Reading 1 & 2 LOS's

Question 1

LOS 1a: Describe the structure of the CFA Institute Professional Conduct Program and the process for the enforcement of the Code and Standards

Answer 1

All CFA Institute members and candidates enrolled in the CFA Program are required to comply with the Code and Standards. The Professional Conduct Program (PCP) and the Disciplinary Review Committee (DRC), are responsible for enforcement of these Code and Standards. The CFA institute Bylaws and Rules of Procedure for Professional Conduct form the basic structure for enforcing the Code and Standards

Professional Conduct inquiries come from a number of sources:

• members and candidates must self-disclose on the annual Professional Conduct statement all matters that questions their professional conduct
• Written complaints received by Professional Conduct staff can bring about an investigation
• CFA institute staff may become aware of questionable conduct by a member or candidate through the media or other public source
• Candidate conduct is moinitored by proctors, who complete reports on candidates suspected to have violated testing rules on exam day

When an inquiry is initiated, the Professional Conduct staff conducts an investigation that may include:

• Requesting a written explanation from the member or candidate
• Interviewing the member or candidate, complaining parties, and third parties
• Collecting documents and records relevant to the investigation

Upon reviewing the material obtained during the investigation, The professional Conduct staff may:

• Take no disciplinary action
• Issue a cautionary letter
• Continue proceedings to discipline the member or candidate

If the Professional Conduct staff believes there was a violation of the Code and Standards, the accused can either accept or challenge the charges in front of the DRC. If found guilty sanctions imposed by the CFA institute can include public censure, suspension of membership and use of the CFA designation, and revocation of the CFA charter.

Adoption of the Code and Standards

Firms may want to adopt a similar code to that of the CFA, though the CFA institute does not encourage this. Once the CFA reviews its codes and determines them to be similar, they still do not let the company say specifically they are CFA certified.

The CFA institute has made the Asset Manager Code of Professional Conduct, which is drafted specifically for firms.

Question 2

LOS 1b: State the six components of the Code of Ethics and the seven Standards of Professional Conduct

Answer 2

The Code of Ethics

Member of CDA Institute and candidates for the CFA designation must:

• Act with integrity, competence, diligence, and respect in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets
• Place the inegrity of the investment profession and the inerests of clients above their own personal interests
• Use reasonable care and exercise indepedent professional judgement when conducting investment analysis, making investment reccommendations, taking investment actions, and engaging in other professional activities
• Practice and encourage others to practice in professional and ethical manner that will reflect credit on themselves and the profession
• Promote the integrity and viability of the global capital markets for the ultimate benefit of society
• Maintain and improve their professional cometence and strive to maintain and improve the competence of other investment professionals

Standards of Professional Conduct

• Professionalism
  
  • Knowledge of the law
  • Independence and Objectivity
  • Misrepresentation
  • Misconduct
• Integrity of Capital Markets
  
  • Material Nonpublic Information
  • Market Manipulation
• Duties to Clients
  
  • Loyalty, Prudence, and Care
  • Fair Dealing
  • Suitability
  • Performance Presentation
  • Preservation of Confidentiality
• Duties to Employers
  
  • Loyalty
  • Additional Compensation Arrangements
  • Responsibilities of Supervisors
• Investment Analysis, recommendations, and Actions
  
  • Diligence and Reasonable Basis
  • Communication with Clients and Prospective Clients
  • Record Retention
• Conflicts of Interest
  
  • Disclosure of Conflicts
  • Priority of Transactions
  • Referral Fees
• Responsibilities as a CFA Member or CFA Candidate
  
  • Conduct as members and candidates in the CFA program
  • Reference to CFA Institute, the CFA Designation, and the CFA program

Question 3

LOS 2a: Standard 1: Professionalism

A) Knowlege of the Law

Answer 3

1a) Knowledge of the Law

The Standard- Members and candidates must understand and comply with all applicable laws, rules, and regulations of any government, regulatory organization, licensing agency, or professional association governing their professional activities. In event of conflict, members and candidates must comply with the more strict law, rule , or regulation.

Guidance

• Members and candidates must understand the applicable laws and regulations of the countries and jurisdictions where they engage in professional activities
• On the basis of their reasonable and good faith understanding, members and candidates must comply with the laws and regulations that directly govern their professional activities and resulting outcomes that protect the interests of the clients
• When questions arise, members and candidates should know their firm’s policies and procedures for accessing compliance guidance.

Relationship between the Code and Standards and Applicable Law

• When applicable law and the Code and Standrads require different conduct, members and candidates must follow the stricter of the applicable law or the Code and Standards

Participation in or Association with Violations by Others

• If a member or candidate has reasonable grounds to believe that imminent or ongoing client or employer activities are illegal or unethical, the member or candidate must dissociate or seperate from the activity, even if it means leaving their employment
• Before having to leave employment a person can dissociate by attempting to stop the behavior by bringing it to the attention of the employer. If the activity continues, then it is the CFA members responsibility to dissociate. Inaction will still lead the member to be in violation

Investment Products and Applicable Laws

• members involved in creating or maintaining investment services should be mindful of where these products or packages will be sold as well as their places of origins and make sure to comply to applicable laws and regulations
• They should also make sure the associated firms that are distributing these services should be in accordance with the law
• They should undertake the necessary due diligence when transacting cross-border business to understand the multiple applicable laws and regulations

Recommended Procedures for Compliance

Members and Candidates

• Stay informed - make sure you are regularly informed about changes in laws, rules, and regulations
• Review procedures - review their compliance procedures on a regular basis to ensure that the procedures reflect current law and provide adequate guidance
• Maintain current files - should maintain readily accessible current reference copies of applicable statutes, rules, regulations, and important cases

Distribution Area Laws

members should make reasonable efforts to understand the applicable laws for the countries and regions where their investment products are developed and are most likely to be distributed to clients

Legal Counsel

• When in doubt about the appropriate action to undertake, it is recommended that a member seek the advice of compliance personal or legal counsel
• If a potential violation is being committed by a fellow employee, it may also be prudent for the member to seek the advice of the firm’s compliance department

Dissociation

When dissociating from an activity that violates the Code and Standards, members should document the violation and urge their firms to attempt to persuade the perpetrator to cease such conduct

Question 4

LOS 2a: Standard 1: Professionalism

B) Independence and Objectivity

Answer 4

The Standard

Members must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities. Members must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another’s independence and objectivity

Guidance

• Members should avoid situations that could cause or perceived to cause a loss of independence or objectivity in recommending investments
• Modest gifts and entertainment are acceptable, but best practice dictates that memebers reject any offers that threaten independence or objectivity
• When possible, prior to accepting bonuses or gifts, members should disclose to their employers such benefits offered
• Members are personally responsible for maintaining independence and objectivity when preparing research reports, making investment recommendations, and taking investment action on behalf of clients

Investment Banking Relationships

• Some sell-side firms may exert pressure on their analysts to issue favorable research reports on current or prospective investment banking clients; members must not succumb to such pressures
• Allowing analysts to work with investment bankers is appropriate only when the conflicts are adequately and effectively managed and disclosed
• Any “firewalls” between the investment banking and research functions must be managed to minimize conflicts of interest ( put them in separate rooms where they do not interact)

Public Companies

• Analysts may be pressured to issue favorable reports and recommendations by the companies they follow.
• Due diligence in financial research and analysis involves gathering information from a wide variety of sources , including public disclosure documents and also company management personnel, suppliers, customers, competitors, and other relevant sources

Buy-Side Clients

• Portfolio managers may have significant positions in the security of a company under review. Consequently, some portfolio managers implicitly or explicitly support sell-side ratings inflation
• It is improper for portfolio managers to threaten or engage in retaliatory practices, such as reporting sell-side analysts to the covered company in order to instigate negative corporate reactions

Fund Manager and Custodial Relationships

members responsible for hiring and retaining outside managers and third-party custodians should not accpet gifts, entertainment, or travel funding

Credit Rating Agency Opinions

• Members employed at rating agencies should ensure that procedures and processes at the agencies prevent undue influences from a sponsoring company during the analysis
• When using information provided by credit rating agencies, members should be mindful of the potential conflicts of interest

Issue-Paid Research

• Some companies hire analysts to produce research reports in case of lack of coverage from sell-side research, or to increase the company’s visability in financial markets
• Analysts must engage in thorough, independent, and unbiased analysis and must fully disclose potential conflicts, including the nature of their compensation. Analysts must try to limit the type of compensation they accept for conducting research (such as stock options or other instruments that benefit from a positive report)
• Best practice if for analysts to accept only a flat fee for their work prior to writing the report, without regard to their conclusions of the report’s recommendations

Travel Funding

• To avoid the appearance of compromising their independence and objectivity, best practice dictates that analysts always use commercial transportation at their expense or their firms expense rather than accept paid travel arrangements from an outside company

Performance Measurement and Attribution

Memebers working within a firm’s investment performance measurement department may also be presented with situations that challenge their independence. Members must not allow internal or external influences to affect their independence and objectivity as they faithfully complete their performance calculation and analysis-related responsibilities

Influence During the Manager Selection/ Procurement Process

• When serving in a hiring capacity, members should not solicit gifts, contributions, or other compensation that may affect their independence and objectivity.
• When working to earn a new investment allocation, members and candidates should not offer gifts, contributions, or other compensation to influence the decision of the hiring representative

Recommended Procedures for Compliance

• Protect the integrity of opinions - establish policies that every report reflects the unbiased opinion of the analysts
• Create a restricted list - if a firm is unwilling to permit dissemination of adverse opinions, it should be put on a restricted list so that firms disseminates only factual information about the company
• Restrict Special cost arrangements - members should pay for transportation and hotel stays
• Limit Gifts - members must limit the acceptance of gifts
• restrict investments - members should encourage their investment firms to develop formal policies related to employee purchases of equity or equity-related IPOs
• Review Procedures- members should encourage their firms to implement effective supervisory and review procedures to ensure that analysts and portfolio managers comply with policies relating to their personal investment activities
• Independence policy- members and firms should establish a formal written policy on the independence and objectivity of research and implement reporting structures and review procedures to ensure that reseach analysts do not reprot to and are not supervised by any department of the firm that could compromise the independence of the analyst
  *

Question 5

LOS 2a: Standard 1: Professionalism

C) Misrepresentation

Answer 5

The Standard

Members must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities

Guidance

• A misrepresentation is any untrue statement or omission of a fact or any statement that is otherwise false or misleading
• A member must not knowingly omit or misrepresent information or give a false impression of a firm
• Members who use webpages should regularly monitor materials posted on these sites to ensure that they contain current information
• Members should not guarantee clients any specific return on volatile investments

Impact on Investment Practice

• members must not misrepresent any aspect of their practice, including their qualifications or credentials, the qualifications or services provided by their firm, their performance record and the record of their firm, and the characteristics of an investment
• Members should exercise care and diligence when incorporating third-party information
• Members must disclose their intended use of external managers and must not represent those managers’ investment practices as their own

Performance Reporting

• members should not misrepresent the success of their performance record by presenting benchmarks that are not comparable to their strategies
• Members should discuss with clients on a continuous basis the appropriate benchmark to be used for performance evaluations and related fee calculations

Social Media

• When communicating through social media, members should provide only information they would be allowed to distribute through any other public method
• The perceived anonymity granted through these platforms may entice individuals to misrepresent their qualifications or abilities

Omissions

• Members should not knowingly omit inputs used in any models and processes they use to scan for new investment opportunities, to develop investment vehicles, and to produce investment recommendations and ratings as resulting outcomes may provide misleading information
• Members should encourage their firms to develop strict policies for composite development to prevent cherry picking (only picking best accounts to represent performance)

Plagiarism

This includes:

• Taking a research report or study performed by another person and changing the name to use it as your own
• Using excerpts from articles or reports without acknowledgement
• Presenting statistical estimates of forecasts prepared by others
• Using charts and graphs without stating the sources

In the case of distributiong third-party, outsources research, members can use and distribute these reports as long as they do not represent themselves as the author of the report

Recommended Procedures for Compliance

• _Factual Presentations -_firms shoud provide guidance to employees who make written or oral presentations
• Qualification summary- member should prepare a summary of their own qualifications and experiences, as well as a list of the services they are capable of performing
• Verify outside information- when providing information to clients from third parties, members and candidates should ensure the accuracy of the marketing and distribution materials that pertain to the third party’s capabilities, services, and products
• Maintain webpages- if they publish a webpage, members should regularly monitor materials posted to the site to ensure the site maintains current information
• Plagiarism policy
  
  • Maintain copies - keep copies of all research reports, articles containing research ideas, material with new statistical methodology, and other materials that were used
  • Attribute quotations to the proper source
  • Attribute summaries to the proper source

Question 6

LOS 2a: Standard 1: Professionalism

D) Misconduct

Answer 6

The Standard

Members must not engage in any professional conduct involving dishonesty, fraud, or deceit, or commit any act that reflects adversely on their professional reputation, integrity, or competence

Guidance

• This addresses all conduct that reflects poorly on the professional integrity, good reputation, or competence of members.
• Conduct that damages trustworthiness or competence may include behavior that, although not illegal, nevetheless negatively affects a member’s ability to perform their responsibilities. (ex. Abusing alcohol during work or personal bankruptcy that involves fraudulent conduct)
• In some cases, the absences of appropriate conduct or the lack of sufficient effort may be a violation.

Recommended Procedures for Compliance

• Code of Ethics - develop or adopt a code of ethics to which every employee must subscribe, and make clear that any personal behavior that reflects poorly on the individual involved will not be tolerated
• List of violations disseminate to all employees a list of potential violations and associated disciplinary sanctions
• Employee references check references of potential employees to ensure that they are of good character and not ineligible to work in the investment industry because of past infractions of the law

Question 7

LOS 2b: Standard 2- Integrity of Capital Markets

A) Material Nonpublic Information

Answer 7

The standard

Members who possess material nonpublic information that could affect the value of an investment must not act or cause others to act on the information

Guidance

This is related to information that is material and is nonpublic. Such information must not be used for direct buying and selling of individual securities or bonds, nor to influence investment actions related to derivatives, mutual funds, or other alternative investments

Material Information

Information is “material” if its disclosure would likely have an impact on the price of a security, or if reasonable investors would want to know the information before making an investment decision. Material information may include:

• Earnings
• Mergers, acquisitions, trade offers, or joint ventures
• Changes in assets
• Innovative products
• New licenses or patents
• Changes in management
• Bankruptices
• Significant legal disputes
• Orders for large trades before they are executed

nonpublic information

• Information is nonpublic until it has been disseminated to the marketplace in general
• Members must be particularly aware of information that is selectively disclosed by corporations to a small group of investors, analysts, or other market participants
• Analysts should be alert to the possibility that they are selectivly receiving material nonpublic info when a company provides them with guidance or interpretation of public information
• A member may use insider information when making a report for the source company

Mosaic Theory

• A financial analyst may use significant conclusions derives from the analysis of public information and nonmaterial nonpublic information as the basis for investment recommendations and decisions. Unde the “mosaic theory”, financial analysts are free to act on this mosaic of information without risking violation
• Investment professionals should not that although they can use this info to paint a picture, they should save their research that lead to the picture

Social Media

• members participating in online discussions should verify that material information obtained from these sources can also be accessed from a source available to the public
• Members may use social media platforms to communicate with clients or investors without conflicting this standrad

Using Industry Experts

• members may provide compensation to industry experts for their insights without violating this standard
• However, members must make sure the info provided to them is not nonpublic

Investment Research Reports

It might often be the case that reports prepared by well-known analysts may have an effect on the market and thus may be considered material information. In this case such a report might have to be made public before it is distributed to clients.

Recommended Procedures for Compliance

• _Achieve public dissemination -_If a member determines that some nonpublic information is material, they should encourage the issue to make the info public.
• Adopt Compliance procedures - Memeber should encourage firms to adopt compliance procedures to prevent the misuse of material nonpublic info.
• _Adopt disclosure procedures -_this is done to ensure info is disseminated in the marketplace in an equitable manner
• Issue press releases - done to decrease the chance that further info will be disclosed
• Firewall elements - an information barrier is the most widely used approach to prevent communication of material nonpublic information
• Appropriate interdepartmental communication
• Physical separation of departments- separate departments and files to prevent communication of sensitive info
• Prevention of personnel overlap- there should be no overlap of personnel between the investment banking and corporate finance ares of a brokerage firm, or the research and sales departments of investment banks
• A reporting system the least a firm should do to protect itself from liability is have an information barrier in place. It should authorize people to review and approve communications between departments
• Personal trading limitations Firms should also consider restrictions or prohibitions on personal trading by employee and should carefully monitor both proprietary trading and personal trading by employees. They should make employees make reports of their own personal transactions
• Record Maintenance- firms should maintain written records of communications among various departments
• Propreitary trading procedures - Procedures concerning the restriction or review of a firm’s proprietary trading while it possesses material nonpublic information will necessarily depend on the types of proprietary trading in which a firm may engage
• Communication to all employees- Written compliance policies and guidelines should be circulated to all employees of a firm
  *

Question 8

LOS 2b: Integrity of Capital Markets

B) Market Manipulation

Answer 8

The Standard

Members must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants

Guidance

• Members must uphold market intergrity by prohibiting market manipulation. Market manipulation includes practices that distort security prices or trading volume with the intent to deceive people or entities that rely on information in the market
• Market manipulation includes 1) the dissemination of false of misleading information and 2) transactions that deceive or would be likely to mislead market participants by distorting the price-setting mechanism of financial instruments

Information-Based Manipulation

• This includes but is not limited to, spreading false rumores to induce trading by others (ex. members can’t inflate a price with positive reports to only dump the investment when the price rises)

Transaction-Based Manipulation

• This involves instances where a member knew or should have known that their actions could affect the pricing of a security. This type of manipulation includes but is not limited to the following:
  
  • Transactions that artificially affect prices or volume to give the impression of activitiy or price movement in a financial instrument, which represent a diversion from the expectations of a fair and efficient market
  • Securing a controlling, dominant position in a financial instrument to exploit and manipulate the price of a related derivative or the underlying asset

Question 9

LOS 2c: Standard 3- Duties to Clients

A) Loyalty, Prudence, and Care

Answer 9

The standard

members have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment. Members must act for the benefit of their clients and place their clients’ interest before their employer’s or their own interests

Guidance

• This standard clarifies that clients interest are paramount, investment actions must be carried out for the sole benefit of the client and in a manner the member believes, given the known facts and circumstances, to be in the best interest of the client
• Prudence requires caution and discretion. It requires that they act with care, skill, and diligence that a reasonable person acting in a like capacity and familiar with such matters would use
• This standard is not a substitute for a member’s regulatory obligations.
• Members must also be aware of whether they have “custody” or effective control of client assets.

Understanding the application of Loyalty, Prudence, and Care

• This standard establishes a minimum benchmark for the duties of loyalty, prudence, and care that are required or all members regardless of whether a legal fiduciary duty applies.
• There is a large variety of professional relationships that members have with their clients and this standard requires them to fulfill the obligations to the best of their abilities

Identifying the Actual Investment Client

• The first step for members in fulfilling their duty of loyalty to clients is to determine the identity of the “client” to whom the duty of loyalty is owed.
• Members managing a fund to an index or an expected mandate owe the duty of loyalty to invest in a manner consistent with the stated mandate

Developing the Client’s Portfolio

• Professional investment managers should ensure that the client’s objectives and expectations for the performance of the account are realistic and suitable to the client’s circumstances and that the risks involved are appropriate
• When members cannot avoid potential conflicts between their firm and clients’ interest, they must provide clear and factual disclosures of the circumstances to clients
• Members must follow any guidelines set by their clients for the management of their assets
• Investment decisions must be judged in the context of the total portfolio rather than by individual investment within the portfolio

Soft Commission Policies

• Conflicts may arise when an investment manager uses client brokerage to purchase research services, a practice commonly called “soft dollars or commision”. A member who pays a higher brokerage commission than they would normally pay to allow for the purchase of goods or services, without corresponding benefit to the client, violates the duty of loyalty
• From time to time, a client will direct a manager to use the client’s brokerage to purchase goods or services for the client, a practice that is commonly called “directed brokerage”.Becaue brokerage commission is an asset of the client and is used to benefit the client, not the manager, such a practice does not violate any duty of loyalty.

Proxy Voting Policies

• Part of a member’s duty of loyalty includes voting proxies in an informed and responsible manner
• An investment manager who fails to vote, casts a vote without considering the impact of the question, or votes blindly with management may violate this standard
• A cost-benefit analysis may show that voting all proxies may not benefit the client, so voting proxies may not be necessary in all instances

Recommended Procedures for Compliance

Regular Account Information

Members with control of client assets should:

• Submit to each client, at least quarterly, an itemized statement showing the funds and securities in the custody or possession of the member plus all debits, credits, and transactions occurred during the period
• Diclose to the clien where the assets are to be maintained
• Separate the client’s assets from any other party’s assets

Client Approval

• If a member is uncertain about the apporpriate course of action with respect to a client, the member should consider what they would expect if they were the client
• If in doubt, a member should disclose the questionable matter in writing to the client and obtain client approval

Firm Policies

Members should encourage their firms to address the following topics:

• Follow all applicable rules and laws
• Establish the investment objectives of the client
• Consider all information when taking actions
• Diversify
• Carry out regular reviews
• Deal fairly to all clients with respect to investment actions
• Disclose conflicts of interest
• Disclose compensation arrangements
• Vote proxies
• Maintain confidentiality
• Seek best execution
• Place client interests first

Question 10

LOS 2c: Standard 3- Duties to Clients

B) Fair Dealing

Answer 10

The Standard

Members must deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities

Guidance

• This standard requires members to treat all clients fairly when disseminating investment recommendations or making material changes to prior investment recommendations
• The term “fairly” implies that the member must take care not to discriminate against any clients when disseminating investment recommendations or taking investment action. It does not say “equally” because each client has unique needs, making all investment opportunities not always suitable
• Members may provide personal, specialized, or in-depth service to clients who are willing to pay for premium services through higher management fees or higher levels of brokerage

Investment Recommendations

• Each member is obligated to ensure that information is disseminated in such a manner that all clients have a fair opportunity to act on every recommendation
• This duty becomes more important when a member revises a recommendation made earlier. It is important to let all clients know about the revision, especially the ones who are affected by the change in recommendation due to previous actions on the early recommendation
• Clients who are unaware of changes in recommendations and try to place orders that go against the new recommendation, should be advised of the change before the order is processed

Investment Action

• members must treat all clients fairly in light of their investment objectives and circumstances.
• Members must make every effort to treat all individual and institutional clients in a fair and impartial manner
• Members should disclose to clients and prospective clients the documented allocation procedures they or their firms have in place and how the procedures would affect the client or the prospect.
• Treating clients fairly also means that members should not take advantage of their positions in the industry to the detriment of clients

Recommended Procedures for Compliace

Develop Firm Policies

• A member should recommend appropriate procedures to management if none are in place
• A member should make management aware of possible violations of fair-dealing practices within the firm when they come to the attention of the member

A common practice to assure fair dealing is to communicate recommendations simultaneously within the firm and to customers. Members should consider the following points when establishing fair-dealing procedures:

• Limit the number of people involved
• Shorten the time frame between decision and dissemination
• Publish guideline for pre-dissemination behavior
• simultaneous dissemination
• Maintain a list of clients and their holdings
• Develop and document trade allocation procedures

With these principles in mind, members should develop written allocation procedures with particular attention to procedures for block trades and new issues. Procedures to consider are as follows:

• Requiring orders and modifications or cancellations of orders to be documents and time stamped
• Processing and executing orders on a first-in, first-out basis with consideration of bundling oders for efficiency as appropriate for the asset class or the security
• Developing a policy to address such issues as calculating execution prices and partial fills when trades are grouped, or in a block, for efficiency
• Giving all client accounts participating in a block trade the same execution price and charging the same commission
• When allocation trades for new issues, obtaining advance indications of interest, allocation securities by client, and providing a method for calculating allocations

Disclos Trade Allocation Procedures

Members should disclose to clients and prospective clients how they select accounts to participate in an order and how they determine the amount of securities each account will buy or sell

Establish Systematic Account Review

Member sepervisors should review each account on a regular basis to ensure that no client or customer is being given preferential treatment and that the investment actions take for each account are suitable for each account’s objectives

Disclose Levels of Service

Members should disclose to all clients whether the organization offers different levels of service to clients for the same fee or different fees

Question 11

LOS 2c: Standard 3: Duties to Clients

C) Suitability

Answer 11

The Standard

1) When members are in an advisory relationship with a client they must:

• Make a reasonable inquiry into a client’s or prospective client’s investment experience, risk and return objectives, and financial constraints prior to making any investment reccomendations or taking investment actions and must reassess and update their information regularly
• Determine that an investment is suitable to the client’s financial situation and consistent with their objectives
• Judge the suitability of investments in the context of the client’s total portfolio

2) When members are responsible for managing a portfolio to a specific mandate, strategy, or style, they must make only invesment recommendations or take only investment actions that are consistent with the stated objectives and constraints of the portfolio

Guidance

• This standard requires members who are in an investment advisory relationship with clients consider carefully the needs, circumstances, and objectives of the clients when determing the appropriateness and suitability of a given investment
• In judging the suitability of a potential investment, the member should review many aspects of the client’s knowledge, experience related to investing, and financial situation.

Developing An investment Policy

• The client’s financial circumstances, personal data, attitudes towards risks, and objectives in investing should all be written in an investment policy statement (IPS)
• The IPS should also identify and describe the roles and responsibilities of the parties to the advisory relationship and investment process, as well as schedules for review and evaluation of the IPS

Understanding the Client’s Risk Profile

• The risk of many investment strategies can and should be analyzed and quantifies in advance
• Members should pay careful attention to the leverage inherent in many synthetic investment vehicles when considering them for use

Updating an IPS

• This should be done at least annually and also prior to material changes to any specific investment recommendations or decisions on behalf of the client
• If clients withold information about their financial portfolios, the suitability analysis conducted by members cannot be expected to be complete; it must be based on the information provided

The Need for Diversification

• The unique characteristics (or risks) of an individual investment may become partially or entirely neutralized when it is combined with other individual investments within a portfolio
• Members can be responsible for assessing the suitability of an investment only on the bases of the info and criteria actually provided by the client

Addressing Unsolicited Trading Requests

• If the unsolicited requests has minimal effects on the portfolio, then the member should inform the client about how the investment goes against the IPS, and then follow their firm’s policy in regard to client approval for executing unsuitable trades
• If the request has a material effect on the portfolio, the member is best changing the IPS after explaining to the client how the strategy deviates from the initiall IPS, and then having the client still want to execute the trade

Recommended Procedures for Compliance

Investment Policy Statement

In formulating an IPS for the client, the member should take the following into consideration:

• Client identification
• Investor objectives - return vs risk
• Investor Constraints - liquidity, expected cash flows, time horizon, tax considerations, regulatory and legal circumstances, investor preferences, proxy voting
• Performance measurement benchmarks

Regular Updates

The investor’s objectives and constraitns should be maintained and reviewed periodically to reflect any changes in the client’s circumstances

Suitability Test Policies

• With the increase in regulartory required suitability tests, members should encourage their firms to develop related policies and procedures

Question 12

LOS 2c: Standard 3- Duties to Clients

D) Performance Presentation

Answer 12

The Standard

When communicating investment performance information, members and candidates must make reasonable efforts to ensure that it is fair, accurate, and complete.

Guidance

• Members must provide credible performance information to clients and prospects and to avoid misstating performance or misleading clients and prospects about the investment performance of members
• This standard covers any practice that would lead to misrepresentation of a member’s performance record
• Members should not state or imply that clients will obtain or benefit from a rate of return that was generated in the past
• Research analysts promoting the success or accuracy or their recommendations must ensure that their claims are fair, accurate, and complete

Recommended Procedures for Compliance

Apply the GIPS Standards

Compliance without Applying GIPS Standards

• Considering the knowledge and sophistication of the audience to whom a perfromance presentation is addressed
• Presenting the performance of the weighted composite of similar portfolios rather than using a single representative account
• Including terminated accounts as part of performance history with a clear indication of when the accounts where terminated
• Maintaining the data and records used to calculate the performance being presented
  *

Question 13

LOS 2c: Standard 3- Duties to Clients

E) Preservation of Confidentiality

Answer 13

The Standard

members must keep information about current, former, and prospective clients confidential unless:

1. The information concerns illegal activities on the part of the client
2. Disclosure is required by law
3. The client of prospect permits disclosure of the information

Guidance

• Members must preserve the confidentiality of information communicated to them by their clients, prospects, and former clients

Status of Client

This standard protects the confidentiality of client information even if the person or entity is no loner a client of the member.

Compliance with Laws

As a general matter, members must comply with applicable law. If they law requires disclosure of illegal activity, then members should comply and disclose information. When in doubt, members should consult with their employer’s compliance personal or legal counsel

Electronic Information and Security

This standard does not require members to become experts in information security technology, but they should have a thorough understanding of the policies of their employer

Professional Conduct Investigations by CFA Institute

The requirements of this standard are not intended to prevent members from cooperating with an investigation by the CFA.

Recommended Procedures for Compliance

The simplest, most conservative way to deal with this standard is to avoid disclosing any information received from a client except to authorized fellow employees who are also working for the client

Communicating with Clients

Members should make reasonable efforts to ensure that firm-supported communication methods and compliance procedures follow practices designed for preventing accidental distribution of confidential information

Question 14

LOS 2d: Standard 4- Duties to Employers

A) Loyalty

Answer 14

The Standard

In matter related to their employment, members must act for the benefit of their emplyer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer

Guidance

• Members should protect the interest of their firm by refraining from any conduct that would injure the firm, deprive it or profit, or deprive it of the member’s skill and ability
• In matters related to their employment, members must comply with the policies and procedures established by their employers that govern the employer-employee relationship – to the extent that these policies do not conflict with the law or the Code and Standards

Employer Responsibilities

• Employers must recognize the duties and responsibilities that they owe to their employees if they expect to have content and productive employees
• Members are encouraged to provide their employer with a copy of the Code and Standards

Independent Practice

• Members must abstain from independent competitive activity that could conflict with the interests of their employer
• Members who plan to engage in independent practice for compensation must notify their employer and describe the types of services being offered
• Members should not render these services unless they receive consent from their employer

Leaving an Employer

• When a member is planning to leave an employer, they must still continue to act in the best interest of that employer until they have left
• A member who is comtemplating other employment must not contact exisiting clients or potential clients about their leaving. Once management is notified about the leaving, then the member can follow managements orders in regards to informing clients of the departure
• Once an employee has left the firm, the skills and experience that the employee gained are not confidential or privledged information
• The standrad does not prohibit former employees from contacting clients from their previous jobs, just as long as these clients weren’t contacted using records from previous job

Use of Social Media

• Member should understand and abide by all applicable firm policies and regulations as to the acceptable use of social media platforms to interact with clients and prospects
• Firm approved business-related accounts would be considered part of the firm’s assets, and should be deleted when leaving
• Best practice is to maintain separate accounts for personal and professional social media activities

Whistleblowing

Sometimes circumstances may arise in which members must act contrary to their employer’s interests in order to comply with their duties to the market and clients. In such instances, these actions may be justified, but only if it was for the better of the market, and not for personal gain.

Nature of Employment

• Members must determine whether they are employees or independent contractors in order to determine the applicability of this standard.
• A member’s duties within an independent contractor relationship are governed by the oral or written agreement between the member and the client

Recommended Procedures for Compliance

Competition Policy

• A member must understand any restrictions placed by the employer on offering similar services outside the firm while employed by the firm
• If a member’s employer has them sign a non-compete form, the member should ensure that the details are clear and fully explained prior to signing the agreement

Termination Policy

• Members should clearly understand the termination policies of their employer. Termination policies should :
  
  • Establish clear procedures regarding the resignation process, including how termination will be disclosed to clients and staff
  • Outline the procedures for transferring ongoing research and account management responsibilities
  • Address agreements that allow departing employees to remove specific client-related information upon resignation

Incident-Reporting Procedures

Members should be aware of their firm’s policies related to whistleblowing and encourage their firm to adopt industry best practices in this area

Employee Classification

Members should understand their status within their employer firm

Question 15

LOS 2d: Standard 4- Duties to Employers

B) Additional Compenstaion Arrangements

Answer 15

The Standard

Members must not accept gifts, benefits, compensation, or consideration that competes with or might reasonably be expected to create a conflict of interest with their employer’s interest unless they obtain written consent from all parties involved

Guidance

Members must obtain permission from their employers before accepting compensation or other benefits from third parties for the services rendered to the employer or for any service that might creat a conflict of interest

Recommended Procedures for Compliance

• Members should make an immediate written report to their supervisor and compliance officer specifying any compensation they propose to receive for services in addition to the compensation or benefits received from the employer
• The details of the report should be confirmed by the party offering the additional compensation, including performance incentives offered by clients
• This written report should state the terms of agreement under which a member will receive additional compensation

Question 16

LOS 2d: Standard 4 - Duties to Employers

C) Responsibilities of Supervisors

Answer 16

The Standard

Members must make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations, and the Code and Standards

Guidance

• Members responsibilities under this standard include instructing those subordinates to whom supervision is delgated about methods to promote compliance
• At a minimum this standard requires members with supervisory responsibilities to make reasonable efforts to prevent and detect violations by ensuring the establishment of effective compliance systems
• To be effective supervisors, members should implement education and training programs on a recurring bases for employees under their supervision
• A member with supervisory responsibility should bring an inadequate compliance system to the attention of the firm’s senior managers and recommend corrective action

System for Supervision

• Members with supervisory responsibility must understand what constitutes an adequate compliance system for their firms and make reasonable efforts to see that appropriate compliance procedures are established, documented, communicated to covered personnel, and followed
• Once a supervisor learns that an employee has violated or may have violated the law or the Code and Standards, the supervisor must promoptly initiate an assessment to determine the extent of the wrongdoing

Supervision Includes Detection

• Members with supervisory responsibility must also make reasonable efforts to detect violations of laws, rules, regulations, firm policies, and the Code and Standards.
• In addition, in some cases, merely enacting such procedures may not be sufficient to fulfill the duty required by the standard. The member may be in violation is they know they procedures designed to promote compliance are not being followed

Recommended Procedures for Compliance

Codes of Ethics of Compliance Procedures

• Members are encourage to recommend that their employers adopt a code of ethics, and put in place specific policies and procedures to ensure compliance with the codes
• Members should encourage their employers to provide their codes of ethics to clients

Adequate Compliance Procedures

should be:

• Be contained in a clearly written and accessible manual that is tailored to the firm’s operations
• Be drafted so that procedures are easy to understand
• Desginate a compliance officer whose authority and responsibility are clearly defined
• Describe the hierarchy of supervision and assign duties among supervisors
• Implement a system of checks and balances
• Outline the scope of procedures
• Outline permissible conduct
• Delineate procedures for reporting violations and sanctions

Once a compliance program is in place a supervisor should:

• Disseminate the contents of the progrm to appropriate personnel
• Periodically update procedures to ensure that measures are adequate under the law
• Continually educate personnel regarding compliance procedures
• Issue periodic reminders of the procedures to appropriate personnel
• Review the actions of employees to ensure compliance and identify violators
• Take the necessary steps to enfore the procedures once a violation have occurred

Once a violation is discovered, a supervisor should:

• Respond promptly
• Conduct a thorough investigation of the activities to determine the scope of the wrongdoing
• Increase supervision or place appropriate limitations on the wrongdoes
• Review procedures for potential changes necessary to prevent future violations from occurring

Implementation of Compliance Education and training

Regular ethics and compliance training, in conjunction with the adoption of a code of ethics is critical

Establish an Appropriate Incentive Stucture

Supervisors and firms must look closely at their incentive structure to determine whether the stucture encourages profits and returns at the expense of ethically appropriate conduct

Question 17

LOS 2e: Standard 5- Investment Analysis, Recommendations, and Actions

A) Diligence and Reasonable Basis

Answer 17

The Standard

Members must:

1. Exercise diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions
2. Have a reasonable and adequate basis, supported by appropriate research and investigation, for investment analysis, recommendation, or action

Guidance

• The requirements for issuing conclusions based on reasearch will vary in relation to the member’s role in the investment decision-making process, but the member must make reasonable efforts to cover all pertinent issues when arriving at recommendation
• Members and candidates enhance transparency by providing or offering to provide supporting information to clients when recommending a purchase or sale or when changing a reccomendation

Defininf Diligence and Reasonable Basis

As with determining the suitability of an investment for the client, the necessary level of research and analysis will differ with the product, security, or service being offered

The steps taken in developing a diligent and reasonable recommendation should minimize unexpected downside events

Using Secondary or Third-party Research

• If members rely on secondary or third-party research, they must make reasonable and diligent efforts to determine whether such research is sound
• Members should make reasonable inquiries into the source and accuracy od all data used in completing their investment analysis and recommendations
• A member should verify that the firm has a policy about the timely and consistent review of approved research providers to ensure that the quality of the research continues to meet the necessary standards

Using Quantitatively Oriented Research

• Members must have an understanding of the parameters used in models and quantitative research that are incorporated into their investment recommendations.
• Members should make reasonable efforts to test the output of investment models and other pre-programmed analytical tools they use
• Although not every model can test for every factor or outcome, members should ensure that their analysis incorporate a broad range of assumptions sufficient to capture the underlying characteristics of investments

Developing Quantitavtively Oriented Techniques

• Members involved in the development and oversight of quantitatively oriented models, methods, and algorithms must understand the technical aspects of the products they provide to clients
• In reviewing the computer models or the resulting output, members need to pay particular attention to the assumptions used in the analysis and the rigor of the analysis to ensure that the model incorporates a wide range of possible input expectations, including negative market events

Selecting External Advisers and Subadvisers

• members must review managers as diligently as they review individual funds and securities.
• Members who are directly involved with the use of external advisers need to ensure that their firms have standardized criteria for reviewing these selected external adivers and managers.

Group Research and Decision Making

In some instances, a member will not agree with the view of the group. `However if the member is confident in the process to come to the consensus, the member does not need to dissociate from the report even if it does not reflect their opinion

Recommended Procedures for Compliance

• Establish a policy requiring that research reports, credit ratings, and investment recommendations have a basis that can be substantiated as reasonable and adequate
• Develop detailed, written guidance for analysts that establishes due diligence
• Develop measurable criteria for assessing the quality of research, the reasonableness and adequacy of the basis for any recommendation and the accuracy of recommendations over time
• Adopt a standardized set of criteria for evaluating the adequacy of external advisors

Question 18

LOS 2e: Standard 5: Investment Analysis, recommendations, and Action

B) Communication with Clients and Prospective Clients

Answer 18

The Standard

Members and candidates must:

1. Disclose to clients and prospects the basic format and general principles of the investment processes they use to analyze investments, select securities, and construct portfolios, and must promptly disclose any changes that might materially affect those processes
2. Disclose to clients and prospects significant limitations and risks associated with the investment process
3. Use reasonable judgment in identifying which factors are important to their investment analyses, recommendations, or actions, and include those factors in communications with clients and prospective clients
4. Distinguish between fact and opinion in the presentation of investment analyses and recommendations

Guidance

• Members should communicate in a recommendation the factors that were instrumental in making the investment recommendations. It is critical to distinguish between opinions and facts
• Follow-up communication of significant changes in the risk characteristics of a security or assest strategy ir required
• Providing regular updates to any changes in the risk characteristics is recommended

Informing Clients of the Investment Process

• Members must adequately describe to clients and prospects the manner in which they conduct the investment decision-making process
• The member must keep clients and other interested parties informed on an ongoing basis about changes to the investment process
• Members should inform the clients about the specialization or diversification expertise provided by the external adviser

Different Forms of Communication

• Members using any social media service to communicate business information must be dilident in their efforts to avoid unintended problems because these servies may not be available to all clients
• If recommendations are contained in capsule form, members should notify clients that additional information and analyses are available from the producer of the report

Identifying Risks and limitations

• Members must outline to clients and prospects significant risks and limitations of analysis contained in their investment products or recommendations
• The appropriateness of risk disclosure should be assessed on the basis of what was known at the time the investment action was taken.
• Having no knowledge of a risk or limitation that subsequently triggers a loss may reveal a deficiency in the diligence and reasonable basis of the research of the member

Report Presentation

• A report writer who has done adequate investigation may emphasize certain areas, touch briefly on others, and omit certain aspects deemed unimportant
• Investment advice based on quantitative research and analysis must be supported by readily available reference material and should be applied in a manner consistent with previously applied methodology

Distinction between Facts and Opinions in Reports

• violations often occur when reports fail to separate the past from the future by not indicating that earnings estimates, changes in the outlook for dividends, or future market price information are opinions subject to future circumstance
• In the case of complex quantitative analyses, members must clearly separate fact from statistical conjecture and should identify the known limitations of an analysis

Recommended Procedures for Compliance

• Members should encourage their firms to have a rigorous methodology for reviewing research that is created for publication and dissemination to clients
• To assist in the after-the-fact review of a report, the member or candidate must maintain records indicating the nature of the research and should, if asked, be able to supply additional information to the client covering factors not included in the report

Question 19

LOS 2e: Standard 5 - Investment Analysis, Recommendations, and Action

C) Record Retention

Answer 19

The Standard

Members must develop and maintain appropriate records to support their investment analyses, recommendations, actions, and other investment-related communications with clients and prospects

Guidance

Members must retain records that substantiate the scope of their research and reasons for their actions or conclusions

Records may be maintained either in hard copy or electronic form

New Media Records

members should understand that although employers and local regulators are developing digital media retention policies, these policies may lag behind the advent of new communication channels. Such lag places greater responsibility on the individual for ensuring that all relevant information is retained.

Records Are Property of the Firm

• Records created as part of a member’s professional activity on behalf of their employer are the property of the firm
• When a member leaves a firm to seek other employment, the member cannot take the property of the firm, including original forms or copies of supporting records of the member’s work
• The member cannot use historical recommendations or research reports created at the previous firm because the supporting documentation is unavailable

Local Requirements

• Local regulators and firms may also implement policies detailing the applicable time frame for retaining research and client communication records
• In absence of regulatory guidance or firm policies, CFA recommends keeping records for at least 7 years

Recommended Procedures for Compliance

The responsibility to maintain records that support investment action generally falls with the firm rather than individuals. Members must however, archive research notes and other documents that support their current investment-related communications

Question 20

LOS 2f: Standard 6- Conflicts of Interest

A) Disclosure of Conflicts

Answer 20

The Standard

Members must make full and fair disclosur of all matters that could reasonably be expected to impair their independence and objectivity of interfere with respective duties to their clients, prospects, and employer. Members must ensure that such disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively

Guidance

• Best practice is to avoid actual conflicts of the appearance of conflicts of interest when possible.
• When conflicts cannot be reasonably avoided, clear and complete disclosure of their existence is necessary
• In making and updating disclosures of conflict of interest, members and candidates should err on the side of caution to ensure that conflicts are effectively communicated

Disclosure of Conflicts to Employers

• When reporting conflicts of interest to employers, members must give their employers enough information to assess the impact of the conflict
• members must take reasonable steps to avoid conflict and , if they occurr inadvertently, must report them promptly so that the employer and the member can resolve them as quickly and effectively as possible

Disclosure to Clients

• The most obvious conflicts of interest, which should always be disclosed, are relationships between an issuer and member or their firm
• Disclosures should be made to clients regarding fee arrangements, subadvisory agreements, or other situations involving non standard fee structure

Cross-Departmental Conflicts

• members and their firms should attempt to resolve situations presenting potential conflicts of interest or disclose them in accordance with the principles set forth

Conflicts With Stock Ownership

The most prevalent conflict requiring disclosure under this standard is a member’s ownership of stock in companies that they recommend to clients or that clients hold. Clearly, the easiest method for preventing a conflict is to prohibit members from owning any such securities, but this can be burdensome and discriminatory against members. Therefore simply disclosing what stocks the member has, and reinforcing why they are recommending it for the client and in the clients best interest, its the best way to deal with this conflict

Conflicts as a Director

This poses 3 basic conflicts of interest

1. A conflict may exist between the duties owed to clients and the duties owed to shareholders of the company
2. Investment personnel who serve as directors may receive the securities or options to purchase securities of the company as compensation for serving on the board, which could raise questions about trading actions that might increase the value of those securities
3. Board service creates the opportunity to receive material nonpublic information involving the company

Recommended Procedures for Compliance

• Members should disclose special compensation arrangements with the employer that might conflict with client interests, such as bonuses based on short-term performance criteria, commissions, incentive fees, performance fees, and referral fees
• Members firms are encouraged to include information on compensation packages in firms promotional literature

Question 21

LOS 2f: Standard 6 - Conflicts of Interest

B) Priority of transactions

Answer 21

The Standard

Investment transactions for clients and employers must have priority over investment transactions in which a member is the beneficial owner

Guidance

• This standard is designed to prevent any potential conflict of interest or the appearance of a conflict of interest with respect to personal transactions
• Clients interests have priority over transactions made on behalf of the member’s personal transactions

Avoiding Potential Conflicts

Although conflicts of interest exist, nothing is inherently unethical about individual managers making money from personal investments as long as :

1. The client is not disadvantaged by the trade
2. The investment professional does not benefit personally from trades undertaken for clients
3. The investment professional complies with applicable regulatory requirements

Standards for Nonpublic Information

• This standard covers the activities of members who have knowledge of pending transactions that may be made on behalf of their clients, who have access to nonpublic information
• Members cannot convey nonpublick information to any person whose relationship to the member makes the member a beneficial owner of the person’s securities

Impact on All Accounts with Beneficial Ownership

• Members may undertake transactions in accounts for which they are a beneficial owner only after their clients and employers have had adequate opportunity to act on a recommendation
• personal transactions include those made for the member’s own account, for family accounts, and for accounts in which the member has a direct or indirect pecuniary interest

Recommended Procedures for Compliance

• Members should urge their firms to establish such policies and procedures
• The specific provisions of each firm’s standards will vary, but all firms should adopt certain basic procedures to address the conflict areas created by personal investing which include:
  
  • Limited participation in early IPOs
  • Restrictions on private placements
  • Establish blackout/restricted periods
  • Disclosure of policies to investors

Question 22

LOS 2f: Standard 6 - Conflicts of Interest

C) Referral Fees

Answer 22

The Standard

Members must disclose to their employer, clients, and prospects, as appropriate, any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services

Guidance

• Members must inform their employer, clients, and prospects of any benefit received for referrals of customers and clients
• Memebers must disclose when they pay a fee or provide compensation to others who have referred prospects to the member

Recommended Procedures for Compliance

• Members should encourage their employers to develop procedures related to referral fees. The firm should indicate the appropriate steps for requestins approval
• Employers should have investment professionals provide to the clients notification of approved referral fee programs and provide the employer regular updates on the amount and nature of compensation received

Question 23

LOS 2g: Standard 7- Responsibilities as a CFA Institute Member or CFA Candidate

A) Conduct as participiants in the CFA Institute Program

Answer 23

The Standard

Members must not engage in any conduct that compromises the reputation or integrity of CFA Institute or the CFA designation or the integrity, validity, or security of CFA Institute programs

Guidance

• This standard prohibits any conduct that undermines the public’s confidence in the CFA
• Conduct covered includes but is not limited to :
  
  • Giving or receiving assistance on any CFA exam
  • Violating the rules, regulations, and testing policies of CFA
  • Providing confidential program or exam information to candidates or the public
  • Improperly using an association with the CFA to further personal or professional goals

Confidential Program information

Examples of information that cannot be disclosed by candidates sitting for an exam include specific details of questions appearing on the exam and braod topical ares and forumlas tested on the exam

Additional CFA Program Restrictions

Violating any of the testing policies constitutes a violation of this standard. Examples of information that cannot be shared by members involved in developing, administering, or grading they exams includes

• questions appearing on the exam
• Deliberation related to the exam process
• information related to the scoring of questions

Expressing an Opinion

This standard does not cover expressing opinions regarding the CFA. However, when expressing a personal opinion, a candidate is prohibited from disclosing content-specific information, including actual exam questions and the information as to subject matter covered or not covered

Question 24

LOS 2g: Standard 7- Responsibilities as a CFA Institute Member or CFA Candidate

B) Reference to CFA Institute, the CFA designation, and the CFA program

Answer 24

The Standard

When referring to CFA Institute, CFA Institute membership, the CFA designation, or candidacy in the CFA Program, members must not misrepresent or exaggerate the meaning or implications of membership in the CFA institute, holding the CFA designation, or candidacy in the CFA Program

Guidance

• This standard is intended to prevent promotional efforts that make promises or gurantees that are tied to the CFA designation. Individuals may refer to their standing in the CFA, but not exaggerate
• This standard is not intended to prohibit factual statements related to the positive benefit of earning the CFA designation. However one cannot allude to having a CFA as being better than everyone else
• members may make claims about the relative merits of the CFA as long as those statements are implicitly or explicitly stated as the opinion of the speaker

CFA Institute Membership

Once accepted as a CFA institute member, the member must satisfy the following requirements to maintain their status:

• Remit annually to CFA Institute a completed Professional Conduct Statement, which renews the commitment to abide by the requirements of the Code and Standards and the CFA institute Professional Conduct Program
• Pay applicable CFA Institute membership dues on an annual basis
• If they fail to meet these requirements, the individual is no longer considered an active member

Using the CFA Designation

• Those who have earned the right to use the Chartered Financial Analysts designation may us the trademarks or registered marks “ Chartered Financial Analysts” or “CFA” and are encouraged to do so, but only in a manner that is not missleading
• The use of the designation may be accompanied by an accurate explanation of the requirements that have been met to earn the right to use the designation
• Once granted the right to use the designation, if they fail to meet any requirements or Code and Standards, they will lose their membership

Referring to Candidacy in the CFA Program

• candidate in the CFA program may refer to their participation in the CFA Program, but such references must clearly state than an individual is a candidate in the program and must not imply that the candidate has achieved any type of partial designation. A person is a candidate if:
  
  • They are registered to take an exam
  • they are waiting on the results of an exam
• If an individual is registered, but does not take or sign up for an exam, they are not a candidate. Once they sign up for an exam, their candicacy resumes
• CFA candidates must never state or imply that they have a partial designation as a result of passing one or more levels, or cite an expected completion date of any level of the CFA program

Proper Usage of CFA Marks

• Upon obtaining the CFA charter from CFA institute, charterholders are given the right to use the CFA marks
• The Chartered Financial Analyst and CFA marks must always be used either after a charterholders name or as adjectives (never as nouns) Example you cannot say I am a CFA, you must state that I have earned the right to use the CFA designation
• Members cannot use nicknames in conjunction with the CFA designation
• As a certification mark, the CFA must be used only to directly refer to an individual charterholder or group of charterholders