Level 1 CFA® Exam Ethics, Standards I (C) & I (D)

Standard I (C) provides lots of useful information and guidelines as far as professional behavior is concerned. The main idea behind the standard is that you mustn’t misrepresent anything that you say or write as a professional.

There is a general rule under the Code and Standards which says that the professional duties of every CFA member or candidate lie particularly with clients and the market. By violating Standard I (C), you harm both your clients and the market.

Harming the Client & the Market

Every misrepresentation that you make is like cheating your clients. If you say something that is not true, it damages your reputation and makes your service less reliable.

Your words and actions may also have a bad and manipulative effect on the market. As a result, you destroy the trust of your clients and the integrity of the market as such.

This is why Standard I (C) makes it clear that CFA members and candidates must not knowingly make any false statements or omit any important information. It refers to any means or channels of communication, be it a written report, an oral presentation, your website, a post on a forum, or a teleconference. Importantly, even an omission of information may lead to the breach of the standard!

Misrepresentation in the Internet

CFA Curriculum pays a lot of attention to websites run by financial professionals.

If you have a website that is related to any financial issues:

• make sure it contains TRUE information,
• make sure it contains current information,
• make sure your qualifications, including education and work experience, are properly presented on your website,
• if you cite words or ideas of other people on your website, appropriately acknowledge their authorship.

Plagiarism

The problem of plagiarism is quite extensively covered in Standard I (C).

Most probably everybody knows that copying is plagiarism and that if they use a quotation, say from somebody’s research report, they have to mark it for example by using inverted commas and give the name of the author to avoid plagiarism.

How about tables, graphs, and things like that?

(...)

Informing the Client

We have already said that it is important that you present your credentials and abilities in a truthful way. It is important not only when you have your own website, but also in your work – in your relationships with clients.

You should always make sure that your clients are duly informed about your abilities, the services you provide, and the services that your company offers.

The communication with clients should always be clear and clients should know everything they need to know about your professional profile and your firm.

Third-party Information

Standard I (C) also emphasizes the importance of preserving due care while using third-party information or services of outside managers.

Every piece of information should be appropriately used and presented. If the materials you use include any misrepresentation you will bear the responsibility. As far as services of outside managers are concerned, it is a good idea to disclose this fact to the client. Needless to say, you must not attribute the findings of such a manager to yourself.

In your relationship with the client you are responsible for conveying information in the right way. This is why it is so important that you know what you can and what you cannot say to your client.

NOTE: Be particularly careful when talking about possible returns on investment. You must not guarantee any return on volatile instruments. So, you must not say things like: “If you invest in this stock I guarantee you will earn 6% in a month”, even if you know it sounds good and will get you a client. Only in some special situations can you offer guarantees, e.g. when an investment is insured by the government, as is the case with U.S. certificates of deposits.

Standard I (D) underlines that it is crucial to avoid any kind of professional misconduct. It particularly touches upon professional reputation and competence and the importance to keep it untarnished.

In consequence, it bans any intentional misconduct, such as fraud, deceit, lies, stealing, and so on.

To make sure that investment professionals pay proper attention to their professional conduct, firms should enforce their ethical codes and compliance procedures. Employees should know what happens if the rules set in the company are violated.

It is important that those employed in the financial industry be honest individuals who care about the well-being of others. This is a natural way for the financial industry to become a place of competence and integrity.

(...)

CFA Exam: Misrepresentation

To avoid misrepresentation:

1. USE COMPARABLE BENCHMARKS when presenting your performance if such benchmarks exist,
2. DON’T OVEREMPHASIZE when presenting your performance (e.g., by using a wrong benchmark) or your company’s results (e.g., by presenting only favorable past performance),
3. GIVE ACCURATE SECURITY PRICING INFO when advising the client and particularly when changing pricing providers, which should not be dictated only by the fact that the new provider reports a higher current value of a security (changing the pricing provider may mislead investors about the real value of the security),
4. COMMUNICATE VIA SOCIAL MEDIA as responsibly as you communicate through any other channels (don’t allow the anonymity to make you misrepresent any of the information provided to the client, including your qualifications, skills, etc.),
5. GIVE REFERENCE when using someone’s work and ideas (keep copies of the materials you use, attribute quotations, paraphrases, data, summaries, etc.),
6. VERIFY OUTSIDE INFO when you use it for your work (e.g., credit ratings, marketing materials, research, etc.),
7. DISCLOSE ISSUER-PAID RESEARCH because otherwise investors may be misled into believing that the research is from an independent source when, in reality, it has been paid for by the subject company (issuer),
8. UPDATE INFO when you run a website on finance,
9. DON’T PRESENT OUT-OF-DATE INFO when providing a service to the client,
10. DON’T OMIT INFO when you, e.g., measure and present performance, use models to provide services, or define composites,
11. DON’T MISREPRESENT COMPOSITE CONSTRUCTION because moving accounts into or out of a composite to influence the overall performance results materially misrepresents the reported values over time,
12. MIND UNINTENTIONAL MISREPRESENTATION that comes as a result of your insufficient knowledge,
13. CORRECT ERRORS when you see them.

CFA Exam: Misconduct

To avoid misconduct:

ALWAYS AVOID situations that could compromise your integrity, professionalism, and competence.

CHECK the list of potential violations as created by the employer. Such a list should be constructed to define the boundaries and specify possible disciplinary sanctions.

Lack of knowledge is not a good excuse for professional misconduct. It does not absolve you – you should seek and acquire knowledge about your professional responsibilities.

Misconduct is any intentional behavior that can be described as unethical (and often also illegal). It includes dishonesty, deceit, fraudulent activities, etc., BUT ALSO:

• creating a negative work environment, e.g., bullying (nonsexual harassment*),
• sexual harassment*,
• excessive drinking at work.

*Anyone can be the target for harassment, regardless of their sex.