1_ethical-professional-standards.pdf

Ethical and Professional Standards

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Mapping to Curriculum  Reading 1 & 2: Standards for Professional Conduct

 Reading 3 & 4: Global Investment Performance Standard

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Reading 1 & 2: Standards for Professional Conduct

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Basic Construct of Investment Profession 1

Basic model for Equity Broking Recommendation leading to buy/sell of share

Institutional Investor

Equity Report and Opinion

Buy-Side Analyst

Raw data and information

Sell-Side Analyst

Company

Possibly same entity

2

Basic model for Money Management Retail investor

Retail investor Retail investor

Retail investor Professional Investment manager

Retail investor

Retail investor Retail investor

Retail investor

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Basic Construct of Investment Profession 3

Basic model for Investment Banking

No direct connect Investor

Investor

Investor

Investor

Investor

Investor

Investment Banker

Company Needs capital

Network of investors

Understanding of the above three situations is extremely important to put yourself into the shoes of the decision maker and answer the question correctly in exam

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CFA Institute Professional Conduct Program (PCP)  The PCP is covered by 1. Institutes’ Bylaws and 2. Rules of Procedures for Proceedings Related to Professional Conduct

 Disciplinary Review Committee of CFA Institute Board of Governors overlooks the entire PCP. PCP = Code of Ethics + Standards of Professional Conduct

 The PCP is applicable on all the Members of the CFA institute as well as CFA candidates (henceforth referred to as accused).

An enquiry against a member / candidate is conducted when 1. Self disclosure by the Members in Professional conduct Statement or otherwise. 2. Written complaints received by Professional Conduct Staff. 3. Evidence of misconduct by a member or candidate that the professional Conduct Staff received from public sources. 4. A report by CFA exam proctor of a possible violation during the examination.

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Outcome of an misconduct enquiry  After conducting interviews with the complainant and the accused, and collecting relevant information, the Designated Officer can: • Orders that no disciplinary sanction is required – Enquiry goes in favour of the accused OR • Issues a cautionary letter to the accused – when misconduct is not gross OR • Issues a disciplinary sanction (punishment) against the accused  Sanction may include –condemnation by member’s peers or suspension of candidate’s continued participation in CFA program.

 If a disciplinary sanction has been issued against the accused then the accused can accept or reject the sanction.

 If Sanction has been rejected by the accused, the matter will be referred to the panel of CFA institute members for a hearing.

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The need for Ethics in Investment Profession There are some inherent characteristics of the investment profession: 1. Agent Principle Problem – Managers’ dilemma 2. It’s based on Recommendations With Ethics in practice Ethical practices by investment professionals benefit all market participants and stakeholders and lead to increased investor confidence in global capital markets. Clients are reassured that the investment professionals they hire have client’s best interest in mind and investment professionals benefit from the goodwill generated. Ethical practices instill a public trust in the fairness of markets, allowing them to function efficiently.

High degree of Ethics is the fundamental requirement of investment profession

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Code of Ethics The member and candidates for the CFA designation 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 and viability of the global capital markets for the ultimate benefit of society. 6. Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.

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The structure of the session going forward 1. Memorize the names and numbers of each standard. 2. Review the executive Summary. 3. Do practice examples. 4. Revise the standard. 5. More practice examples will follow.

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The Seven Standards for Professional Conduct I

II

III

IV

V

VI

VII

Professionalism A B C D Integrity of Capital Markets A B Duties to Clients A B C D E Duties to Employers A B C Investment Analysis, Recommendations and Actions A B C Conflicts of Interest A B C Responsibilities as a CFA Institute Member or CFA candidate A B

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All the above standards apply to members and candidates of CFA Institute. In the following slides only the term “member” will be used but all the standards apply to the candidates as well

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Executive Summary for Seven Standards

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Standard I - Professionalism A. Knowledge of the Law. Members and candidates must understand and comply with all applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct) of any government, regulatory organization, licensing agency, or professional association governing their professional activities. In the event of conflict, members and candidates must comply with the more strict law, rule, or regulation. Members and candidates must not knowingly participate or assist in and must dissociate from any violation of such laws, rules, or regulations. B. Independence and Objectivity. Members and candidates must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities. Members and candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another’s independence and objectivity. C. Misrepresentation. Members and candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities. 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.

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Standard II - Integrity of Capital Markets A. Material Non-Public Information. Members and candidates who possess material non-public information that could affect the value of an investment must not act or cause others to act on the information. B. Market Manipulation. Members and candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.

Remarks Material

Non-public

Not Allowed to Used

Material

Public

Allowed

Non-material

Public

Allowed

Non-material

Non-public

Allowed

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Standard III - Duties to Clients A. Loyalty, Prudence, and Care: Members and candidates have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment. Members and candidates must act for the benefit of their clients and place their clients’ interests before the management’s or their own interests. In relationships with clients, members and candidates must determine applicable fiduciary duty and must comply with such duty to persons and interests to whom it is owed. B. Fair Dealing: Members and candidates must deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities. C. Suitability: 1. When members and candidates are in an advisory relationship with a client, they must: a) Make a reasonable inquiry into a client’s or prospective client’s investment experience, risk and return objectives, and financial constraints prior to making any investment recommendation or taking investment action and must reassess and update this information regularly. b) Determine that an investment is suitable to the client’s financial situation and consistent with the client’s written objectives, mandates, and constraints before making an investment recommendation or taking investment action. c) Judge the suitability of investments in the context of the client’s total portfolio.

2. When members and candidates are responsible for managing a portfolio to a specific mandate, strategy, or style, they must only make investment recommendations or take investment actions that are consistent with the stated objectives and constraints of the portfolio.

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Standard III - Duties to Clients (Contd.) D. Performance Presentation. When communicating investment performance information, members or candidates must make reasonable efforts to ensure that it is fair, accurate, and complete. E. Preservation of Confidentiality. Members and candidates must keep information about current, former, and prospective clients confidential unless: 1. The information concerns illegal activities on the part of the client or prospective client, 2. Disclosure is required by law, or 3. The client or prospective client permits disclosure of the information.

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Standard IV - Duties to Employers A. Loyalty. In matters related to their employment, members and candidates must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer. B. Additional Compensation Arrangements. Members and candidates must not accept gifts, benefits, compensation, or consideration that competes with, or might reasonably be expected to create a conflict of interest with, their employer’s interest unless they obtain written consent from all parties involved. C. Responsibilities of Supervisors. Members and candidates must make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations, and the code and standards.

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Standard V - Investment Analysis, Recommendations and Actions A. Diligence and Reasonable Basis. Members and candidates must: 1. Exercise diligence, independence, and thoroughness in analysing investments, making investment recommendations, and taking investment actions.

2. Have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action.

B. Communication with Clients and Prospective Clients. Members and candidates must: 1. Disclose to clients and prospective clients the basic format and general principles of the investment processes used to analyse investments, select securities, and construct portfolios and must promptly disclose any changes that might materially affect those processes. 2. Use reasonable judgment in identifying which factors are important to their investment analyses, recommendations, or actions and include those factors in communications with clients and prospective clients. 3. Distinguish between fact and opinion in the presentation of investment analysis and recommendations.

4. Disclose to clients and prospective clients significant limitations and risk associated with the investment process.

C. Record Retention. Members and candidates must develop and maintain appropriate records to support their investment analysis, recommendations, actions, and other investment-related communications with clients and prospective clients.

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Standard VI - Conflicts of Interest A. Disclosure of Conflicts. Members and candidates must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients, and employer. Members and candidates must ensure that such disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively. B. Priority of Transactions. Investment transactions for clients and employers must have priority over investment transactions in which a member or candidate is the beneficial owner. C. Referral Fees. Members and candidates must disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received from, or paid to, others for the recommendation of products or services.

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Standard VII - Responsibility as a CFA Institute Member or Candidate A. Conduct as Participants in CFA Institute Programs: Members and Candidates must not engage in any conduct that compromises the reputation or integrity of CFA Institute or the CFA designation or the integrity, validity, or security of CFA Institute Programs. B. Reference to CFA Institute, the CFA Designation, and the CFA Program: When referring to CFA Institute, CFA Institute membership, the CFA designation, or candidacy in the CFA Program, members and candidates must not misrepresent or exaggerate the meaning or implications of membership in CFA Institute, holding the CFA designation, or candidacy in the CFA program.

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Seven Standards in Detail

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Standard I - Professionalism I

II

III

IV

V

VI

VII

Professionalism A Knowledge of the law B Independence and objectivity C Misrepresentation D Misconduct Integrity of Capital Markets A B Duties to Clients A B C D E Duties to Employers A B C Investment Analysis, Recommendations and Actions A B C Conflicts of Interest A B C Responsibilities as a CFA Institute Member or CFA candidate A B

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I (A) - Knowledge of the Law  Members and candidates must understand and comply with all applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct) of any government, regulatory organization, licensing agency, or professional association governing their professional activities.  In the event of conflict, members and candidates must comply with the more strict law, rule, or regulation.

 Members and candidates must not knowingly participate or assist in and must dissociate from any violation of such laws, rules, or regulations.  Members must have knowledge and understanding of all the laws of the countries in which they engage in business. They should always comply with more strict laws. In the absence of local laws and regulation they must adhere to Codes and Standards.  Members should disassociate themselves from any illegal employee or client activities and if required should leave the employer. Members may confront the involved individual first but should separate himself/herself from any illegal activity. Inaction with the continued association may be considered as participation in the illegal conduct.

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Application of Standard I (A) Knowledge of the law Example 1 : Nic Cage is a US citizen, who works for an investment firm based in United Kingdom. Most of his recommendations and analysis is on the stocks of a the USA where participation in IPOs for personal account is strictly prohibited. The following week an IPO is expected to hit the market. Market rumors as well as a number of analysts are of the opinion that the IPO will be a highly successful and Nic could gain a substantial amount of money by investing in it. The United Kingdom laws have no restriction in this regard. Comment on Nic’s most likely course of action given that he wishes to comply with the CFA Institutes Standards. Comment : Nic must comply with the most strict laws and regulation among US corporate laws, CFA Institute Standards and the laws of the United Kingdom. United States > CFA Institute Standards > United Kingdom Since his area of work is the country where participation in IPOs for personal accounts is strictly prohibited. He must not participate in the IPO for his personal account, however he can recommend the IPO to his clients.

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Application of Standard I (A) Knowledge of the law Example 2: Jones Smith is working on an underwriting for XYZ firm. While preparing the financial statements he discovers that the financial statements have been altered to hide losses. The company has used a number of dummy subsidiary companies acting in consort to siphon of funds while trying to hide the losses from the investors. The inaccurate data has already been included in the prospectus which is going to be made public next week. Jones is wondering on what should be his course of action.

Comment: Jones Smith should report the problem to his supervisor. If the statements are not fixed by the firm he should disassociate himself from the underwriting and seek legal advice for additional reporting requirements.

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Comment

No

Is the activity is unethical/illegal

Yes Report to supervisor

No action required

No

Does he takes actions

Dissociate your name

No May need to consider leaving employment

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Does your employer allows

Yes

“OK”

Yes

“OK”

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I (B) - Independence and Objectivity  Members and candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another’s independence and objectivity.  Investment Process should not be influenced from any external source. • Modest gifts and entertainment are permitted. • Allocation of shares of oversubscribed IPOs to investment manager for their personal account are not permitted. • Members must disclose any benefits received from the client to the employer.

 There should be effective firewall between the investment management/research and investment banking activities. Analyst should not be pressured by the sell side firms to issue favorable research on current or prospective clients.  Compensation of Analyst for Issuer paid research should be limited preferably flat fees without regard to conclusion. Disclaimer: The dollar value of acceptable gifts is not given in the text book. However, gifts should be disclosed to your supervisor irrespective of its cost.

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Application of Standard I (B) Independence and Objectivity Example 1 : Joel Silver a fund manager with VR Capital. For the past five years his macro fund has consistently outperformed the benchmark S&P500. Grant Hill one of his big time customers is very satisfied with his portfolio performance and he gifts him a watch of significant value. The gift is supposed to reward him for his outstanding performance. Joel accepts the gift and discloses the gift to his employer.

Comment : The Standard I B has not been violated here as the gift given by the client is not based on the performance going forward and also the gift has been disclosed to the employer. If the gift was contingent on future performance then the fund manager had to take permission from the employer as the employer need to ensure that the manager doesn’t give any advantage to the client as compared to other clients.

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Application of Standard I (B) Independence and Objectivity Example 2: Bill Pope a CFA Level I candidate works as a free-lancing analyst providing recommendations to a number of stock-market related web-sites. To augment her income he enters into a contract to write some issuer paid research. The client is impressed by his work and believes that he has a very good following in the market. They decide to sign a contract with Bill for a flat fees plus a bonus for attracting new investors. Bill is very happy with this contract as it will significantly affect his income.

Comment: The Standard I B has been violated here since the compensation depends on the reports conclusion. Flat fees as compensation for issuer paid research is permitted with proper disclosure. The analyst needs to disclose that the research is paid by the subject company. If the analyst fails to disclose the agreement or enters into a contract based on the number of investors that he can attract for the company then he is in violation of the CFA Standard of Professional Conduct.

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I (C) - Misrepresentation  Members and candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities.  Trust is the foundation of the investment profession. Member must not knowingly misrepresent or give a false impression in oral or written communication.  Guaranteeing investment performance and plagiarism are encompassed in Misrepresentation. • Plagiarism is defined as using someone’s work without giving them the credit.

 Employee qualification should be accurately presented and to avoid plagiarism, records of all the material used for making the report should be maintained.  Information from recognized financial and statistical reporting services need not be cited.

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Application of Standard I (C) Misrepresentation Example 1: Matt Doran runs an investment management firm. His firm subscribes to service from a larger investment firm that provides research reports. Matt copies the reports and after making a few cosmetic changes to the formatting distributes the research report as his own proprietary research. His clients pay him a considerable sum of money for the reports which they find are very well researched and provide information regarding a large set of companies.

Comment 1: This is a violation of Standard I C. Matt is plagiarizing the reports and to comply with the standards he should inform the clients that the research report is not an in house report but rather a third party report from a large investment firm.

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Application of Standard I (C) Misrepresentation (Cont…) Example 2: Joe Pantoliano has recently started Cyher Research an investment & research management firm. In his prospectus he mentions that he has studied in one of the top MBA programs in the country. He also states that he has 10 years of experience in equity research and has worked with a number of well-known analysts in the country. He also mentions that he is working towards his CFA Charter. The prospectus states that CFA is a rigorous program and it takes more than 250 hours of study to clear any of the levels. Later it comes to light that though Joe has worked for a number of years in the industry he has never been in any MBA program. Comment 2: Joe has clearly violated the standards relating to misrepresentation of information. He has knowingly distributed the document that misrepresents his qualifications. By creating a wrong picture about his credentials Joe is misleading his potential clients. As a CFA Candidate and member of the program Joe must set very high standards and ensure that there is full disclosure of his true academic credentials.

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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.  CFA Institute discourages any sort of unethical behavior by member but the Codes and Standards are only limited to the professional lives of members.

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Application of Standard I (D) Misconduct Example 1 :

A. Smith an analyst was sent to a conference in Denver. His company decides to cover all the costs of the trip. After returning from the trip Smith intentionally includes an expense receipt that was not in his expense for the company trip. Comment 1:

A. Smith has violated that Standard, since his act involves dishonesty and fraud and reflects poorly on members integrity. Example 2: Luis Garcia is a mutual fund manager. She is also an active member of a PETA. She firmly believes that animals deserve the same respect as humans. As a PETA member she has taken part in a number of non violent protests. Her activities has resulted in her being arrested for a number of times for un-lawful conduct. Comment 2: Generally Standard I D doesn’t cover legal transgression resulting from civil disobedience in support of personal beliefs .So this is not a violation of the Standard.

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Summary for Professionalism The Professionalism standard has been further divided into four sub-standards:

A. Knowledge of the Law. Members and candidates must understand and comply with all applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct) of any government, regulatory organization, licensing agency, or professional association governing their professional activities. In the event of conflict, members and candidates must comply with the more strict law, rule, or regulation. Members and candidates must not knowingly participate or assist in and must dissociate from any violation of such laws, rules, or regulations. B. Independence and Objectivity. Members and candidates must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities. Members and candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another’s independence and objectivity. C. Misrepresentation. Members and candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities.

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. © EduPristine

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Standard II – Integrity of Capital Market I

II

III

IV

V

VI

VII

Professionalism A B C D Integrity of Capital Markets A Material non-public information B Market Manipulation Duties to Clients A B C D E Duties to Employers A B C Investment Analysis, Recommendations and Actions A B C Conflicts of Interest A B C Responsibilities as a CFA Institute Member or CFA candidate A B

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II (A) - Material Non-public Information  Members and candidates who possess material non-public information that could affect the value of an investment must not act or cause others to act on the information.  Information is “material” if disclosure would have an impact on the price of the security and a reasonable investor would like to have that information before making an investment decision. Ambiguous information may not be considered material.  Information is non public if it has not been disseminated to the marketplace. Selective dissemination of information to the analyst is an area of a potential conflict.  Mosaic Theory: There is no violation when an analyst reaches a conclusion using information that is non material and non public.

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Application of Standard II (A) Material Non-public Information Example 1: C Lock frequents a café near his work place. The café is a favorite hangout for employees of a tech company TrixAm Inc.. While having coffee in the morning he meets a few employees who tell him about a recent transaction that could double the revenues in the next few years. Lock decides to buy some TrixAm stocks for his personal portfolio. Comment 1: Lock has violated the standards as he has acted on material non public information. Unless the information was made public through a press release Lock should not act or make any recommendation on the information. Example 2: Bruce Wayne is a member of CFA Institute and has a friend who is an active investor, he tells Bruce that based on his research Microsoft stock will be bought in huge amounts in the near future. Bruce does his own research and purchases the stock. Comment 2: There is no violation since Bruce’s friend doesn’t have any inside information. This information is not material as a reasonable investor would not want to know what Bruce’s friend thinks about a particular stock.

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II (B) - Market Manipulation  Members and candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.  The standard applies to transactions that deceive the market participants by distorting the price setting mechanism of financial instrument or spreading false information. Application of Standard II (B) Market Manipulation:

Example 1: Gloria Foster a member and a Level I candidate works in consort with a group of friends by posting wrong information about a firm on the Internet. They spread the information through IRC chat, web forums and other stock-tips related sites. The information is picked up by a number of shareholders and creates panic in the market. This results in a lot of shareholders selling their stake. This results in the price falling very drastically. Comment 1: This is a violation of Standard as it distort the prices of stock by misleading the market participants. As a CFA Institute member Gloria is expected to maintain the highest levels of professionalism and not resort to any kind of market manipulations.

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Summary - Integrity of Capital Markets Integrity of capital markets are subdivided into two sub standards:

A. Material Non-Public Information. Members and candidates who possess material non-public information that could affect the value of an investment must not act or cause others to act on the information. B. Market Manipulation. Members and candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants. Materiality

Awareness

Remarks

Material

Non-public

Not Allowed to Used

Material

Public

Allowed

Non-material

Public

Allowed

Non-material

Non-public

Allowed

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Standard III – Duties to Clients I

II

III

IV

V

VI

VII

Professionalism A B C D Integrity of Capital Markets A B Duties to Clients A Loyalty, Prudence and Care B Fair dealing C Suitability D Performance Presentation E Preservation of confidentiality Duties to Employers A B C Investment Analysis, Recommendations and Actions A B C Conflicts of Interest A B C Responsibilities as a CFA Institute Member or CFA candidate A B

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III (A) - Loyalty, Prudence, and Care  Clients interest always comes before employer’s or personal interest.

 Exercise prudence ,care, skill and diligence while making investment decisions in a way in which a reasonable investor acting in like capacity would do.  Adhere with fiduciary responsibility specific to a client.  Ensure clients objectives and expectation for a performance of account are reasonable and in accord with clients circumstances and risk appetite.  Investment decision should be judged in the context of total portfolio.  Duty of loyalty includes voting proxies in an informed manner.Voting all proxies may not be necessary as it may not benefit the client.

 Client brokerage should be used to benefit the client.

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Application of Standard III (A) Loyalty, Prudence, and Care Example 1: Don Davis a member uses a broker for clients account. The broker is an old friend of Davis. He charges very high fees and does not always provide the best execution . The broker however allows Davis to use his vacant apartment for personal use. Davis uses the apartment to host any clients that may be visiting them. Comment 1: This is a violation of the Standard since the member failed to get best execution for the client. Also client brokerage should only be used for services that will directly benefit the client. Use of the brokerage for any other activity is strictly prohibited. Example 2: Carrie Moss runs an investment management firm. She directs all her brokerage to Neo Ltd. a private broking firm. She directs all trades originating from accounts referred to her by Neo and also any other account. In return Neo provides her some account management business. Comment on whether the above complies with the CFA Standards. Comment 2: Two instances of violation of the CFA Standards can be found in the above case. If the broker fails to provide the best price or execution then Carrie should change her brokers. She must search for the broker who can provide the least execution cost. Another violation occurs if the broker-member relationship is not disclosed to the client. © EduPristine

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III (B) - Fair Dealing  Don’t discriminate between clients when providing investment analysis. Fairly doesn’t mean equally.  Different service levels are acceptable but should be disclosed to all the client and prospective clients.  Fair opportunity should be given to all the clients to act upon an investment recommendation. Clients who are not aware of change in recommendation and place orders that are contrary should be advised about the change in recommendation.  Treat all clients irrespective of whether they are individual or institutional , fairly and in accord to their investment objective and circumstances. Disclose written allocation procedures of their firm to clients.

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Application of Standard III (B) Fair Dealing Example 1: Neil Raiment an investment manager participates in the IPO for TrixAm Inc. The IPO is oversubscribed 10 times. Neil receives 5,000 shares due to his bid. He decides to allocate 3,000 shares among individual accounts and into accounts of his friends and relatives. Comment on whether any violation has occurred in the above case. Comment 1: As a investment professional Neil should follow the highest ethical standards. After being allocated 5,000 shares he is supposed to allocate it among all the participating clients on a pro-rata basis. By allocating it into his own account and that of related persons Neil has violated the standards relating to fair dealing.

Example 2: Mark Smith after considerable amount of investigation writes a research report and recommends purchase for shares of small analytic firm. He calls his best client and tell him about the recommendation, this recommendation has to be disseminated to the clients in the next week. Comment 2: The Standard has been violated, as Mark has disseminated the purchase recommendation to his best client before the recommendation was sent to all clients. He has not dealt fairly with his clients.

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III (C) – Suitability 1. When members and candidates are in an advisory relationship with a client, they must: A. Make a reasonable inquiry into a client’s or prospective client’s investment experience, risk and return objectives, and financial constraints prior to making any investment recommendation or taking investment action and must reassess and update this information regularly. B. Determine that an investment is suitable to the client’s financial situation and consistent with the client’s written objectives, mandates, and constraints before making an investment recommendation or taking investment action. C. Judge the suitability of investments in the context of the client’s total portfolio.

2. When members and candidates are responsible for managing a portfolio to a specific mandate, strategy, or style, they must only make investment recommendations or take investment actions that are consistent with the stated objectives and constraints of the portfolio  Gather client information in the form of Investment Policy Statement (IPS).Consider clients needs, circumstances and risk appetite.  If a particular mandate is to be followed then make sure the investments are consistent with the stated mandate.

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Application of Standard III (C) Suitability Example 1: Mark Smith ,a member gives a client account allocation of high risk securities, even though the client has low risk tolerance and modest return objectives. Comment 1: The Standard has been violated, as Mark has not considered clients needs ,circumstances and risk appetite before allocation shares to the client account. Example 2: David Kilde a member of the CFA Institute is a portfolio manager for a pension fund. The pension fund has a mandate for investing in high quality debt investments that are rated AAA or in large-cap stocks. David notices that the small-cap index has been outperforming the market for the last sixmonths. He decides to invest a part of the portfolio in small-cap stocks. He argues that he will liquidate the holdings within a two month period. This will allow him to show higher returns on his portfolio. Comment 2: This is a violation of the standard. The pension fund mandate clearly states that investment is to be made in only high quality debt instruments or in large-cap stocks. By investing in a portfolio of smallcap stocks he is violating his mandate.

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III (D) - Performance Presentation  When communicating investment performance information, members or candidates must make reasonable efforts to ensure that it is fair, accurate, and complete.  This standard prohibits overstating of past performance or reasonable expected performance. Members should not state or imply the ability to achieve a rate of return as achieved in the past.  The average of returns of all portfolios over the past 5 years should be given. This should include discontinued portfolios and portfolios that generated losses. This average should not have a survivorship bias.

Global Investment Performance Standards to be adhered to

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Application of Standard III (D) Performance Presentation Example 1: Mark Zooberg states in his firm’s brochure “You can expect a steady 30% annual compounded growth of the value of your investment over the year". The form achieved 30% growth in the value of the investment in the past year. But the average growth over past five years have been 10%. Comment 1: Mark Zooberg is in violation of the Standard III D. He should have mention that 30% growth occurred only once .Also by stating that you can expect a steady 30% growth, he has also violated Standard I C which prohibits statement of assurances regarding an investment. Example 2: Steve Bastoni is preparing a brochure for his investment management firm. He reproduces the results of a study that he had performed while in B-school. The study simulated the returns from an ideal portfolio that will be selected using a proprietary model prepared by Steve. The brochure claims that the results are actual ones and are the result of Steve’s experience in the investment management industry. Comment 2: The Standard has been violated as the brochure gives a wrong impression of the results being actual ones instead of being simulated.

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III (E) - Preservation of Confidentiality  Members and candidates must keep information about current, former, and prospective clients confidential unless: 1. The information concerns illegal activities on the part of the client or prospective client, 2. Disclosure is required by law, or 3. The client or prospective client permits disclosure of the information.

 You cannot disclose client information, even in the case where the client makes profits.  If you require to discuss the holdings of a client, that must be done on a no-name basis.  This standard extends to former clients as well.

 This Standard is not intended to prevent members from cooperating with CFA Institute Professional Conduct Program (PCP) investigation.  Members should avoid disclosing information about clients except to authorized co-workers who also work for the same client.

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Application of Standard III (E) Preservation of Confidentiality Example 1: A member has learned from his clients that his goal is to give a large proportion of his portfolio income to the charity. The member tells his friends who woks for a charity firm about the clients intentions and tells him to contact the client. Comment 1: The member has violated the standard by disclosing the information about a client which he learned in the course of business relationship. Example 2: David Crowe manages portfolio of James Trust, CEO of Real estate company. Crowe believes that CEO is embezzling money from the corporation and putting it in his personal investment account. Comment 2: Crowe should check with his firm’s compliance department and also the outside counsel to determine whether applicable regulation requires stating the CEO’s financial records.

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Summary for Duties to Clients A. Loyalty, Prudence, and Care: Members and candidates have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment. Members and candidates must act for the benefit of their clients and place their clients’ interests before the management’s or their own interests. In relationships with clients, members and candidates must determine applicable fiduciary duty and must comply with such duty to persons and interests to whom it is owed. B. Fair Dealing: Members and candidates must deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities. C. Suitability: 1. When members and candidates are in an advisory relationship with a client, they must: a) Make a reasonable inquiry into a client’s or prospective client’s investment experience, risk and return objectives, and financial constraints prior to making any investment recommendation or taking investment action and must reassess and update this information regularly. b) Determine that an investment is suitable to the client’s financial situation and consistent with the client’s written objectives, mandates, and constraints before making an investment recommendation or taking investment action. c) Judge the suitability of investments in the context of the client’s total portfolio.

2. When members and candidates are responsible for managing a portfolio to a specific mandate, strategy, or style, they must only make investment recommendations or take investment actions that are consistent with the stated objectives and constraints of the portfolio.

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Summary for Duties to Clients (Contd.) D. Performance Presentation. When communicating investment performance information, members or candidates must make reasonable efforts to ensure that it is fair, accurate, and complete. E. Preservation of Confidentiality. Members and candidates must keep information about current, former, and prospective clients confidential unless: 1. The information concerns illegal activities on the part of the client or prospective client, 2. Disclosure is required by law, or 3. The client or prospective client permits disclosure of the information.

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Standard IV – Duties to Employers I

II

III

IV

V

VI

VII

Professionalism A B C D Integrity of Capital Markets A B Duties to Clients A B C D E Duties to Employers A Loyalty B Additional Compensation Arrangements C Responsibilities of supervisors Investment Analysis, Recommendations and Actions A B C Conflicts of Interest A B C Responsibilities as a CFA Institute Member or CFA candidate A B

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IV (A) - Loyalty  In matters related to their employment, members and candidates must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer.  Once you resign from a company, you cannot take • any client information or any financial models or documents you made. • A client’s non-public contact information.

• However, you can use the knowledge and skills you have developed in the next job.

 Members must refrain from any conduct that could injure the firm, deprive it of profits or deprive it of advantage of employees skill or ability. Always place clients interest above employers interest.  Members before engaging in independent practice for compensation must notify their employer describing all the aspect of service, the expected duration of the services, the compensation for the services and should not render services until consent has been received from their employer to all of the terms of the arrangement.  This extra work should in no way hamper your primary job. If in doubt, your supervisor takes the call.

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IV (A) – Loyalty (Contd.)  If Member intends to leave the employer he/she must continue to work for the best interest of the employer until the resignation becomes effective. Activities which may lead to violation are: • Misappropriation of trade secrets. • Misuse of confidential information. • Solicitation of employer’s clients prior to cessation of employment. • Self-dealing.

• Misappropriation of clients or client lists.

 Members may violate duty to one’s employer in order to protect clients interest or to protect the integrity of the capital markets.

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Application of Standard IV (A) Loyalty Example 1: Gloria Foster, CFA works with Nerban Securities. She has recently decided to start her own investment management firm. She decides to send mailers to her employer’s clients informing them of her decision. In the body of the mailer she includes information regarding the list of services that she plans to provide. She also informs them that if they decide to invest part of their portfolio with her she will provide them her services at a cheaper cost. Comment on Gloria’s actions.

Comment 1: Gloria has violated the Standard of Practice. She cannot solicit the clients of a firm while she is still employed with the firm. She can make preparations to start her own private practice. But she cannot act in a manner that is detrimental to the interest of the firm. When she advertises her services to the firm’s current clients and promises them cheaper services she is violating the Standards. Example 2: Thomas Anderson is a CFA Level I Candidate and also a member of the CFA Institute he has recently joined VR Capital. He uses public sources to get contacts of clients and prospects of the previous employer and solicits their business for his new employer. Comment 2: This is not a violation of Standard as long as there is no agreement between the member and his previous employer that prohibits solicitation.

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IV (B) - Additional Compensation Arrangements  Members and candidates must not accept gifts, benefits, compensation, or consideration that competes with, or might reasonably be expected to create a conflict of interest with, their employer’s interest unless they obtain written consent from all parties involved.  Compensation includes both direct compensation by the client and indirect compensation or other benefits from third parties.

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Application of Standard IV (B) Additional Compensation Arrangements Example 1: Debby Jones sits on the board of directors of Future Unlimited, Inc. In return for her services on the board, Jones receives membership privileges for her family at all Future Unlimited facilities. Jones purchases Future Unlimited stock for the client accounts for which it is appropriate. She doesn’t disclose the arrangement her employer as there is no monetary compensation involved. Comment: Debby violated the Standard by failing to disclose to her employer the benefits (which may or may not be monetary received in exchange for her services on the board of directors.

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IV (C) - Responsibilities of Supervisors  Members and candidates must make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations, and the code and standards.  Members with supervisory responsibility have an obligation to bring into attention of firm management any inadequacies related to the compliance system and also recommend corrective action. In case the management does not take any corrective measure, the supervisor is no longer responsible for any such violations.  Limit suspected employees activity when there is a breach in the compliance procedure.  Once the compliance procedure has been laid down a supervisor should: • Disseminate the content to right personnel. • Regularly update procedures. • Educate staff continually. • Review employee actions. • Enforce procedure when violate occurs.

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Summary - Duties to Employers A. Loyalty. In matters related to their employment, members and candidates must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer. B. Additional Compensation Arrangements. Members and candidates must not accept gifts, benefits, compensation, or consideration that competes with, or might reasonably be expected to create a conflict of interest with, their employer’s interest unless they obtain written consent from all parties involved. C. Responsibilities of Supervisors. Members and candidates must make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations, and the code and standards.

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Standard V – Investment Analysis, Recommendations and Actions I

II

III

IV

V

VI

VII

Professionalism A B C D Integrity of Capital Markets A B Duties to Clients A B C D E Duties to Employers A B C Investment Analysis, Recommendations and Actions A Diligence and Reasonable Basis B Communication with clients and prospective clients C Record Retention Conflicts of Interest A B C Responsibilities as a CFA Institute Member or CFA candidate A B

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Investment Analysis, Recommendations and Actions  Stage 1 Research

My Research

Company Research

I feel this is Wrong

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I feel this is Right

My supervisor’s judgment is biased

My supervisor has better judgment

I wont support the analysis

I will support the analysis

I will support the analysis

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Investment Analysis, Recommendations and Actions  Stage 2 If the committee asks me to change my finding. Do I agree?

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The committee’s judgment is biased

The committee has better judgment

I wont sign the analysis

I will register it in the minutes of the meeting and sign the analysis

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V (A) - Diligence and Reasonable Basis  Members and candidates must: 1. Exercise diligence, independence, and thoroughness in analysing investments, making investment recommendations, and taking investment actions. 2. Have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action.

 The application of this standard depends on the investment philosophy followed, member’s role in the investment decision making process and support provided by the member’s employer. These factors shall dictate the amount of diligence, thoroughness of research and proper level of investigation required.  Guidance – Using Secondary or Third Party Research: Members must make reasonable efforts to determine that such research is sound. • Examples used to evaluate the research are:  Review the assumptions.  How rigorous was the performed analysis?  Whether the research is timely?  Evaluate the objectivity and independence of the Recommendation.

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Application of Standard V (A) Diligence and Reasonable Basis Example 1: Ryan makes a presentation for an offering his firm is underwriting using only the maximum production levels as his estimate in order to justify the price of share that he has given as a purchase recommendation. Comment 1: The Standard has been violated, as using only the maximum production levels doesn’t provide a reasonable basis for the purchase recommendation. Example 2: A member is an analyst in a small investment firm that bases its security recommendation on the third party research that the firm buys. Comment 2: This is not a violation as long as the research the firm purchase meets the criteria of objectivity and reasonability.

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V (B) - Communication with Clients and Prospective Clients  Members and candidates must: 1. Disclose to clients and prospective clients the basic format and general principles of the investment processes used to analyse investments, select securities, and construct portfolios and must promptly disclose any changes that might materially affect those processes. 2. Use reasonable judgment in identifying which factors are important to their investment analyses, recommendations, or actions and include those factors in communications with clients and prospective clients. 3. Distinguish between fact and opinion in the presentation of investment analysis and recommendations. 4. Disclose to clients and prospective clients significant limitations and risk associated with the investment process.

 Facts are historical figures and Opinions are future projections made with sensitivity analysis.  Developing and maintaining proper communication is important for providing high quality financial services.  This standard requires members to effectively distinguish between opinion and fact. Also members must illustrate to the clients and prospective clients their investment decision making process.  All type of communications are included in the standard(oral, written, research report, background reports etc).

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Application of Standard V (B) Communication with Clients and Prospective Clients Example 1: Richard Max is a mining analyst for East Bank Securities. He has just finished his report on Bay Minerals Corporation. Max completed his calculation based on the core samples from the company’s latest drilling. According to Max’s calculations, the company has in excess of 300,000 ounces of gold on the property and he concludes his research report as follows: “Based on the fact that the company has 300,000 ounces of gold to be mined, I recommend a strong BUY.”

Comment 1: If Mac issues the report as written, he will violate Standard V(B). His calculation of the gold reserves is an opinion and not a fact. Opinion must be distinguished from fact when writing a research report. Example 2: A members firm changes to a new model for equity selection and doesn’t inform the clients about the change. Comment 2: As there is a significant change in the investment process, it should be disclosed to the clients. By not disclosing it to the clients the member and his firm has violated the Standard.

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V (C) – Record Retention  Members and candidates must develop and maintain appropriate records to support their investment analysis, recommendations, actions, and other investment-related communications with clients and prospective clients.  Members must maintain the research reports that supports the analyst conclusions and investment actions. If no other regulatory standards are present that CFA Institute recommends 7 years as Holding Period.  This holding period is for a firm, and not its employees/candidates.  All these reports are property of the firm.

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Application of Standard V (C) Record Retention Example 1: A member mails investment research and promotional material documents to prospects. If the prospects fail to become the clients, all the documents concerning the prospects are deleted within one year from the database of the firm. Comment : The Standard has been violates as the document is investment related, so the information must be retained for at least 7 years for future references.

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Summary of Investment Analysis, Recommendations and Actions A. Diligence and Reasonable Basis. Members and candidates must: 1. Exercise diligence, independence, and thoroughness in analysing investments, making investment recommendations, and taking investment actions. 2. Have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action.

B. Communication with Clients and Prospective Clients. Members and candidates must: 1. Disclose to clients and prospective clients the basic format and general principles of the investment processes used to analyse investments, select securities, and construct portfolios and must promptly disclose any changes that might materially affect those processes. 2. Use reasonable judgment in identifying which factors are important to their investment analyses, recommendations, or actions and include those factors in communications with clients and prospective clients. 3. Distinguish between fact and opinion in the presentation of investment analysis and recommendations. 4. Disclose to clients and prospective clients significant limitations and risk associated with the investment process.

C. Record Retention. Members and candidates must develop and maintain appropriate records to support their investment analysis, recommendations, actions, and other investment-related communications with clients and prospective clients.

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Standard VI – Conflicts of Interest I

II

III

IV

V

VI

VII

Professionalism A B C D Integrity of Capital Markets A B Duties to Clients A B C D E Duties to Employers A B C Investment Analysis, Recommendations and Actions A B C Conflicts of Interest A Disclosure of conflicts B Priority of Transactions C Referral Fees Responsibilities as a CFA Institute Member or CFA candidate A B

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VI (A) - Disclosure of Conflicts  Members and candidates must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients, and employer. Members and candidates must ensure that such disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively.  Members must fully disclose all the potential and actual conflicts of interest to clients and prospective clients to protect investors and employers. These disclosures must be clearly stated.  As standard requires Members to fully disclose all the matters that can reasonably impair member’s objectivity allows the clients and prospects to judge the motives and possible biases.  Disclosure of broker/dealer market making activities, Actual Ownership of stocks and Board services are all included in this standard.  Members while reporting conflicts of interest to the employer should give enough information so that the employer can judge the assess the impact of conflict.  Compensation Arrangement, Bonus, Commissions and incentives should be disclosed.

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Application of Standard VI (A) Disclosure of Conflicts Example 1: Carrie Moss works with a broking firm. She is one of the star traders at the firm and has been instrumental in bringing in a number of clients for the firm. TMR Corp. has recently listed its stock on the stock market and the promoters are eagerly anticipating the increased visibility that a public listing brings to the company. To attract more shareholders the promoters enter into an agreement with Carrie for providing her additional compensation whenever she sells TMR Corp. stocks to her clients. Carrie doesn’t inform her employers or her clients about the deal with the stock promoter. Comment on any violation that has occurred in the above situation. Comment 1: The Standard VI A regarding Disclosure of Conflicts has been violated. She must disclose her additional compensation to her employer and clients whenever she recommends the stock. This is to ensure that the client and employer can determine the extent to which additional compensation might affect member’s objectivity. By disclosing the agreement Carrie ensures that there are no conflict of interest and she has the clients best interest whenever she makes any recommendations.

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Application of Standard VI (A) Disclosure of Conflicts Example 2: Larry Wachowski a CFA Institute member is preparing a research report on TrixAm Inc. He distributes the report to his clients. In the meantime his wife inherits a significant number of shares of the stock from her aunt who has recently expired. Larry had given a strong buy recommendation to his clients. What is Larry’s best course of action? Comment 2: A member should disclose any interest in the stock that they are recommending. Since Larry’s wife owns a significant number of stocks in TrixAm , he has a personal interest in the stock. To avoid any potential conflicts the ideal situation would be that Larry avoid issuing any research reports on the stock. However since he has released the report any subsequent reports should carry a full and fair disclosure indicating his holdings in the company.

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VI (B) - Priority of Transactions  Investment transactions for clients and employers must have priority over investment transactions in which a member or candidate is the beneficial owner.  Client transaction must take precedence over the employer or member’s personal transaction.  Personal transactions are the transactions in which the member has a direct or indirect personal interest. Personal transactions may be undertaken only after when the client and employer has adequate time to act on a recommendation.  Personal transaction should never adversely effect client or employer investments. Clients (and Family ONLY IF they are clients)

The Firm

The priority of a Family Member’s Transaction depends on whether they are clients.

Self (and Family if they are NOT clients)

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Application of Standard VI (B) Priority of Transactions Example 1: A member who is a research analyst doesn’t recommend a stock to his employer or the client and quickly purchases the stock for his personal account. Comment 1: The Standard has been violated. The member is seeking to benefit personally at his employer and clients expense. Also the Standard states the Interest of client and employer comes before the member’s personal interest. Example 2: A member allows an employee who is a CFA candidate to continue his duty without signing the required report of his personal trading activity. The employee has been purchasing securities for his personal account before the purchase recommendation have been released by the firm. Comment 2: The employee has violated the Standard VI (B) by purchasing securities for his personal account before the recommendation has been made public. Also the member has violated the Standard by not fulfilling his role of supervisor and hence violated the Standard IV (C).

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VI (C) - Referral Fees  Members and candidates must disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received from, or paid to, others for the recommendation of products or services.  Members before entering into formal agreement must disclose to the clients or prospects any benefits received or given for recommendation of any service by the member .Also disclose the nature of benefit.

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Summary of Conflicts of Interest A. Disclosure of Conflicts. Members and candidates must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients, and employer. Members and candidates must ensure that such disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively. B. Priority of Transactions. Investment transactions for clients and employers must have priority over investment transactions in which a member or candidate is the beneficial owner. C. Referral Fees. Members and candidates must disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received from, or paid to, others for the recommendation of products or services.

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Standard VII - Responsibilities as a CFA Institute Member or CFA candidate I

II

III

IV

V

VI

VII

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Professionalism A B C D Integrity of Capital Markets A B Duties to Clients A B C D E Duties to Employers A B C Investment Analysis, Recommendations and Actions A B C Conflicts of Interest A B C Responsibilities as a CFA Institute Member or CFA candidate A Conduct as Members and Candidates in the CFA program B Reference to CFA Institute, the CFA designation and the CFA Program

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VII (A) - Conduct as Participants in CFA Institute programs  Members and candidates must not engage in any conduct that compromises the reputation or integrity of CFA Institute or the CFA designation or the integrity, validity, or security of CFA Institute programs.  Conduct covered includes: • Cheating in CFA or any other examination. • Disregarding CFA examination policies.

• Providing confidential program information to the public. • Disregarding the security appointed for the CFA examination. • Improperly using CFA charter for personal or professional gains. • Misrepresenting Information in Professional Conduct Program.

 This standard is a subset of Misconduct and it’s the preferred option over misconduct in CFA exam.  This standard does not stop anyone to express opinions about the CFA institute or CFA program and Members are free to agree or disagree with the CFA institute policies or procedures.

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Application of Standard VII (A) Conduct as Participants in CFA Institute programs Example 1: Alex is writing a level 1 exam in US. After writing his exams he immediately contacts his friend in New Zealand to tell him some questions in the exam. Comment 1: Alex has violated the Standard by giving his friend an unfair advantage and thus compromising the integrity of CFA examination.

Example 2: A candidate keeps on writing on CFA level 3 exam even when the proctor at the Exam has asked to stop writing. Comment 2: By taking extra time the candidate has gained an unfair advantage and thus violated the Standard.

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VII (B) - Reference to CFA Institute, the CFA Designation and the CFA Program  When referring to CFA Institute, CFA Institute membership, the CFA designation, or candidacy in the CFA Program, members and candidates must not misrepresent or exaggerate the meaning or implications of membership in CFA Institute, holding the CFA designation, or candidacy in the CFA program.  Members must not make promotional efforts that promises or guarantees tied to CFA designation.  Members must not : • Over promise the competency of an individual. • Promise future investment result.

 Members to maintain membership should satisfy the following requirements: • Remit Professional Conduct Statement annually.

• Pay annual membership dues.

 Candidates must clearly state that they are candidates in the CFA program and there is no partial designation.  Chartered Financial Analyst or CFA marks must always be used either after a charter holder's name or as adjective and never as nouns.

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Correct and Incorrect Use of the Chartered Financial Analyst And CFA Marks Correct

Incorrect

Principle

He is one of two CFA Charterholders in the company.

He is one of two CFAs in the company.

He earned the right to use the Chartered Financial Analyst Designation.

He is a Chartered Financial Analyst.

Jane Smith, CFA

Jane Smith, C.F.A . John Doe, cfa

No Periods Always Capitalize the letters “CFA”.

John Jones, CFA

John, a CFA type portfolio manager. The Focus is on Chartered Financial Analysis. CFA –Equivalent program. Swiss-CFA

Do not alter the designation to create new words or phrases.

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The CFA and Chartered Financial Analyst designations must always be used as adjectives, never as nouns or common names

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Correct and Incorrect Use of the Chartered Financial Analyst And CFA Marks (Contd.) Correct

Incorrect

Principle

John Jones, Chartered Financial Analyst

Jones Charted Financial Analysts, Inc.

The designation must not be used as part of the name of a firm.

Jane Smith, CFA John Doe, Chartered Financial Analyst

Jane Smith, CFA John Doe, Chartered Financial Analyst

The CFA Designation should not be given more prominence (e.g., larger, bold) than the charterholder’s name.

Level I candidate in the CFA Program

Chartered Financial Analyst(CFA) September 2011

Candidates in the CFA program must not cite the expected date of exam completion and award of charter

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Correct and Incorrect Use of the Chartered Financial Analyst And CFA Marks (Contd.) Correct

Incorrect

Principle

Passed Level I of the CFA examination in 2010

CFA Level I. CFA degree expected in 2011

No Designation exists for someone who has passed Level I, Level II or Level III of the exam. The CFA designation should not be referred to as a degree.

I have passed all three levels of the CFA Program and may be eligible for the CFA charter upon completion of the required work experience.

CFA (Passed Finalist)

A candidate who has passed level III but has not yet received his or her charter cannot use the CFA or Chartered Financial Analyst designation

CFA, 2009, CFA Institute, (optional: Charlottesville, Virginia, USA)

CFA, 2009, CFA Society of the UK

In citing the designation in a resume, a charterholder should use the date that he or she received the designation and should cite CFA Institute as the conferring body.

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Application of Standard VII (B) Reference to CFA Institute, the CFA Designation, and the CFA Program Example 1: A XY Investment firm has published an advertisement that states that all the firms principals are CFA charter holders and have passed the exam in first attempt. The advertisement relates the superior performance of the firm to the above fact. Comment 1: The Standard has been violated. It is permissible to state that their principals are CFA charterholders who have passed the examination in the first attempt but to imply that because of that the firm has achieved superior performance is a violation.

Example 2: A member puts CFA logo on his business card, letterhead and the company letterhead. Comment 2: By putting the logo on company letterhead the member has violated the Standard. He can put the logo on his personal business card and letterhead without violating the Standard.

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Summary - Responsibility as a CFA Institute Member or Candidate A. Conduct as Members and Candidates in the CFA Program: Members and candidates must not engage in any conduct that compromises the reputation or integrity of CFA Institute or the CFA designation or the integrity, validity, or security of the CFA examinations.

B. Reference to CFA Institute, the CFA Designation, and the CFA Program: When referring to CFA Institute, CFA Institute membership, the CFA designation, or candidacy in the CFA Program, members and candidates must not misrepresent or exaggerate the meaning or implications of membership in CFA Institute, holding the CFA designation, or candidacy in the CFA program.

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The Seven Standards for Professional Conduct I

II III

IV

V

VI

VII

Professionalism A Knowledge of the law B Independence and objectivity C Misrepresentation D Misconduct Integrity of Capital Markets A Material non-public information B Market Manipulation Duties to Clients A Loyalty, Prudence and Care B Fair dealing C Suitability D Performance Presentation E Preservation of confidentiality Duties to Employers A Loyalty B Additional Compensation Arrangements C Responsibilities of supervisors Investment Analysis, Recommendations and Actions A Diligence and Reasonable Basis B Communication with clients and prospective clients C Record Retention Conflicts of Interest A Disclosure of conflicts B Priority of Transactions C Referral Fees Responsibilities as a CFA Institute Member or CFA candidate A Conduct as Participants in CFA Institute programs B Reference to CFA Institute, the CFA designation and the CFA Program

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Reading 3 & 4: Global Investment Performance Standard

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The Need for Global Investment Performance Standards (GIPS®)  The investment community had great difficulty making meaningful comparisons on the basis of accurate investment performance data.  Previously, some practices hindered the comparability of performance returns from one firm to another.  Some questioned the overall accuracy and credibility of performance reporting.  Common misleading practices are : a) Representative Accounts: showing a top-performing portfolio as representative of a firm’s result. b) Survivorship bias: excluding “weak performance” accounts that have been terminated. c) Varying Time Periods used in the analysis: showing performance for selected time periods with outstanding returns.

 Comparing firms that were considered to be the epitome of ethical practices was also difficult since there might be completely different methodologies that are used for calculating the results.

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Introduction - GIPS ® To bring standardization in the presentation of performance by various investment firms, different rules are formed to bring consistency in presentation Who can claim compliance with GIPS?  Any investment management firm can chose to comply with GIPS.

 Firms based in any country may present GIPS compliant performance histories.  Complying with GIPS is voluntary, it is not legal.  Only firms who manage funds can claim compliance with GIPS, Plan sponsors and consultants cannot claim GIPS compliance.

 There is no partial GIPS compliance - Either a firm must fulfill all the requirements and claim compliance or a company cannot make any reference to the GIPS standards.  GIPS Benefits 2 Groups: 1. Prospective Clients – report is both complete and fairly presented. 2. Investment Management Firms – Confidence in the integrity of performance.

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GIPS® Objectives 1. Obtain global acceptance of calculation & presentation standards in a fair, comparable format with full disclosure. 2. Ensure that there is an accurate and consistent investment performance data for reporting, record keeping, marketing and presentations. 3. Promote fair, global competition among investment management firms for all markets w/o any barriers to entry. 4. Foster the notion of “self-regulation”.

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Defining Composites  A firm is defined as a separate entity.

 Definition of the firm, for purposes of GIPS compliance, must be the corporation, subsidiary, or division that is held out to clients as a business entity.  A firm is a sum of Composites which is a key component of GIPS.  The composite is an aggregation of discretionary portfolios into a single group that represents a particular investment objective or strategy.

 The determination of whether a portfolio will be included in a particular composite must be done according to a pre-established criteria and not after the performance measurement. • This is to done to ensure that there is no bias in the performance measurement.

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GIPS ® has several key characteristics 1. The entire firm is required to be compliant with the standards.

2. A Composite is defined as a grouping of all actual fee-paying, discretionary portfolios. The grouping should be such that they have a similar strategy/or investment objective. 3. GIPS standards rely on integrity of the input data. All benchmarks and composites should be created on an ex-ante basis and not after the fact.

4. Firms are encouraged to adopt the recommended provisions. 5. If additional information is required then the firm can provide as a supplement. 6. To claim compliance - all guidelines should be adhered to. 7. If local laws conflict with the GIPS standards then the disclosure should be based on the local requirements and full disclosure of conflicts should be provided (Not stricter of the two – local laws always prevail). 8. There are separate provisions for Private Equity and Real estate disclosures.

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Time period applicable in GIPS® 1. In the first year of compliance - Firm must initially present a minimum of five years of compliant performance presentation for the firm  For firms or composites in existence less than five years, compliant performance since inception must be presented.

2. After initial compliant performance presentation, one year of compliant performance must be added each year to required performance history of ten years.

3. Along with #1 above, firms may present periods of noncompliant performance immediately prior to the compliant performance history as long as noncompliant performance is presented for any periods prior January 1, 2000  Firms must specify which performance results are noncompliant & the ways in which such (noncompliant) performance does not comply with GIPS.

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Implementation of GIPS in different countries  Different countries may have their own version of the performance standards that is applicable in respective country.  In case there is no such LOCAL standard, it is recommended to apply GIPS as the LOCAL standard.  Firms that previously presented performance in compliance with a particular Country Version of GIPS (CVG) may claim GIPS compliance for any CVG-compliant results prior to January 1, 2006.

 In any cases where country-specific regulations conflict with GIPS, firms must follow the applicable country-specific regulations but must also disclose the nature of the conflict with GIPS.

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Nine major sections of GIPS® 1. Fundamentals of Compliance: issues involved are: definition of the firm, documentation of firm’s policies, complying with GIPS updates, claiming compliance in appropriate manner, appropriate verification statement. 2. Input Data: It should be consistent in order to establish full, fair & comparable investment performance presentations. 3. Calculating Methodology: There should be uniformity in methods employed for calculating portfolio returns, composite returns, etc. 4. Composite Construction: Creation of meaningful, asset-weighted composite is important to achieve a fair presentation. 5. Disclosures: Firm must disclose information about the presentation & policies adopted. 6. Presentation and Reporting: Investment performance must be presented according to GIPS requirements. 7. Real Estate: Certain provisions apply to all real estate investments (land, building, etc.) 8. Private Equity: Private equity investments must be valued according to the GIPS Private Equity Valuation Principles. 9. Wrap Fee/ Separately Managed Account (SMA) Portfolios: For these portfolios, some of the requirements & recommendations in Sections 0 through 5 are supplemented or replaced by the requirements specified in this section. © EduPristine

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Application of GIPS ® - Fundamentals of Compliance A. Definition of a firm 1. GIPS must be applied on a firm-wide basis. 2. Firm is defined as an investment firm, subsidiary or division which is considered as a distinct business entity. 3. Total firm assets are aggregated at market value for all discretionary and nondiscretionary assets under management – including fee-paying and non-fee-paying. 4. Firms must include performance of assets assigned to sub advisors. 5. Changes in the firm’s organization should not lead to alteration of historical composite.

 Definition of a firm – Recommendations 1. Firms are encouraged to adopt the broadest, most meaningful definition of the firm. 2. Scope should include all geographies.

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Application of GIPS ® - Fundamentals of Compliance (Cont…) B. Document Policies and Procedures 1. Firms must document all their policies and procedures that are used in establishing and maintaining compliance with all the applicable requirements.

C. Claims of Compliance 1. A firm must use the following compliance statement to indicate its compliance with the GIPS standards – "[Insert name of Firm] has prepared and presented this report in compliance with the Global Investment Performance Standards ( GIPS®)“. 2. If a firm does not meet all the requirements, or a statement regarding the compliance of a calculation methodology with GIPS or the performance of a single client as being in compliance is strictly prohibited.

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Application of GIPS ® - Fundamentals of Compliance (Cont…) D. Firm Fundamental Responsibilities 1. Firms are required to provide compliant information to all prospective clients. 2. A composite list and a description should be made available to all prospective clients on request. 3. Firms will provide a compliant presentation for any composite listed on the firm’s list and a composite description to any prospective client that makes the request. 4. A firm jointly being marketed with other firms must clearly define and separate the firm that is in compliance with the one that is not in compliance with the GIPS standards. 5. Firms are encouraged to comply with all updates, reports, guidance statements, interpretations, or clarifications as published by the CFA Institute and the Investment Performance Council.

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Verification for GIPS ® (like certification/ audit) Requirements

 Verification is performed by an independent third party to verify their claims of compliance.  Verification of compliance is voluntary.  Aspects to be verified: 1. Whether the investment firm has complied with all the composite construction requirements of GIPS on a firm-wide basis (construction of composite is correct?). 2. Whether the firm’s processes and procedures are designed to calculate and present performance results in compliance with the GIPS standards (presentation has been as per the Standard?). 3. Verification applies on the entire firm’s performance measurement practices & methods, not a selected composite.

Recommendation  Firms are encouraged to pursue independent verification.  Verified firms should also include the following disclosure language: “[Insert the name of the firm] has been verified for the periods [insert dates] by [name of verifier]. A copy of verification report is available upon request.”

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Case Study  Ted Elliot, CFA is discussing the GIPS standards with Keira Harris a CFA Level 1 candidate and an analyst in his firm. Elliot’s investment management firm is planning to become compliant with the GIPS standards he wants Keira to chalk out a strategy plan that the firm will use to become compliant. Elliot states that a firm which wants to be in compliance with the GIPS standards must comply with all the requirements given in the standards. It should maintain GIPS compliant performance records for at least five years. If information is not available for that period, the records should be compliant for the period for which the fund has been in existence. Keira enquires whether they can state that a particular fund is in compliance with the standard. She also states the following: Statement 1: One of the key requirements of the GIPS standards is the aggregation of portfolios that have been created with similar horizons into composites. Statement 2: Another key requirement of the standard is the use of an independent third-party for verifying the firm’s compliance with the GIPS standards. Elliot states that there are required and some recommended provisions in the GIPS standards and Keria must go back and study it more thoroughly. He also asks her to study the recommendations regarding the firms fundamental responsibilities. He states that the firm cannot differentiate between clients and all clients must receive the same GIPS compliant presentation.

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Case Study - Questions 1. Elliot states that a firm must be compliant with all the requirements of the standards to claim GIPS-compliance. Also he makes a statement regarding the number of years for which the firm should present compliant data. He is most likely Compliance with all Standards

GIPS compliant records for 5-years

A

Correct

Correct

B

Incorrect

Correct

C

Correct

Incorrect

2. When Keira states that whether a fund can claim GIPS compliance for a particular fund, she is most likely A. Correct, since a firm can start by becoming compliant for a single fund B. Incorrect, since the GIPS standards state that the fund should be in compliance with the standards for at least five years before claiming compliance

C. Incorrect, since compliance is firm wide and not for a particular fund.

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Case Study - Questions 3. Regarding Keira’s first statement she is most likely A. Incorrect, since a composite is an aggregation of portfolios belong to the same client B. Incorrect, since a composite is an aggregation of portfolios with similar investment objectives or strategies C. Correct, since a composite is aggregated based on the maturity of a particular portfolio

4. Regarding the second statement made by Keira, she is most likely A. Correct, since an independent verifier provides credence to a firms compliance statement B. Incorrect, since verification by an independent verifier is a recommendation and not a required provision C. Incorrect, since the utility of an independent third-party verifier is always questionable

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Case Study - Questions 5. A firm can provide discretionary services to its fee-based clients. The firm can also provide different GIPS compliant presentations to different clients based on their asset-size. The statement is most likely A. Incorrect, since a firm should always provide the same presentation to all clients irrespective of their assetsize B. Correct, since larger clients should be given better service C. Correct, since it is the firm’s discretion to provide different level of disclosures depending on the clients sophistication

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Case Study - Solution 1. A. A firm must be in compliance with all the provisions of the standards to claim to be in compliance with the GIPS standards. Also a firm should at least provide GIPS compliant data for 5 years, if they are available or from the date of inception. 2. C. There should be firm-wide compliance of the standards for the investment management firm to claim to be GIPS compliant. A firm is strictly prohibited from claiming GIPS compliant for a single fund.

3. B. A composite is an aggregation of portfolios with similar investment objectives or strategies. 4. B. A firm is expected to comply with certain provisions to claim compliance. But verification by an independent third party verifier is not a required provision. 5. A. A firm should not differentiate between clients and should always try to provide full and complete disclosure.

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