CFA Level 1

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Ethics and Standards - Standard I-D: Misconduct

Members and Candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence.

Reasoning behind Standard I-D
This Standard was written with the understanding that simple compliance with all laws, rules and regulations (i.e. the essence of Standard I-A) is in a number of cases not enough to create a highly ethical culture for the investments profession. Standard I-D thus extends beyond the scope of Standard I-A to address the personal integrity of Members and Candidates. For example, there is no law, rule or regulation preventing one from drinking alcoholic beverages before going to work or while at lunch and returning to work while under the influence. It's also true that such behavior was socially acceptable decades ago with the popularity of the so-called three-martini lunch. But times have changed.

In today's culture, such behavior is clearly viewed as adversely impairing one's judgment and reasoning. It reflects poorly not just on that individual, but on the person's firm and on investment professionals in general. While the language of Standard I-D is open to interpretation (and one could debate whether the rule is being violated in certain situations), the overriding spirit of Standard I-D is that the investment management business is very image conscious, and Members and Candidates must assume that their conduct is being judged - not just by clients, coworkers or supervisors, but in relation to the profession as a whole.

What type of specific conduct constitutes a violation of Standard I-D? Even if your conduct within your professional workplace is impeccable, the activities you partake in after-hours can also constitute a violation of the Standard.

For example; if an individual has been convicted of a felony, crime, or misdemeanor, that person has indicated to others that he or she partakes in immoral, dishonest, and unethical activities. Who's to say this behavior will not be repeated within his or her professional activities?


Applying Standard I-D
CFA candidates typically know the difference between right and wrong, so exam questions will try to trap you with various qualifiers to a situation. Be aware that the most important thing to evaluate is what the person actually has done, and avoid the following traps:

  1. Don't rely on the judgment of the individual's supervisor - Many examples will indicate that "a supervisor didn't find that the behavior in question affected day-to-day responsibilities, and the supervisor knew about it but was OK with it as long as it didn't happen again". In these cases, the opinion of the supervisor is not important - it's the actual act that must be your focus. Don't worry about the supervisor. Keep the analysis simple: do the actions of this person violate any facet of the Standards? (Is it a felony? Does it involve fraud or an act of moral turpitude?)
  2. Don't forgive misconduct simply because there is no conviction - In our legal system, most cases get settled out of court. If an activity is fraudulent, if the perpetrator tried to get away with something or tried to deceive, it's a violation of Standard I-D even if the misconduct doesn't result in a conviction. Again, focus on what the person did.
  3. Dishonesty and fraud are possible even when one is engaged in volunteering for charitable causes - Focus on what the person has actually done. If it is fraudulent, if it misrepresents, or if it is deceitful, then it's a violation.

How to Comply
Personal integrity and professional conduct start with the individual, with one's sense of right and wrong behavior, and with one's moral character. Improper and inappropriate actions have consequences, but in a position of trust, one is sometimes in a position to get away with fraudulent behavior. If an action provokes the feeling that you hope no one else finds out, it's probably something that shouldn't be done. You should never feel like you have something to hide.

In addition to the CFA Institute, the Securities and Exchange Commission, FINRA, and many other governing and regulatory bodies are in place to provide a regulatory framework and require compliance and full disclosure of one's activities. In addition, CFA Members and Candidates should encourage employers to adopt a code of ethics to cover personal conduct for everyone in the organization, and to adopt background-checking procedures for potential employees, so that an organization is fully aware of any prior legal issues and is confident that potential employees are not ineligible for employment in the investment industry.

Standard II-A: Material Nonpublic Information
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