The ethics sections are comprised of some readings on rules that an analyst must live by in order to earn the designation of Certified Financial Analyst. The program also wants you to know right off the bat that there are committees in place, namely the Disciplinary Review Committee, directly overseen by the Board of Governors, whose sole purpose is to investigate CFA titleholders who do not abide by the standards.
There are three main bodies of regulation that the CFA itself imposes. There is a six commandment code of ethics which broadly defines the character of a CFA titleholder. Then there is the CFA Standards which goes into great depth on proper conduct as an investment professional in all aspects of the job. Finally, there is a short bit on the Global Investment Performance Standards, which presents the need for an ethical and globally standardized way to report investment performance results.
Code of Ethics
The code of ethics is a broad summation of what the character of a CFA financial analyst should be. Loosely summarized they are:
- Be honest, competent, and ethical in business dealings and relationships
- Place the profession and clients above personal interests
- Produce work that is based on your own professional judgement backed by personal research and due diligence
- Promote CFA ethics among peers and coworkers
- Promote integrity of global capital markets
- Maintain skills and seek constant improvement
I don’t want to go into too much more because basically just basic good character that is taught in grade schools: be honest, do your own work, learn. It is in an investment framework and features some specific finance related goals like promoting a global capital market that exists to benefit society, and to promote the CFA practices itself. Nothing like free marketing.
This is the protein of the ethics section. There are 7 broad standards which have many individual sub-sections. In terms of the test, the best way to answer questions on the standards is to refer back to the code of ethics, and see which answer correctly demonstrates good character. In grey areas, you can usually choose the most conservative answer to the question. The most important themes to understand in the standards can be broken down into these tips:
- Follow the strictest laws applicable whether it is local, national, firm or CFA Code
- Make disclosures beyond the requirements of the law, strive for transparency
- Make extraordinary efforts to treat everyone in a fair, equal and respectful manner
There are cases where the standards seem to be more flexible, usually in an intuitive manner. While trading on insider info is not legal, the standards does allow for analysts to make predictions on based on “nonmaterial nonpublic” info. This is a vague way of saying that you can use opinions that you gather through private research, as long as this information is not a blatant price variable. Overhearing a CFO talk about lower earnings is material and illegal info, but talking to an industry expert who has opinions but isn’t directly related to a firm is non-material, even if it is nonpublic. So there is leeway in areas that are required for job function.
There are a few more common themes that are worth hitting on. Always be conscious of things that could appear as bribes. For conferences, accept lodging and transport in exchange for work done, like leading seminars, but don’t accept more than that. Any payment that could impair independence and neutrality is not allowed by standards. Bribes don’t have to be monetary or gifts, they can also be in the form of favors, such as directing trades to a broker for personal discounts. In terms of extra compensation, the rule is if you are comfortable disclosing it to your company, then you can ask them. If you’re not, then don’t accept.
Avoid exaggeration in the industry. This can be in the form of misrepresenting your returns to up-selling the CFA designation itself. There are some strict guidelines on proper use of the CFA title.
Perform due diligence and have well-documented, unbiased research to back up any investment actions or decisions. For clients, don’t recommend stocks without establishing a proper risk profile, investment objectives and needs. When managing a fund, the beneficiaries of the fund are the employers. Never manipulate markets for personal gain.
Finally, in terms of employers, poaching clients and taking company data is against standards. Anything that has company branding should be treated as employer property, even if they are client lists you made.
This is a short section because the actual GIPS standards are optional. The idea is that the GIPS is a global guideline for standardized investment performance reporting. The guidelines cover input data, calculation methodology, composite construction, proper disclosures and has special sections for sectors like real estate, private equity and SMA portfolios. The ideas all fall in line with the CFA Code of Ethics: honest representations, full disclosures and meaningful consistent outputs. A major point that is stressed is that firm cannot claim partial compliance with the GIPS, it is pass/fail.