sell-side client division (investment bank) may pressure buy-side

client to write good report on the company

Recommended procedure:

- Protect integrity of opinion through separation of reporting lines- Create restricted list of controversial company from the research universe, so no

pressure is created among divisions- Restrict special cost arrangement: no corporate issuer should reimburse travel

arrangement of researchers. Only modest arrangement can be accepted. It best to have your own company to pay for your expenses.

- Limit gift: customary ordinary business related entertainments are allowed as long as its purpose not to influence member. Other forms of gifts could be accepted as long as it is disclosed to their employers and within the norms.

- Restrict personal investment of member from client company- Never promise client or your boss on the result of your research. - When your compensation is closely linked to the certain product performance,

member should not be affected by compensation pressure. Am I able to justify that the market price has been fairly adjusted? Is this good investment for my client?

- Fair fee arrangement: As a researcher, you should only accept flat fee when a company asks you to write a recommendation about itself. Compensation should not be tied to company’s stock performance.

- Do not get affected by the general trend of the market or manager’s desire to follow the historical norms. Use best practice method.

c. Misrepresentationi. Must not knowingly make any misrepresentations. Misrepresentation could

be oral or written. If unknowingly make misrepresentation, member needs to take steps to cease distribution of information, correct the error and inform those who have received the erroneous information. Member could not say that he has unknowingly use error set of data when it has happened for years. Misrepresentation could include credential of the writer. E.g. Say you are a degree holder when you are not.

ii. Must not omit certain type of information, e.g. member is related to the firm he covers.

iii. Exercise diligence when incorporating third party informationiv. E.g. of misleading statement: “ I can guarantee…” unless institution has

agreed to cover any lossesv. Prohibit plagiarism

In the case of distributing third party research, member should not represent himself as the authorOther forms of plagiarism: citing specifications as leading analyst and investment experts without naming the specific references, presenting statistical estimates of forecasts prepared by others and identifying the sources but without including the qualifying statements or caveats that may have been uses, using charts without stating the sources, copying proprietary computerized spreadsheets without seeking cooperation from the creators, using model developed by others (even though you have modify the model, you should still acknowledge the source)Candidate need to give credit to sources. In the case where member use the work previously developed by leaving employee, it is allowed as long as the work is done for the employer and hence belong to the firm. Member, however, cannot release the report solely under his name. He needs to cite his firm.

Even if you are putting normal definition such as what is P/E in your report, you should still acknowledge the source.

You also can copy description of concepts without acknowledging. For instance, you would like to describe what P/E means. Although this is general knowledge, you still need to cite the source. Always cite from the original information. E.g. you learn abt a study by reading financial times. You need to refer back to the original script of study instead of relying to financial times’ representation.When you cannot understand a certain security, never invest or let your client invest in it since you cannot properly explain the risk involved.

Recommended procedures:

- Factual presentations- Present your qualification summary on your research- Verify outside information. Providing information to clients from 3rd party means

that member share a responsibility to the accuracy of the marketing, distribution of the material.

- When maintaining webpages, members should ensure that the information is current.

- Maintain copies of article you cite, attribute quotation, attribute summary

d. Misconducti. E.g. fraud, deceit, etc.

ii. Include non illegal action such as abusing alcohol during business hours, personal bankruptcy, deceitful business conduct

iii. In certain cases, absence of appropriate conduct can be counted as violation

e.g. A is an environmental activist. As the result of her participation in nonviolent protest, A has been arrested for trespassing the property of firm that is accused of damaging environment. In this case, A’s civil disobedience in support of personal beliefs does not reflect poorly on the integrity of financial profession. CFA standard is not meant to covel legal transgression of this nature.

II. INTEGRITY OF CAPITAL MARKETSa. Material Nonpublic Information

i. Members who possess material nonpublic information that could affect the value of an investment must not act or cause others to act on the information

ii. So long as the material has not been made public, member should not act on the information

iii. When the source of material is not reliable, for instance your doctor who follows market thinks that company A is going to be an acquisition target. In this case, you could act on the information.

iv. Mosaic theory: analyst may use significant conclusion derived from the analysis of public and NONMATERIAL nonpublic information as the basis of their recommendation or decision. They are however should save and document all their research. Example of NONMATERIAL information: opinions of designers, retailersExample of MATERIAL information: quarterly earnings, new innovative products, changes in management, legal disputes, government reports of economic trends, orders for larger trades before being executed, change in auditor’s qualified opinion, new license/patents, bankruptcy, impending transaction/merger, etc.

Interesting type of information: research recommendation from well-known or respected analyst, for instance Goldman Sachs recommend a SELL for company A. This info alone may have an effect on the market and thus considered material. However, we presume that the analyst arrives at the conclusion by using public available information and his expertise. Thus, when his client acts upon it, it s not forbidden. The analyst also does not have the obligation to make his recommendation public.

However, if he has decided to make his information public, parties other than his own client who got hold of this information should not act on it first. Example: A is a famous analyst. He is scheduled on air to give his recommendation to public. B is a television producer. B gets hold of the information before the show goes on air. B quickly tells his broker to sell his stocks. B’s act is considered violation of the standard.

Interesting case:A is B’s golf buddy. B is an executive at company C. During their golf session, B says that his company is going to make a surprise with good earnings. A thinks that B as a professional would not disclose insider information. He acts on this. However stock company C decreases due to other factor. Is A guilty?

Yes. Why?1. Although A believes that B would not disclose insider information, it is

A’s duty to actually ensure that the information is not insider information.

2. It does not matter if A gains or losses money in the trade. It is still a form of violation

Recommendation of procedures:

- Separating reporting system, personnel, physical data- Firewall element- Public dissemination of information, press release - Appropriate interdepartmental communication

- Personal trading limitation- Record maintenance, be it internal or external communication- Proprietary trading information

b. Market manipulationi. Members must not engage in practices that distort prices or artificially

inflate trading volume with the intent to mislead market participantsii. Information based manipulation: spreading false rumors

iii. Transaction based manipulation: securing a dominant position in a financial instrument, manipulate the price of a related derivatives, doing back and forth trading of certain security to create artificial growing volume of trading and liquidity

iv. Pump priming strategy: an exchange company enteres into agreements with members in which they commit to a substantial minimum trading volume on the new contract over a specific period in exchange for substantial reductions in regular commission. This helps to increase liquidity of the instrument. However this is not actual formal liquidity. It misled investors when the agreed period is offered. Pump priming strategy is allowed if the exchange FULLY DISCLOSE the agreement with members to boost transaction for initial launch period. By fully disclosing the exchange is not there to harm investors but to give them better service.

III. DUTIES TO CLIENTSa. Loyalty, Prudence and care

i. Identifying the actual investment client: who are they? Will serving these clients create conflict of interest with existing client?

ii. Developing the client s portfolio:1. Ensure that the clients objective and expectation is realistic2. Provide clear and factual disclosures of circumstances whereby

there is conflict of interest3. Help the client to judge the investment decision as part of the

client’s total portfolio, tax implications, diversification, cash flow, etc.

iii. Soft commission policies1. E.g. use client brokerage to purchase research service or other

benefits that will not benefit clients2. This needs to be disclosed

iv. Proxy voting policies: they should use the voting proxies in informed and responsible manner. Failing to vote, or voting without considering the impact is considered violation of standard

v. Place client interest FIRST, above your employer and yourselfvi. Maintain confidentiality

vii. Consider short term and long term prospects for clientviii. Seek the best price and execution for client

ix. Should not charge client for things beyond what needed to make the investment decision. E.g. extended personal holiday while visiting target company should not be charged to client.

Recommended procedures:- Regularly updating clients , at least quarterly- In times of uncertainty, ask for client’s approval

b. Fair Dealingi. Must deal fairly and objectively with all clients. Fair implies that member

must take care not to discriminate against clients when disseminating investment information. Disseminate information at the same time. Do not disseminate during lunch a week before disseminate to all clients. Seconds difference is okay.

ii. If the issue is oversubscribed, then the issue should be prorated to all subscribers. Should also forgo sales to themselves or their immediate family

iii.

Recommended procedures:

- Simultaneous dissemination- Develop and document trade allocation procedures, time stamped- First in first out basis- Fair pricing for all clients- Clearly disclose level of service to clients for the same fee or different fees. Are

you only acting as broker or also as advisers?

Interesting case

W uses email to issue a new recommendation to all clients. However he calls his 3 largest client to discuss the recommendation in detail? Violation?

NO. he has widely disseminated the information. Larger clients receives greater service presumably because they pay higher fees

c. Suitabilityi. When members are in an advisory relationship with a client, they must make

a reasonable inquiry into a client’s investment experience, risk and return objectives, etc.Example of investment policy statement

1. Client identification2. Investor objectives3. Investor constraints4. Performance measurement benchmark

ii. Determine if the investment is suitable with the situationiii. Judge the suitability against the client’s total portfolioiv. Suitability test policy:

1. Impact of investment on portfolio’s diversification2. A comparison of the investment risks with the client’s assessed risk

and tolerance3. The fit of investment with the required investment strategy. Low

beta investment for low risk client.d. Performance Presentation

i. Members should make reasonable efforts to ensure that it is fair, accurate and complete

ii. Full disclosure of investment performance data to CURRENT client and PROSPECTIVE client. Performance record has to be factual.

iii. Even if the presentation is brief, member must make available the detailed information supporting the communication upon request. Best practice dictates that member include a reference to the milited nature of the information provided.

iv. Member should consider the knowledge and sophistication of the audience to whom a performance presentation is addressed

v. When including terminated accounts as part of performance history, member need to be clear when the accounts were terminated

vi. Include full disclosures of how the performance is calculated, e.g. after tax, net fees. Etc.

vii. Maintain detail data and records that are used to calculate the performanceviii. When using simulated results (using his method of trading using historical

data), has to be accompanied by full disclosures and retrospective method. e. Preservation of Confidentiality

i. Members must keep information abt current, former and prospective client confidential unless:

1. Information concerns illegal activities on the part of the clients2. Disclosure is required by law3. Client or prospective client permit disclosure

ii. Should not disclose information even if it is well-intended. For instance, client talked about giving 50,000 to charity to reduce income tax. A happens to be in charity organization. A advises charity organization to approach her client. Not allowed.

iii. If member knows that the client is doing sth illegal, he should approach legal counsel on appropriate step and considering to resign from being the client’s adviser.

IV. DUTIES TO EMPLOYERSa. Loyalty

i. Should act for the benefit of their employment and should not deprive their employer of the advantage of their skills, abilities or divulge confidential information that may harm your empplyer

ii. Understand well some of policies in the employment contract:

1. Competition policy: restriction to offer similar service outside the firm while employed or for certain period after being employed

2. Termination policy3. Incident-reporting procedures

iii. Unless permitted, departing member may not take employer property, records, reports, etc.

iv. A proper employee led buyout is allowed so long as it is to the benefit of shareholders and done in appropriate manner

v. Although there is no proper contractual obligation, when you are working part time, your work considers belong to company if you use company resources to finish the work.

vi. In the case of internship or probono work, your completed work is still the company’s property. You are considered to have received benefits in the form of work experience and knowledge.

vii. In the presence of non competing agreement, contacting former client without permission from former employer is not allowed because client records are considered the property of the firm. Only in the absence of a non compete and as long as member maintains his duty of loyalty to his employer until he has left his former firm and does not make us of material from his former employer after he has left he does not violate the codes.e.g. a knows his former clients well. He now moves to another firm. He knows that the clients will follow him to his new employer. He is not in violation so long as there is no nonc ompete agreement.Soliciting can only be done after you leave your former employers. Contacting former client is done by obtaining client contact from public records. You cannot take clients’ contact details from your former employer’s list. When you leave, you should clear your personal computer and phone from those contact information.

viii. While working for company A, B is also preparing his own company in the same business. It is allowed as long as B only uses his spare time outside office hours to do preparation and do not solicit clients from his employers. Soliciting can only be done after he has officially left company A.

ix. When you take up a position outside your work that may take a lot of time, you should discuss your outside activity with your employer. For instance, you are going to be selected as president of some big organization.

b. Additional Compensation arrangementi. Members and candidates must not accept gifts. Benefits, compensation or

consideration that competes with or might reasonably be expected to create a conflict of interest with their employer’s interest unless they obtain written consent from all parties involved.

ii. For instance, to serve as non executive board director in another company, A has to disclose all the benefits and non monetary compensation that he receives

c. Responsibilities of supervisors

i. Members must make reasonable efforts to detect and prevent violation of applicable standards or laws

ii. Establish reasonable1. Detection procedures2. Compliance procedures3. Inadequate procedures4. Enforcement of non investment related policies

iii. Check to ensure that your subordinate had a reasonable and adequate basis for his recommendation

iv. As supervisor, you need to be especially sensitive towards potential conflicts between your self interest and supervisory responsibilities

v. Non action to investigate of peculiar situation is considered as violation

V. INVESTMENT ANALYSIS, RECOMMENDATIONS, AND ACTIONSa. Diligence and Reasonable basis

i. Exercise diligence, independence and thoroughness in doing his workii. Have a reasonable and adequate basis, supported by appropriate research

and investigation. General knowledge, market sentiment and a few news article do not constitute an adequate support.

iii. Minimize the unexpected downside of eventsiv. When using secondary or third party research, member has to ensure that

these research has a sound basis, assumption, good rigor of analyst performed, timeliness of the research, evaluation of independence of the recommendation. Ensure that the third party material is of quality standard

v. When using quantitative oriented research (model, formula, etc.), members need to have a good understanding of the parameters used in the model. They must at least be able to explain to clients the important of the quantitative research, its limitation and its use in decision making process.Members should ensure that data used for the model is not out of date. Members may need to present various scenarios of the model to ensure the rigor of the analysis. Do sufficient scenario testing.

vi. When choosing external advisers or subadvisers, member need to follow certain criteria regarding the external advisers’ internal control procedures, published return information, adherence to its strategy and codes of ethics, etc. Do not base solely on the fee structure alone. Select based on suitability and ability of the external advisers. Decision should not be arbitrary or based on personal judgment.

vii. When member not confident or have doubt during the discussion as a part of group research, he may decline to put his name on the report. Only agree to put you name on it when you are satisfied with the decision making process.

b. Communication with clients and prospective clientsi. Explain statistical significance of the results from the model they use to

clients.

ii. Remind client that past performance do not guarantee future performance. It is merely an indication.

Guidance:1. Inform clients of the process, inherent risk, actual and implied risl,

basic process and logic of recommendation2. Different forms of communication carry similar weight. You still

need to be responsible in verbal communication3. Identify limitations of analysis4. Distinguish between fact and opinion5. Update client if there is any changes with data, model or investment

process adopted by the firm

c. Record retentioni. Develop and maintain appropriate records to support their recommendation

and past communication with clientsii. Records are property of the firms even if the employee made it themselves.

When member leaves the firm, they cannot take the property without express consent from previous employer.

iii. Failure to maintain record is considered violation of the standard.

VI. CONFLICT OF INTERESTa. Disclosure of conflicts

i. Conflict with employer discloseii. Conflict with clients disclose

1. Need to disclose his compensation arrangement which may create conflict of interest with his client

iii. Cross departmental conflictsiv. Conflicts with stock ownership

1. Even when the holding may not be material now, member should still disclose in case the holding become material after stock price increases

v. Conflicts as director

When there is conflict of interest, member should disclose to all related parties or consider from dissociating himself from one of the activities.

Evenb. Priority of transactionsc. Referral fees

VII. RESPONSIBILITIES AS A CFA INSTITUTE MEMBER OR CFA CANDIDATEa. Conduct as members and candidates in the CFA programb. Reference to CFA Institute, the CFA Designation and the CFA program