Level 1 CFA® Exam:
Code of Ethics & Standards
Before we talk about each Standard separately, we define the Code of Ethics and the Standards of Professional Conduct as such and look at their structure.
Code of Ethics = a set of moral principles to be followed in the financial world, i.e. agreed on and accepted by investment professionals
6 Principles
There are six major principles included in the Code of Ethics that generally correspond to the following moral obligations:
- Act in a morally acceptable manner and to the best of your abilities in any of your professional relationships.
- Always place the good of your profession and your clients first.
- Stay independent and exercise reasonable care in your professional activities.
- Practice in an ethical way that earns you an honest reputation and encourage others to do so.
- Promote the integrity of the market.
- Maintain and improve your competence and encourage others to do so.
These six points are core to the Standards, which cover basic ethical matters in greater detail.
CFA Institute Standards of Professional Conduct = comprehensive description of best practices and moral duties for investment professionals
7 Standards
There are seven Standards of Professional Conduct established by CFA Institute. Each Standard includes some sub-sections that specify acceptable ethical conduct and responsibilities in particular profession-related situations:
Standard I: Professionalism
- (A) Knowledge of the Law
- (B) Independence and Objectivity
- (C) Misrepresentation
- (D) Misconduct
Standard II: Integrity of Capital Markets
- (A) Material Nonpublic Information
- (B) Market Manipulation
Standard III: Duties to Clients
- (A) Loyalty, Prudence, and Care
- (B) Fair Dealing
- (C) Suitability
- (D) Performance Presentation
- (E) Preservation of Confidentiality
Standard IV: Duties to Employers
- (A) Loyalty
- (B) Additional Compensation Arrangements
- (C) Responsibilities of Supervisor
Standard V: Investment Analysis, Recommendations, and Actions
- (A) Diligence and Reasonable Basis
- (B) Communication with Clients and Prospective Clients
- (C) Record Retention
Standard VI: Conflicts of Interest
- (A) Disclosure of Conflicts
- (B) Priority of Transactions
- (C) Referral Fees
Standard VII: 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
The general idea behind the Standards has not changed since their creation in the 1960s. All CFA members, charterholders, and candidates are obliged to obey the provisions of the Code of Ethics and the Standards of Professional Conduct. Any violations may result in appropriate disciplinary sanctions including, but not limited to, the exclusion from the CFA Program or the revocation of the CFA designation.
To find out more about violations, inquiries, and possible kinds of sanctions, listen to our bite-size video:
Trust
In the investment industry, trust is even more important than in other businesses. It’s the foundation without which a strong investment industry cannot exist.
Unethical behavior can damage investor trust, lead to erosion in public confidence in investment professionals, and impair the sustainability of global capital markets.
Culture of Integrity
Individuals should strive for and companies should promote the so-called culture of integrity, which is based on ethical standards of conduct when it comes to working with clients. The best interest of the client should be always given prominence and his or her assets should be managed in the best possible way, even beyond legal regulations (i.e. when the law is not strict enough).
Market Sustainability
Finance is a global industry and the aim of the Code and Standards is to provide a common ethical background for all investment professionals all over the world. The global crisis that the financial world suffered from in the first decade of the 21st century showed that apart from short-term responsibilities also long-term objectives must be defined. The idea of market sustainability takes into account the well-being of the market viewed in the long-run perspective and indicates that all market participants are equally responsible for the global market and should bear it in mind when taking their actions.
The concept of market sustainability has been added to the CFA Curriculum to draw attention to the fact that financial professionals should consider not only the present but also future consequences of their actions in a broader perspective.
Ethics and Legal Regulations
Sometimes ethical behavior and legal behavior do not go hand in hand. Legal means required by law, whereas ethical is morally correct. Sometimes, abiding by law can be morally insufficient or even unacceptable. Moreover, some individuals often try to circumvent the law for personal gains, thus compromising both law and ethics.