CFA Level 1

AAA

Ethics and Standards - Code of Ethics

Standards of Practice Handbook
The Standards of Practice Handbook was first published in 1982. The 10thP edition, released in 2010, contains a number of changes to the Code and Standards, which make the handbook easier to understand. Standard III (A) Duties to Clients –Loyalty, Prudence and Care was shortened and clarified. A new chapter was added, which discusses ethics in investment management in the wake of the recent turmoil in the capital markets. Bulleted tables were added to the handbook to help investment professionals locate guidance and standards quickly when faced with real-life ethical dilemmas. The 10th edition also makes it easier for the reader to find examples of situations they may encounter and cross-references the various standards that may come into play in a single situation.

The CFA Institute has published their entire Standards of Practice Handbook, 10th Edition as of PDF online for free. We strongly recommend savings and/or printing the handbook as a source of study for your exam as it contains examples that are quite similar to the types of questions that will appear on your exam.

Organization of this Section
Each Standard is used as the heading for a section that covers that Standard in detail and presents examples that will help make the intent of each Standard clearer. Some Standards are very clear and straightforward; other Standards are quite complicated and open to interpretation. Certain Standards that we believe are more likely to be emphasized on the exam are highlighted so candidates can focus additional attention on them while studying.

A: Why Ethics Matter
The addition of the chapter, "Why Ethics Matter," is a major change to the handbook. Resulting from the financial crisis of 2008, this section addresses the importance of understanding the long-term impact of investment decisions on market integrity and sustainability. Recent events have revealed unethical behavior not just within investment firms, but also rating agencies, corporate boards, accounting firms, financial technology products and more. The chapter emphasizes the interconnected, global nature of finance today.

Key points from this section include the following:

1. Top managers must create a strong culture of ethics at their firms, which must filter throughout their entire organization, not just among CFA charter holders or CFA candidates.

2. The integrated and global nature of finance today gives rise to concerns over market sustainability. Investment professionals must consider that the sum of their individual decisions may precipitate a market crisis in ways unimagined years ago. Minor, relatively insignificant decisions can compound into a major crisis that can jeopardize the proper functioning of the capital markets.

3. Regulation alone can't prevent the ethical lapses that create financial crises. What's required are strong ethical principles, adopted by individuals and firms beyond those associated with the CFA Institute. Regulators and others are encouraged to adopt the Handbook's guidance to promote ethical behavior.

4. The CFA Institute is committed to providing educational resources to members, candidates and the investment community at large in order to assist in holding true to the Code and Standards. Podcasts, reading material, presentations and the like can be found at www.cfainstitute.org

Capital markets operate on trust. The recent financial crisis showed how unstable markets can be when trust is violated. Investment professionals must now integrate a concern for the long-term health and sustainability of the global capital markets when making their individual investment decisions.

B: Code of Ethics

The Six Components to the Code of Ethics
Members of the CFA Institute (including Chartered Financial Analyst [CFA] charterholders) and candidates for the CFA designation ("Members and Candidates") must:

  1. 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 profession and the interests of clients above their own personal 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 activities.
  4. Practice and encourage 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 markets.

Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.

Look Out!
Remember: the handbook emphasizes that members should discuss the content of the Code and Standards with their superiors, legal and compliance departments

Reasoning Behind the Code of Ethics
The Code of Ethics lays out a series of guidelines that serves as the basis for creating the more specific Standards of Professional Conduct. The Code of Ethics is analogous to a company's mission statement, or the preamble to the Constitution. The 149 words comprising the Code are intended to be broad, sweeping and general and to reflect what CFA charterholders believe defines them.

The CFA examination will likely devote a couple of questions to testing whether a candidate has taken the time to memorize these six components. Therefore, ensure you memorize all six components!

Here is an easy way to glue these concepts to your memory: PEJMAR

  • Priority - Your client's interests always come first.
  • Encourage - Practice and encourage others to act professionally and ethically to reflect credit on yourself and the profession.
  • Judgment - use reasonable care and judgment when performing all professional activities.
  • Maintain - keep your knowledge up to date and encourage other professionals to do the same.
  • Actions - employ integrity, competence, diligence, and respect in an ethical manner with everyone.
  • Rules - promote the integrity of capital markets by following the rules.
The Standards of Professional Conduct
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