CFA Tutorials - Level 1 - Reading 01

Reading 01 - Enforcement of standards and code of ethics

CFA Institute professional conduct is governed by CFA bylaws. Disciplinary committee is

responsible for enforcement of CFA code of ethics.
A Disciplinary inquiry may be initiated on members or candidates in these cases: self-disclosure
about civil or criminal litigation, written complaint by others of misconduct, evidence of
misconduct disclosed by public sources or misconduct during CFA examination.
Post the enquiry, the disciplinary officer may decide to not take any action, warn the candidate or
initiate disciplinary process.

Code of Ethics

Members of CFA Institute and Candidates must adhere to these ethics standards:
1. Act with integrity, diligence, competence and respect with all the stake holders in global
capital markets.
2. Place professional integrity and client interest over personal interest.
3. Use care and independent judgment in investment analysis and recommendation.
4. Practice and encourage others to follow ethical standards
5. Follow rules of capital markets
6. Maintain and improve ones professional competence and also encourage others

Reading 02 - Standards of Professional Conduct

Standards of Professional Conduct

1. Professionalism
2. Integrity of Capital Markets
3. Duties to Clients
4. Duties to Employers
5. Investment analysis, Recommendation and Actions
6. Conflicts of Interest
7. Responsibilities as CFA institute member or CFA Candidate

To Remember: A (7) Responsible CFA (1) Professional upholds (2) integrity of markets, is
aware of (3) duties to clients & (4) employers, makes diligent (5) investment analysis and
avoids any (6) conflicts of interest.

I. Professionalism

1. Knowledge of Law
1. Be aware of and Comply with all law & regulations.
2. Follow most stricter law.
3. Never knowingly participate in any violation and dissociate when it comes to
knowledge.
 2. Independence and Objectivity
1. Exercise reasonable care and judgment to maintain independence & objectivity.
2. Never offer or solicit anything which can influence independence & objectivity.
3. Misrepresentation
1. Never knowingly misrepresent anything related to investment analysis,
recommendation or actions.
4. Misconduct
1. Never commit any act which will adversely affect professional reputation,
integrity or competence.

II. Integrity of Capital Markets

1. Material Non Public Information

1. Dont act or cause others to act on material nonpublic information which can
affect an investment.
2. Mosaic Theory: No violation when investment conclusion achieved with public
information combined with non-material non-public information.
2. Market Manipulation
1. Never manipulate prices or volumes to mislead market participants.

III. Duties to Clients

1. Loyalty, Prudence and Care

1. Place clients interest over employers and personal interests.
2. Determine applicable fiduciary duty and comply to it. (E.g. For pension fund,
fiduciary duty is to participants of pension fund and not to the fund manager)
2. Fair Dealing
1. Deal fairly & objectively with all clients when providing professional services.
(It doesnt mean dealing equally. Differentiated services can be provided but all
clients should have an option to subscribe to any services offered.)
3. Suitability
1. Before offering any product or services, find out clients risk & return objectives,
constraints and knowledge of financial markets.
2. Determine suitability of product by considering clients total portfolio and not
as an individual investment.
3. Follow mandates given by written objective & constraints of clients portfolio.
4. Performance Presentation
1. It should be fair, accurate and complete.
5. Prevention of Confidentiality
1. Always keep information of previous, current and prospective clients
confidential. Except when: disclosure is required by law, information is related
to illegal activities or when client gives permission to disclose.
IV. Duties to Employers

1. Loyalty
1. Act for benefit of employer and dont divulge confidential information.
2. Additional Compensation Arrangements
1. Dont accept any gift or compensation from others that may cause conflict of
interest with employer without obtaining written approval from all parties.
3. Responsibilities of Supervisors
1. Detect and prevent any violations of applicable laws and regulations by
subordinates.

V. Investment Analysis, Recommendation and Actions

1. Diligence and Reasonable Basis

1. Exercise Diligence, Independence and Thoroughness in investment analysis,
recommendation and action.
2. Have Reasonable and adequate basis in investment analysis, recommendation
and action.
2. Communication with Clients and Prospective Clients
1. Disclose format, principles and processes followed in investment analysis,
recommendation and action.
2. Disclose any changes which may materially affect the methodologies followed.
(E.g. If the portfolio manager resigns, it should be promptly disclosed to all the
clients.)
3. Distinguish between fact and opinion in investment presentation. (Dont make
opinion appear as fact.)
3. Record Retention
1. Develop & Maintain records to support investment analysis, recommendation &
action and also for the purpose of communication with clients.

VI. Conflicts of Interest

1. Disclosure of Conflicts
1. Full & fair disclosure of any details that may create conflict of interest with
client or employers. Must be disclosed in simple language and should be
effectively communicated to clients and employers.
2. Priority of Transactions
1. Investment transaction of clients and employers should take priority over
personal transactions.
3. Referral Fees
1. Must disclose about any referral fees arrangement with any third parties to
clients and employers.
VII. Responsibilities as a CFA Institute Member or CFA Candidate

1. Conduct as Members and Candidates in the CFA Program

1. Never engage in any activity which will compromise the integrity and
reputation of CFA Institute, CFA designation and CFA examination.
2. Reference to CFA Institute, CFA Designation and the CFA Program
1. Never misrepresent or exaggerate meaning of CFA designation or candidacy of
CFA program. (e.g. Dont mention having cleared all three levels in 1st attempt
implies having superior understanding of markets.)

Reading 03 & 04 - Global Investment Performance Standards (GIPS)

Global Investment Performance Standards (GIPS)

1. Set of ethical principles based on globally accepted standards.

2. Firms can voluntarily follow GIPS
3. It helps firms in avoiding misrepresentation of performance.

GIPS Verification Requirements Firm should be verified by third party, Standard should be
followed at firm wide basis and firm should comply with GIPS prescribed processes and data
formats.

GIPS Characteristics

1. Follow it at firm wide basis and not at individual portfolio level.

2. There is no partial compliance to GIPS standards.
3. All fee paying, discretionary portfolio of firm and those in composites should be
presented for a minimum of 5 years or since inception. After 5 years, firms should add
annual performance till a minimum period of 10 years.

Major Sections of the GIPS Standards

1. Consistent input data for fair and accurate performance computation.

2. Standard calculation methodologies to be used by firms to enable performance
comparison.
3. Meaningful asset weighted composite construction for fair presentation of performance.
4. Disclosures required to make raw data more meaningful.
5. Presentation and reporting should be made as per GIPS standards.
6. Certain real estate provisions need to be followed by all firms.
7. Private equity valuation should be done as per GIPS Private Equity Valuation Principles
(Except for open ended or ever-green private equity firms they should follow regular
GIPS standards.)