Code of Ethics and Standards of Professional Conduct

Welcome to Ethics: The Heart of the CFA Program

Welcome to your study of the Code of Ethics and Standards of Professional Conduct. If you’ve already cleared Level I, you know that Ethics is a major part of the exam. In Level II, the focus shifts slightly: instead of just memorizing the rules, you need to master how to apply them to complex, real-world scenarios. Don't worry if this seems tricky at first—Ethics is less about "black and white" and more about finding the "most professional" path through the gray areas. Think of these standards as the "rules of the road" for being a world-class investment professional.

The Code of Ethics: Our Six Core Promises

The Code of Ethics is a high-level set of principles. Think of it as the "spirit" of the law. There are six main components you should remember:

1. Act with integrity, competence, and diligence.
2. Place the integrity of the investment profession and the interests of clients above your own.
3. Use reasonable care and exercise independent professional judgment.
4. Practice in an ethical and professional manner that reflects credit on yourself and the profession.
5. Promote the integrity and viability of global capital markets.
6. Maintain and improve your professional competence.

Quick Review: The Code is the "What we believe," while the Standards (which we will cover next) are the "How we behave."

Standard I: Professionalism

This standard is the foundation. It’s all about keeping the profession clean and respected.

A. Knowledge of the Law

You must follow the strictest law that applies to you. If your local law is lax but the CFA Standards are strict, follow the CFA Standards. If your local law is stricter than the CFA Standards, follow the local law.
Analogy: If you are driving in a country where the speed limit is 100 km/h, but your company policy says you must never exceed 80 km/h for safety, you drive 80 km/h.

B. Independence and Objectivity

Do not let gifts, favors, or pressure influence your professional judgment.
Common Mistake: Thinking you can't accept any gift. You can accept modest "token" gifts (like a branded pen or a simple lunch), but anything substantial must be disclosed to your employer. Always prefer "flat fee" structures over performance-based bonuses from third parties to avoid bias.

C. Misrepresentation

Never lie or mislead. This includes plagiarism. If you use someone else's research, you must cite them. If you use a third-party service for your calculations, you must say so.
Did you know? Omitting a relevant fact can be just as much of a misrepresentation as telling an outright lie.

D. Misconduct

Don't do anything that reflects poorly on your honesty or integrity. This isn't just about work; it includes illegal acts like fraud or theft in your personal life. However, things like civil disobedience (e.g., a peaceful protest) usually don't count as a violation of this standard.

Key Takeaway: When in doubt, follow the stricter rule and always be honest about where your information comes from.

Standard II: Integrity of Capital Markets

This is about keeping the "game" fair for everyone.

A. Material Nonpublic Information

If you have "inside info" that could move a stock price, you cannot act on it or cause others to act on it.
Pro Tip: Use the Mosaic Theory. You are allowed to reach a conclusion based on a combination of public information and non-material nonpublic information. It’s like putting together a puzzle; if you find one small piece that isn't public, but it only makes sense when combined with public info, you're safe!

B. Market Manipulation

Don't try to "trick" the market. This includes spreading false rumors to pump up a stock price or high-volume trading intended to give the illusion of liquidity. If your goal is to distort prices or mislead others, it’s a violation.

Standard III: Duties to Clients

The client always comes first (after the law and market integrity).

A. Loyalty, Prudence, and Care

You have a fiduciary duty. This means you must act with the same care as a "prudent person" would for their own affairs. You must put the client's interests before your employer's or your own.

B. Fair Dealing

You must treat all clients fairly. This doesn't mean "equally" in terms of time spent, but you cannot favor one client over another when disseminating research or executing trades.
Example: You cannot send a "Buy" recommendation to your biggest clients via phone and then email your smaller clients two hours later. They should all get the info at the same time.

C. Suitability

Before you invest a dime, you must understand the client. You need an Investment Policy Statement (IPS) for every client.
Checklist for Suitability:
1. Determine the client's financial constraints and risk tolerance.
2. Ensure the investment fits the client's written objectives.
3. Evaluate the investment in the context of the entire portfolio, not just in isolation.

D. Performance Presentation

Don't cherry-pick your best years. Your performance reports must be fair, accurate, and complete. While the CFA Institute encourages using GIPS (Global Investment Performance Standards), it is not a requirement under this specific standard—but being honest is!

E. Preservation of Confidentiality

Keep client information private unless:
1. The info concerns illegal activity.
2. Disclosure is required by law.
3. The client gives you permission.

Quick Review: Client interests are paramount. Treat them fairly, keep their secrets, and only buy what fits their specific needs.

Standard IV: Duties to Employers

You owe your boss your best effort, but not your soul.

A. Loyalty

Don't harm your firm. If you're planning to leave to start your own firm, you can make preparations (like renting an office) on your own time, but you cannot solicit your current firm's clients until you have actually left.

B. Additional Compensation Arrangements

You cannot accept gifts or bonuses from third parties that might create a conflict of interest unless you get written consent from all parties involved.
Memory Aid: If it's a gift from a client for past performance, you just need to disclose it to your employer. If it's for future performance, you need written permission first.

C. Responsibilities of Supervisors

If you manage people, you are responsible for making sure they follow the rules. You must have a system in place to prevent and detect violations. If you find a violation, you must investigate and stop it.

Standard V: Investment Analysis, Recommendations, and Actions

This is the "meat" of the work you do as an analyst.

A. Diligence and Reasonable Basis

Don't just follow a "hot tip" on social media. You must have a thorough and reachable basis for every recommendation. If you use a quant model, you need to understand its limitations and the data going into it.

B. Communication with Clients and Prospective Clients

Explain your investment process. Distinguish between fact and opinion.
Example: Saying "The company's earnings grew by 10% last year" is a fact. Saying "The company will grow by 10% next year" is an opinion/forecast and must be labeled as such.

C. Record Retention

Keep your files! The CFA Institute recommends keeping records for at least 7 years. These records prove that you had a "reasonable basis" for your actions.

Standard VI: Conflicts of Interest

Humans have biases; the Standards help manage them.

A. Disclosure of Conflicts

The best way to handle a conflict is to disclose it. If you own shares in a company you are writing a report on, you must say so clearly. This allows the client to judge if you might be biased.

B. Priority of Transactions

The order of trading should always be:
1. Clients first.
2. Employers second.
3. Your personal account last.
You should not benefit from a trade until your clients have had the opportunity to do so first.

C. Referral Fees

If you get paid for referring a client to someone else, or if you pay someone to refer a client to you, you must tell the client. This includes both cash and non-cash "soft dollar" benefits.

Standard VII: Responsibilities as a CFA Institute Member or CFA Candidate

This is about protecting the "CFA" brand.

A. Conduct as Participants in CFA Institute Programs

Don't cheat on the exam. Don't share specific questions from the exam with others. Don't lie on your Professional Conduct Statement.

B. Reference to CFA Institute, the CFA Designation, and the CFA Program

There are very specific rules here:
- You can say "I am a CFA charterholder."
- You cannot say "I am a CFA." (CFA is an adjective, not a noun).
- You cannot say the CFA designation makes you a better investor or guarantees superior returns.
- You can say "I passed all three levels on the first attempt," as long as it's a fact.

Final Encouragement: Ethics can feel subjective, but on the exam, there is usually a clear "most correct" answer based on these rules. Practice as many vignettes as possible to get used to the nuance. You've got this!