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Cfa1 1 Ethical And Professional Standards Notes

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This is an extract of our Cfa1 1 Ethical And Professional Standards document, which we sell as part of our CFA Level 1 Notes collection written by the top tier of University Of London (examined By LSE) students.

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CFA1 Level 1

Ethical and Professional Standards

Knowledge of the Law
 Comply with all applicable laws, rules, and regulations, codes and standards.
 Comply with the more strict ones in case of conflict.
 Not participate in any violation.
 Dissociate from any violation.
 Presumed to have knowledge of all applicable laws.
Duties of Analysts
 Stay Informed of changes in applicable laws.
 Review compliance procedures regularly.
 Maintain up-to-date reference copies of applicable laws and cases.
 Seek further legal advice when in doubt.
 Report violations to appropriate organization(s) or CFA Institute.
Duties of Firms
 Develop / adopt / adhere to a code of ethics.
 Keep staff informed of relevant laws.
 Establish written protocols for reporting suspected violations.
Independence and Objectivity (IO)
 Use reasonable care and judgment to achieve and maintain IO.
 Not offer, solicit or accept any benefit at the expense of IO.
 Avoid potential conflict of interest.
 Can accept modest gifts and entertainment.
 Disclose any benefits received and potential conflicts of interest.
 Give investment opinions free of bias.
 Use clear and unambiguous language to give investment opinions.
 Anticipate / Interpret / Assess a company in a factual manner.
Duties of Firms
 Maintain a culture supporting IO.
 Separate clearly authority and responsibility.
Due Diligence
 Gather info from a wide variety of sources.
 Disclose necessary info.
Sources of Pressure threatening IO
1 CFA1 Level 1

Ethical and Professional Standards

Investment Banking Clients
Public Companies
Buy-side Clients (e.g. Portfolio managers)
Issuer-Paid Research

Buy-side Analysts
 Hired by an entity, such as a mutual fund, that invests on firm capital.
 Identify investment opportunities for their firm.
 Research usually unavailable to external parties.
Sell-side Analyst
 Hired by an entity, such as a brokerage firm, that manages clients' money.
 Identify investment opportunities for their clients.
 Research usually available to external parties.
 An intermediary between an issuer of a security and the investor.
Duties of Analysts
 Adhere to strict standards of conduct.
 Engage in thorough, independent and unbiased analysis.
 Disclose potential conflicts.
 Analyze audited financial statements thoroughly.
 Provide thorough benchmarking and industry analysis.
 Conduct research in an objective manner.
 Distinguish facts and opinions in reports.
 Give reasonable conclusions supported by appropriate research.
 Accept only a flat fee prior to writing a report.
Duties of Firms
 Establish policies to protect integrity of opinions.
 Created a restricted list to exclude controversial companies.
 Limit special cost arrangements (e.g. air travel) from clients.
 Limit gifts received from clients.
 Restrict personal investments (e.g. equity related IPOs).
 Implement effective supervisory and review procedures.
 Establish a formal written policy on IO.
 Untrue statement or omission of facts.
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Ethical and Professional Standards

 Omission of any statement that is otherwise false and misleading.
Duties of Analysts
 Not knowingly make any misrepresentations relating to investment.
 Not misrepresent any aspect of their practice, including qualifications.
 Not guarantee clients specific return on volatile investments.
 Can provide clients with info on return of investments with built-in guarantee.
 Not commit plagiarism when preparing investment materials.
 Acknowledge and identify the source of ideas from other parties.
 Can revise outsourced research.
 Disclose any outsourced research.
 Not commit plagiarism in oral communications.
 Not use undocumented info.
 Reveal sources to bring responsibility back to the author.
Duties of Firms
 Limit capabilities of individual staff.
 Provide guidance for employees who make presentations to (potential) clients.
 Designate which employees can speak on behalf of the firm.
 Require staff to prepare a summary of their qualifications / experience.
 Monitor materials published on the web pages regularly.
 Maintain copies of all research reports / articles.
 Not engage in any professional conduct involving dishonesty / fraud / deceit.
 Not commit any act that adversely affects professional reputation / competence.
Duties of Analysts
 Not commit any sort of unethical behaviour related to professional activities.
 Not commit any act that negative affects their ability to perform responsibilities.
 Not abuse CFA Conduct by actively seeking enforcement of CFA Conduct.
Duties of Firms
Develop / Adopt a code of ethics.
 Disseminate to staff a list of potential violations and associated punishments.
 Check reference of potential staff.
Material Nonpublic Info
 Not act or cause others to act on material nonpublic investment info (inside info).
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Ethical and Professional Standards

Material Info
 Info that has an impact on the price of a security or affects investment decisions.
Nonmaterial info
 Low Reliability
 Ambiguity of Effect
 Available to General Investors
Examples of Material Info
 Earnings
 Mergers / Acquisition / Tender Offers / Joint Ventures
 Change in Assets
 New Licenses / Patents / Trademarks
 Development of Business

Changes in Management
Change in Auditor Notification
Events regarding the issuer's securities
Significant Legal Disputes
Gov Reports of Economic Trends
Orders for Large Trades before Execution

Mosaic Theory
 Collect public / non-public / nonmaterial info for forming recommendations.
 Recognized by CFA Institute as a valid method of analysis.
Duties of Analysts
 Collect info from sources other than the company in question.
 Document all research.
 Disclose the details of the info and methodology used.
 Not take investment action on the basis of material info.
 Make reasonable efforts to disseminate material info.
 Not induce company insiders to provide private info.
 Not share info with colleagues of other departments.
 Consult a designated compliance officer in case of doubt.
Duties of Firms
 Adopt and document compliance procedures.
 Develop and follow disclosure policies.

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