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LM1 Code of Ethics and Standards of Professional Conduct 2024 Level III Notes © IFT. All rights reserved 1 LM1 Code of Ethics and Standards of Professional Conduct 1. Introduction .......................................................................................................................................................2 CFA Institute Professional Conduct Program.......................................................................................2 Adoption of the Code and Standards .......................................................................................................3 Acknowledgments...........................................................................................................................................4 2. Ethics and the Investment Industry..........................................................................................................4 Why Ethics Matter...........................................................................................................................................4 Ethics, Society, and the Capital Markets.................................................................................................4 Capital Market Sustainability and the Actions of One.......................................................................5 The Relationship between Ethics and Regulations ............................................................................5 Applying an Ethical Framework ................................................................................................................5 Commitment to Ethics by Firms ................................................................................................................6 Ethical Commitment of CFA Institute......................................................................................................6 3. CFA Institute Code of Ethics and Standards of Professional Conduct .........................................6 Summary ............................................................................................................................................................... 11 This document should be read in conjunction with the corresponding reading in the 2024 Level III CFA® Program curriculum. Some of the graphs, charts, tables, examples, and figures are copyright 2023, CFA Institute. Reproduced and republished with permission from CFA Institute. All rights reserved. Required disclaimer: CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by IFT. CFA Institute, CFA®, and Chartered Financial Analyst® are trademarks owned by CFA Institute. Version 1.0
LM1 Code of Ethics and Standards of Professional Conduct 2024 Level III Notes © IFT. All rights reserved 2 1. Introduction The laws governing the investment profession in every country differ. There are questions/situations such as these that investment professionals deal with on a daily basis: Is it alright to engage in insider trading if there are no strict laws against it in the country you reside/trade, unlike the U.S.? Is it acceptable to buy shares for your own account before you buy for a client? What if a family member is a client in your firm who pays fees just like any other client; should he/she be discriminated against? Several events (WorldCom, Enron) over the last decade that brought down companies, have put the spotlight on the need for ethical behavior in the investment profession. The Code and Standards stipulate rules and guidelines for CFA Institute members and candidates on how to conduct themselves professionally and ethically, with integrity, under all circumstances for the benefit of society. Efficient, well-functioning capital markets help make the financial system more stable. For the capital markets to be efficient, its market participants must be able to trust the market. What happens if they don’t trust or believe, only a certain section of the market participants benefit from trades (let’s say due to insider trading, nonpublic information, or malpractices)? They will lose faith in the market and stay away. This reading is divided into the following sections: • CFA Institute Professional Conduct Program • Code of Ethics • Standards of Professional Conduct CFA Institute Professional Conduct Program • All CFA Institute members and candidates enrolled in the CFA program are required to comply with the Code and Standards. This includes you, assuming you are taking this course because you have signed up for the exam, or because you are a member of the CFA Institute. If it is applicable to you in the reading, it is applicable to any member or candidate. • Professional Conduct Program (PCP), in conjunction with the Disciplinary Review Committee (DRC), is responsible for enforcement of the Code and Standards. • The DRC is a volunteer committee of CFA charter holders who serve on panels to review conduct and partner with professional conduct staff to establish and review professional conduct policies. • The CFA Institute Bylaws and Rules of Procedure for Professional Conduct (Rules of Procedure) form the basic structure for enforcing the Code and Standards. The inquiry can be prompted by several reasons: • Self-disclosure: On the annual Professional Conduct Statement, you disclose if you have been a subject of civil litigation or criminal investigation. • Written complaints: If the PCP staff receives any written complaints.
LM1 Code of Ethics and Standards of Professional Conduct 2024 Level III Notes © IFT. All rights reserved 3 • Evidence of misconduct: Through media or any public source. • Report by a CFA exam proctor: If a candidate violated any rules on exam day and is reported by the proctor. • CFA Institute may conduct analyses of scores and exam materials after the exam, as well as monitor online and social media to detect disclosure of confidential exam information. For instance, if a friend sits for the exam in Australia and discusses specific questions online after the exam while you are in the United States where the exam hasn’t started, it can be considered a violation of the Code and Standards. Investigation: If the professional conduct staff believes a violation of the Code and Standards or testing policies has occurred, the member or candidate has the opportunity to reject or accept any charges and the proposed sanctions. There are two scenarios in case the PCP staff believes a violation has occurred: member does not accept, the member accepts. The member/candidate does not accept: The matter is referred to the DRC, which reviews materials and presentations from professional conduct staff and from the member or candidate. The panel’s task is to determine whether a violation of the Code and Standards or testing policies has occurred and, if so, what sanction should be imposed. Sanctions include: Public censure, suspension of membership and use of the CFA designation, and revocation of the CFA charter. Candidates may be suspended or prohibited from further participation in the CFA program. If the member/candidate accepts the violation, then the sanctions will be imposed. Adoption of the Code and Standards The Code and Standards apply to individual members of CFA Institute and candidates in the CFA Program. CFA Institute encourages firms to adopt the Code and Standards, as part of their code of ethics. Once a firm—ensures its code of ethics meets the principles of the Code and Standards, it should claim compliance by making the following statement: “[Insert name of party] claims compliance with the CFA Institute Code of Ethics and Standards of Professional Conduct. This claim has not been verified by CFA Institute.” When firms comply with the CFA Institute Code of Ethics and Standards of Professional Conduct, CFA Institute welcomes public acknowledgment, when appropriate, and encourages firms to notify them. CFA Institute has also published the Asset Manager Code of Professional Conduct, for asset managers to comply with the codes of ethics for investment advisers. The Code and Standards are for individual investment professionals and the Asset Manager Code is
LM1 Code of Ethics and Standards of Professional Conduct 2024 Level III Notes © IFT. All rights reserved 4 drafted for firms. The Asset Manager Code provides guidelines in six areas: loyalty to clients, the investment process, trading, compliance, performance evaluation, and disclosure. Acknowledgments CFA Institute is a not-for-profit organization that relies on the expertise and intellectual contributions of member volunteers. The CFA Institute Standards of Practice Council (SPC), a group consisting of CFA charterholder volunteers from many different countries to maintain and interpret the Code and Standards. It draws members from different securities organizations. The SPC evaluates the Code and Standards, and the guidance in the Handbook so that they are • representative of high standards of professional conduct, • relevant to the changing nature of the investment profession, • globally applicable, • sufficiently comprehensive, practical, and specific, • enforceable, and • testable for the CFA Program 2. Ethics and the Investment Industry Investors should trust markets to be fair and transparent so that they have the opportunity to be rewarded for the risk they choose to take. Laws, regulations, and enforcement are insufficient alone to guarantee fair and transparent markets. The markets need an ethical foundation for participants’ judgment and behavior. CFA Institute maintains and promotes the Code of Ethics and Standards of Professional Conduct for the ultimate benefit of society. Why Ethics Matter Ethics can be defined as a set of moral principles or rules of conduct that guide our behavior when it affects others. Governments and regulators have in the past combated misconduct through regulatory reform, with some success. Global capital markets are highly regulated to protect investors and other market participants. Compliance with regulation alone is insufficient. Individuals and firms must develop a “culture of integrity” that promotes the ethical principles of stewardship of investor assets and work in the best interests of clients, in addition to strict compliance with the law. A strong ethical culture will encourage investors' trust, and lead to strong global capital markets. Ethics, Society, and the Capital Markets To live in a socially, politically, and financially stable society that fosters individual and public well being the global capital markets should be able to channel the efficient