Ethics and Standards - Disciplining CFA Members

To be exhaustive, we will now examine the requirements of an LOS that has since been removed, on the rules of procedure for proceedings related to professional conduct. Note that it is unlikely the CFA Institute will draw exam problems from the material set forth in this section. If you are pressed for time, feel free to skip this section.

In practice, few - if any - CFA exam problems are likely to be drawn from this material. There are only a certain number of problems that can be devoted to Ethics and Professional Standards, and there's a much higher priority to test the details of each Standard (i.e. the material we've already covered). In preparing for Ethics, spend your time focusing on the Standards and the situations in which these Standards are tested. We present a brief summary of the Rules of Procedure primarily to be exhaustive in our coverage of every Learning Outcome indicated in the Study Guide. Don't get too bogged down in this material - it is included by the CFA Institute primarily as a warning.

Disciplining CFA Members
Disciplinary cases involving CFA members are handled by the CFA Institute's Professional Standards and Policy Committee, or PSPC. The PSPC has the authority to conduct investigations and impose sanctions. The PSPC has formed two subcommittees:

1. Disciplinary Review Subcommittee (DRS)
Responsible for:

a. Enforcing the Code and Standards

b. Reviewing (and changing, if necessary) the Rules of Procedure

c. Reviewing disciplinary matters

d. Reviewing summary suspensions

2. Standards and Policy Subcommittee (SPS)
Responsible for:

a. Reviewing (and changing, if necessary) the Code and Standards

b. Promoting the Code and Standards

c. Revising published material related to the Code and Standards (Standards of Practice Handbook, self-administered ethics exams)

d. Reviewing the annual PCS (Professional Conduct Statement)

e. Assisting in any investigations

Grounds for Discipline
CFA Institute members may be investigated based on:

1. Violation of the CFA Institute Articles of Incorporation, Bylaws, Code of Ethics, Standards of Professional Conduct, or Rules of Procedure or other applicable rules

2. Sanction or injunction imposed by a government or judicial agency, or public or private self-regulatory organization with jurisdiction over investment-related activities

3. Conviction of a felony, or (if the jurisdiction does not define a felony) any crime punishable by more than one year in prison

4. Ban or restriction (permanently or indefinitely) from registration under a jurisdiction's securities laws, or any restriction related to any investment-related professional activity

5. Failure to complete, sign and return the Professional Conduct Statement

6. Falsifying information on a candidate or society membership application

7. Failure to cooperate with the CFA Institute's inquiry and investigation into one's own conduct, or into the conduct of another member

8. Any other good cause

Sanctions
The PSPC is authorized to impose any of the following sanctions in a disciplinary matter (in ascending order from the least severe to the most severe):

1. Private Censure - The member is promptly notified and a public announcement of the censure is made in a CFA-Institute-issued publication circulated to members. However, the member's name and any specific identifying information are withheld from the announcement.

2. Public Censure - A public announcement may be made in a CFA-Institute-issued publication, and the announcement may identify the person being sanctioned. Notice of a public censure may also be delivered to the member's governing regulatory body and member society.

3. Timed Suspension of Membership - In addition to the public notification guidelines required of public censures, the member is suspended from membership in the CFA Institute and its affiliated societies, for a specified period of time. However, he or she may continue to use the CFA designation in professional matters. Timed suspension of the right to use the CFA designation is the same as #3, except the use of the CFA designation is also revoked, but only for a timed period, after which this right may be reinstated.

4. Revocation of Membership - With this sanction, in addition to all of the public notices imposed in less-severe penalties, the member is barred permanently from membership in the CFA Institute or affiliated societies, though the right to use the CFA designation is not necessarily included in this permanent ban.

5. Revocation of Right to Use the CFA Designation - This sanction is the most severe penalty that can be imposed on a CFA charterholder: a lifetime ban on using the CFA designation.

6. Summary Suspension - This involves the automatic removal of membership in the CFA Institute, affiliated organizations or member societies, of the right to use the CFA designation and of the right to participate in the CFA Program.

7. Suspension or Revocation from Further Participation in the CFA Professional Designation Study and Examination Program - This sanction covers CFA candidates, barring them either temporarily or permanently from the CFA Program (i.e. sitting for any exams).

Notice of Disciplinary Action
Any sanction must first be communicated to the affected person, summarizing the following:

  • The nature of the matter and a summary of the disciplinary proceeding
  • Which applicable Code, Standard or rule was violated
  • Other appropriate information determined by the PSPC

Investigations
Investigations into potential violations are conducted by the designated officer appointed by the DRS, acting upon information provided by a complaining party who has filed a written complaint regarding a member's professional conduct. The identity of the complaining party will be made known to the person who is the subject of the complaint, unless the complaining party specifically requests anonymity. In this case, the designated officer will make every effort to protect the anonymity of the complaining party, though this protection may hamper the ability to gather information and establish that a violation has occurred.

Actions by the Designated Officer and the DRS

1. Termination of Inquiry - If insufficient evidence is present to continue, the designated officer may terminate the inquiry by written notification to the member. However, the same matter may be reopened at a future date based on additional evidence.

2. Private Censure - Imposed on minor violations, the recipient has the right to reject within 30 days and request a hearing. A failure to reject constitutes an admission of the charge and acceptance of the sanction.

3. Stipulation Agreement - For any sanctions above private censure, the designated officer must proceed by proposing a Stipulation Agreement in writing. The member has the right to either reject and request a hearing, or accept and sign the agreement. The agreement must be signed by both parties (member and designated officer); acceptance waives any future rights to request a hearing.

Request for Hearing
When a proposed sanction is rejected and a hearing is requested, a hearing panel of three to five members is designated by the PSPC to review the matter. In these cases, the member is entitled to the following:

  • Hearing in person - hearings may also be conducted by conference call
  • Scheduling of a mutually agreeable date and time within 120 days of the request, and with 30 days notice
  • A reasonable opportunity to be heard in his or her own defense
  • Representation by counsel
  • Present witnesses and evidence - all evidence and a list of witnesses must be submitted to the hearing panel at least 14 days prior to the hearing
  • Cross-examination of any witnesses

The hearing proceeds first with witnesses and evidence in support of the charge, and then with witnesses and evidence in defense of the allegations. The hearing panel deliberates privately and renders a finding of misconduct and an appropriate sanction (based on a preponderance of the evidence), or a finding that the allegations were not valid.

Review of Hearing Panel Determination
Disciplinary action recommended by the hearing panel shall be imposed unless a review panel determines that there are exceptional and unusual circumstances. A written request for review by a review panel may be made within 30 days. The review panel (appointed by the chair of the PSPC) consists of members who have not been previously involved in the matter and who do not have a conflict of interest. The member must detail (in writing) the exceptional and unusual circumstances, and then the review panel meets by conference call and reaches a determination. The review panel's determination is final and conclusive.

Summary Suspension
This sanction removes an individual from membership in the CFA Institute, affiliate organizations and member societies. It prohibits use of the CFA designation or participation in the CFA Program.

Summary suspensions are imposed by a designated officer of the PSPC based on one of four circumstances:

1. The member is convicted or pleads guilty to a crime classified as a felony in the laws of the convicting jurisdiction, or (if felony is not defined) the member is guilty of a crime punishable by more than one year in prison.

2. The member is barred permanently or indefinitely from registering under the securities laws of a government or judicial agency, or by a public or private self-regulatory organization with jurisdiction over investment-related activities.

3. The member fails to cooperate with a designated officer's investigation into a member's conduct (either his/her own or that of another person).

4. The member fails to complete, sign and return the annual Professional Conduct Statement.

A summary suspension automatically becomes a revocation of membership and revocation of the right to use the CFA designation, unless the member petitions for review within five years of the date of the summary suspension. In the case of category 3 (failure to cooperate) and category 4 (failure to file annual statement), the member may object to the suspension by either cooperating with the investigation or filing the statement, or submitting a request for review within 30 days to the PSPC chair. Failure to request a review within 30 days means that the summary suspension is imposed for a minimum of one year, after which a review can be requested. A request to review a summary suspension is procedurally very similar to the review process for a sanction imposed by a designated officer (described earlier).

Reinstatement Following Revocation
Members may seek reinstatement of revoked privileges to be a member of the CFA Institute (or affiliated organizations and societies), to use the CFA designation or to participate in the CFA Program. The following guidelines apply:

  • A five-year waiting period between the effective date of the revocation and the application for reinstatement
  • Demonstration of fitness to practice financial analysis: to the satisfaction of the PSPC, the member must produce evidence that he or she is rehabilitated and in full compliance with any disciplinary sanctions
  • Adherence to other conditions requested by the PSPC: for example, passing of a self-administered Standards of Practice examination, and filing a completed and signed Professional Conduct Statement

Petitions for reinstatement are assigned to a designated officer of the PSPC, who conducts an investigation and renders a decision. Should a petition be denied, no subsequent petition shall be reviewed for at least two years.

Confidentiality
All CFA Institute proceedings related to professional conduct are kept confidential, except if an alleged violation is a clear violation of a law, rule or regulation (in which case there is an obligation to adhere to the law), or if the member waives this right to confidentiality. A regulatory body (e.g. the SEC) has a right to request copies of certain documents, including stipulation agreements, notices of disciplinary action and decisions rendered by a hearing panel and/or review panel.
To be exhaustive, we will now examine the requirements of an LOS that has since been removed, on the rules of procedure for proceedings related to professional conduct. Note that it is unlikely the CFA Institute will draw exam problems from the material set forth in this section. If you are pressed for time, feel free to skip this section.

In practice, few - if any - CFA exam problems are likely to be drawn from this material. There are only a certain number of problems that can be devoted to Ethics and Professional Standards, and there's a much higher priority to test the details of each Standard (i.e. the material we've already covered). In preparing for Ethics, spend your time focusing on the Standards and the situations in which these Standards are tested. We present a brief summary of the Rules of Procedure primarily to be exhaustive in our coverage of every Learning Outcome indicated in the Study Guide. Don't get too bogged down in this material - it is included by the CFA Institute primarily as a warning.

Disciplining CFA Members
Disciplinary cases involving CFA members are handled by the CFA Institute's Professional Standards and Policy Committee, or PSPC. The PSPC has the authority to conduct investigations and impose sanctions. The PSPC has formed two subcommittees:

1. Disciplinary Review Subcommittee (DRS)
Responsible for:

a. Enforcing the Code and Standards

b. Reviewing (and changing, if necessary) the Rules of Procedure

c. Reviewing disciplinary matters

d. Reviewing summary suspensions

2. Standards and Policy Subcommittee (SPS)
Responsible for:

a. Reviewing (and changing, if necessary) the Code and Standards

b. Promoting the Code and Standards

c. Revising published material related to the Code and Standards (Standards of Practice Handbook, self-administered ethics exams)

d. Reviewing the annual PCS (Professional Conduct Statement)

e. Assisting in any investigations

Grounds for Discipline
CFA Institute members may be investigated based on:

1. Violation of the CFA Institute Articles of Incorporation, Bylaws, Code of Ethics, Standards of Professional Conduct, or Rules of Procedure or other applicable rules

2. Sanction or injunction imposed by a government or judicial agency, or public or private self-regulatory organization with jurisdiction over investment-related activities

3. Conviction of a felony, or (if the jurisdiction does not define a felony) any crime punishable by more than one year in prison

4. Ban or restriction (permanently or indefinitely) from registration under a jurisdiction's securities laws, or any restriction related to any investment-related professional activity

5. Failure to complete, sign and return the Professional Conduct Statement

6. Falsifying information on a candidate or society membership application

7. Failure to cooperate with the CFA Institute's inquiry and investigation into one's own conduct, or into the conduct of another member

8. Any other good cause

Sanctions
The PSPC is authorized to impose any of the following sanctions in a disciplinary matter (in ascending order from the least severe to the most severe):

1. Private Censure - The member is promptly notified and a public announcement of the censure is made in a CFA-Institute-issued publication circulated to members. However, the member's name and any specific identifying information are withheld from the announcement.

2. Public Censure - A public announcement may be made in a CFA-Institute-issued publication, and the announcement may identify the person being sanctioned. Notice of a public censure may also be delivered to the member's governing regulatory body and member society.

3. Timed Suspension of Membership - In addition to the public notification guidelines required of public censures, the member is suspended from membership in the CFA Institute and its affiliated societies, for a specified period of time. However, he or she may continue to use the CFA designation in professional matters. Timed suspension of the right to use the CFA designation is the same as #3, except the use of the CFA designation is also revoked, but only for a timed period, after which this right may be reinstated.

4. Revocation of Membership - With this sanction, in addition to all of the public notices imposed in less-severe penalties, the member is barred permanently from membership in the CFA Institute or affiliated societies, though the right to use the CFA designation is not necessarily included in this permanent ban.

5. Revocation of Right to Use the CFA Designation - This sanction is the most severe penalty that can be imposed on a CFA charterholder: a lifetime ban on using the CFA designation.

6. Summary Suspension - This involves the automatic removal of membership in the CFA Institute, affiliated organizations or member societies, of the right to use the CFA designation and of the right to participate in the CFA Program.

7. Suspension or Revocation from Further Participation in the CFA Professional Designation Study and Examination Program - This sanction covers CFA candidates, barring them either temporarily or permanently from the CFA Program (i.e. sitting for any exams).

Notice of Disciplinary Action
Any sanction must first be communicated to the affected person, summarizing the following:

  • The nature of the matter and a summary of the disciplinary proceeding
  • Which applicable Code, Standard or rule was violated
  • Other appropriate information determined by the PSPC

Investigations
Investigations into potential violations are conducted by the designated officer appointed by the DRS, acting upon information provided by a complaining party who has filed a written complaint regarding a member's professional conduct. The identity of the complaining party will be made known to the person who is the subject of the complaint, unless the complaining party specifically requests anonymity. In this case, the designated officer will make every effort to protect the anonymity of the complaining party, though this protection may hamper the ability to gather information and establish that a violation has occurred.

Actions by the Designated Officer and the DRS

1. Termination of Inquiry - If insufficient evidence is present to continue, the designated officer may terminate the inquiry by written notification to the member. However, the same matter may be reopened at a future date based on additional evidence.

2. Private Censure - Imposed on minor violations, the recipient has the right to reject within 30 days and request a hearing. A failure to reject constitutes an admission of the charge and acceptance of the sanction.

3. Stipulation Agreement - For any sanctions above private censure, the designated officer must proceed by proposing a Stipulation Agreement in writing. The member has the right to either reject and request a hearing, or accept and sign the agreement. The agreement must be signed by both parties (member and designated officer); acceptance waives any future rights to request a hearing.

Request for Hearing
When a proposed sanction is rejected and a hearing is requested, a hearing panel of three to five members is designated by the PSPC to review the matter. In these cases, the member is entitled to the following:

  • Hearing in person - hearings may also be conducted by conference call
  • Scheduling of a mutually agreeable date and time within 120 days of the request, and with 30 days notice
  • A reasonable opportunity to be heard in his or her own defense
  • Representation by counsel
  • Present witnesses and evidence - all evidence and a list of witnesses must be submitted to the hearing panel at least 14 days prior to the hearing
  • Cross-examination of any witnesses

The hearing proceeds first with witnesses and evidence in support of the charge, and then with witnesses and evidence in defense of the allegations. The hearing panel deliberates privately and renders a finding of misconduct and an appropriate sanction (based on a preponderance of the evidence), or a finding that the allegations were not valid.

Review of Hearing Panel Determination
Disciplinary action recommended by the hearing panel shall be imposed unless a review panel determines that there are exceptional and unusual circumstances. A written request for review by a review panel may be made within 30 days. The review panel (appointed by the chair of the PSPC) consists of members who have not been previously involved in the matter and who do not have a conflict of interest. The member must detail (in writing) the exceptional and unusual circumstances, and then the review panel meets by conference call and reaches a determination. The review panel's determination is final and conclusive.

Summary Suspension
This sanction removes an individual from membership in the CFA Institute, affiliate organizations and member societies. It prohibits use of the CFA designation or participation in the CFA Program.

Summary suspensions are imposed by a designated officer of the PSPC based on one of four circumstances:

1. The member is convicted or pleads guilty to a crime classified as a felony in the laws of the convicting jurisdiction, or (if felony is not defined) the member is guilty of a crime punishable by more than one year in prison.

2. The member is barred permanently or indefinitely from registering under the securities laws of a government or judicial agency, or by a public or private self-regulatory organization with jurisdiction over investment-related activities.

3. The member fails to cooperate with a designated officer's investigation into a member's conduct (either his/her own or that of another person).

4. The member fails to complete, sign and return the annual Professional Conduct Statement.

A summary suspension automatically becomes a revocation of membership and revocation of the right to use the CFA designation, unless the member petitions for review within five years of the date of the summary suspension. In the case of category 3 (failure to cooperate) and category 4 (failure to file annual statement), the member may object to the suspension by either cooperating with the investigation or filing the statement, or submitting a request for review within 30 days to the PSPC chair. Failure to request a review within 30 days means that the summary suspension is imposed for a minimum of one year, after which a review can be requested. A request to review a summary suspension is procedurally very similar to the review process for a sanction imposed by a designated officer (described earlier).

Reinstatement Following Revocation
Members may seek reinstatement of revoked privileges to be a member of the CFA Institute (or affiliated organizations and societies), to use the CFA designation or to participate in the CFA Program. The following guidelines apply:

  • A five-year waiting period between the effective date of the revocation and the application for reinstatement
  • Demonstration of fitness to practice financial analysis: to the satisfaction of the PSPC, the member must produce evidence that he or she is rehabilitated and in full compliance with any disciplinary sanctions
  • Adherence to other conditions requested by the PSPC: for example, passing of a self-administered Standards of Practice examination, and filing a completed and signed Professional Conduct Statement

Petitions for reinstatement are assigned to a designated officer of the PSPC, who conducts an investigation and renders a decision. Should a petition be denied, no subsequent petition shall be reviewed for at least two years.

Confidentiality
All CFA Institute proceedings related to professional conduct are kept confidential, except if an alleged violation is a clear violation of a law, rule or regulation (in which case there is an obligation to adhere to the law), or if the member waives this right to confidentiality. A regulatory body (e.g. the SEC) has a right to request copies of certain documents, including stipulation agreements, notices of disciplinary action and decisions rendered by a hearing panel and/or review panel.

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