Code of Ethics and Standards of Professional Conduct- Exam Ready Notes

Module 1: Ethics and Trust in the Investment Profession

Introduction

• Ethics: Principles guiding right conduct beyond laws.
• Core purpose: Protect investors, promote fair and efficient markets, support long-term economic growth.
• Ethical behavior builds investor confidence and market integrity.

Ethics, Society, and Capital Markets

• Trust is essential for capital markets to function efficiently.
• Ethical lapses erode confidence, raise capital costs, reduce liquidity.
• Professionals must act with integrity to sustain market efficiency and growth.

Sustainability & Relationship

• Ethical conduct fosters sustainable relationships between firms, investors, and markets.
• Professionals must consider long-term impacts, not just short-term gains.

Ethical Decision-Making Frameworks

• Identify stakeholders and facts.
• Consider applicable laws, regulations, and ethical standards.
• Evaluate choices based on fairness, transparency, and market integrity.
• Decide and act in the best interest of clients and markets.
• Reflect on long-term outcomes.

Module 2: Code of Ethics and Standards of Professional Conduct

Introduction

• The Code of Ethics sets out the core ethical principles for all CFA Institute members and candidates.
• It guides professionals to act with integrity, diligence, and respect to maintain trust in the capital markets.

Code of Ethics – Key Principles

Members and candidates must:

1. Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, employers, employees, colleagues, and participants in global capital markets.
2. Place the integrity of the investment profession and the interests of clients above personal interests.
3. Use reasonable care and exercise independent professional judgment when conducting analysis, making recommendations, or taking investment actions.
4. Practice and encourage others to practice in a professional and ethical manner that reflects credit on themselves and the profession.
5. Promote the integrity of capital markets for the ultimate benefit of society.
6. Maintain and improve professional competence and strive to improve the competence of other investment professionals.

Standard I – Professionalism

I(A) Knowledge of the Law

Guidance:
Members and candidates must know and comply with all applicable laws, rules, and regulations of any government, regulatory organization, licensing agency, or professional association. Where laws and CFA standards differ, follow the stricter standard.

Required:

• Understand applicable laws in every jurisdiction.
• Always comply with the stricter rule (local law vs. CFA Standards).
• Dissociate from illegal or unethical activity.

Recommended:

• Maintain a compliance manual summarizing laws and standards.
• Seek legal or compliance advice when in doubt.
• Document incidents and steps taken to remain compliant.

Example:

A portfolio manager discovers her firm is front-running trades, which is legal in her jurisdiction but violates CFA Standards. She reports it and refuses to participate.

I(B) Independence and Objectivity

Guidance:
Members and candidates must use reasonable care and judgment to achieve and maintain independence and objectivity in professional activities. Must not offer, solicit, or accept any gift, benefit, or compensation that could compromise objectivity.

Required:

• Avoid situations that compromise objectivity (bribes, lavish gifts, inappropriate entertainment).
• Disclose and get approval for any gifts or benefits.

Recommended:

• Firm policies for gifts/entertainment (value limits).
• Regular staff training on conflicts of interest.
• Keep records of gifts and approvals.

Example:

A research analyst declines an all-expenses-paid trip from a company under coverage, as it could bias his recommendation.

I(C) Misrepresentation

Guidance:
Members and candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities. Avoid plagiarism.

Required:

• No false or misleading statements.
• Disclose sources for information (including paid research).
• Prohibit plagiarism.

Recommended:

• Review marketing materials for accuracy.
• Keep written records of sources and research.
• Implement a firm plagiarism policy.

Example:

An advisor quotes performance returns but clearly cites sources and avoids using another firm’s research as their own.

I(D) Misconduct

Guidance:
Members and candidates must not engage in any professional misconduct, including dishonesty, fraud, deceit, or any act reflecting adversely on professional reputation, integrity, or competence.

Required:

• Avoid any illegal, fraudulent, or deceitful actions.
• Maintain personal integrity and professional competence.

Example:

A portfolio manager repeatedly shows up intoxicated to client meetings, damaging the firm’s reputation and client trust, even though no specific law is broken. This behavior violates CFA Standards due to the negative impact on professional integrity.

Recommended:

• Establish internal reporting and whistleblowing mechanisms.
• Provide training on firm policies and legal obligations.

I(E) Competence

Guidance:
Members and candidates must maintain and improve professional competence and strive to keep current with evolving practices, laws, and regulations.

Required:

• Undertake continuing education to stay competent.
• Recognize limitations and seek assistance when needed.

Recommended:

• Regular professional development (CFA courses, industry seminars).
• Firms should support training and development program

Example:

An analyst new to derivatives attends training before advising clients on complex options strategies.

Standard II – Integrity of Capital Markets

II(A) Material Nonpublic Information

Detailed Guidance:

• Members and candidates must not act or cause others to act on material nonpublic information (MNPI) when such action would breach their duty to maintain market integrity.
• Material = Information that a reasonable investor would consider important in making an investment decision or that would significantly affect security prices.
• Nonpublic = Not yet disseminated broadly to the market (not accessible to the general investing public).
• Acting on MNPI undermines fairness and damages confidence in capital markets.
• The Mosaic Theory allows use of a combination of public and nonmaterial nonpublic information to reach conclusions, provided no MNPI is used.

Required Actions (Mandatory):

1. Do not trade or advise others to trade based on MNPI.
2. Do not share or disclose MNPI to colleagues, clients, or third parties unless necessary for professional duties and with safeguards.
3. Take steps to prevent misuse of confidential information (e.g., information barriers).
4. Comply with all applicable insider trading laws and firm policies.

Recommended Procedures (Best Practice):

• Maintain restricted or watch lists for securities potentially impacted by MNPI.
• Implement “firewalls” within the firm to separate research, investment banking, and trading departments.
• Educate employees regularly on MNPI rules and procedures.
• Communicate only necessary details internally and avoid discussing sensitive info in public places.

Example:

An analyst receives an early, confidential earnings report. They do not trade or tip others and wait until the information is public.

II(B) Market Manipulation

Detailed Guidance:

• Members and candidates must not engage in practices that distort prices or artificially inflate trading volume, with the intent to mislead market participants.
• Manipulation includes both:
  • Information-based manipulation: Spreading false or misleading information to move prices (e.g., pump-and-dump schemes).
  • Transaction-based manipulation: Artificially creating trading activity (wash trades, spoofing) to mislead other market participants.
• Such conduct undermines market fairness and can lead to regulatory penalties.

Required Actions (Mandatory):

1. Avoid any activity intended to mislead or deceive market participants, including deliberate price or volume distortion.
2. Do not disseminate false or misleading information for personal or client benefit.
3. Report and dissociate from any firm activities that involve manipulation.

Recommended Procedures (Best Practice):

• Establish firm-wide compliance policies prohibiting manipulative practices.
• Use surveillance systems to detect unusual trading patterns within the firm.
• Train employees to recognize manipulative practices (e.g., improper rumors, coordinated trades).
• Document all legitimate large trades or marketing activities to show no intent to manipulate.

Example:

A trader avoids creating wash trades to inflate volume, even though it might temporarily boost market perception.

Standard III – Duties to Clients

III(A) Loyalty, Prudence, and Care

Guidance (What It Means):

• Members and candidates must act with loyalty, prudence, and care toward clients, placing client interests above their own or their firm’s interests.
• Loyalty involves protecting client interests, managing conflicts, and avoiding self-dealing.
• Prudence means applying the care, skill, and diligence of a prudent professional managing their own money.
• Care includes following investment mandates and constraints and keeping the client’s long-term goals central.

Required Actions (Must-Do):

1. Identify the true client (e.g., beneficiaries for a pension plan, not just the plan sponsor).
2. Place client interests first in every decision.
3. Follow investment guidelines, risk parameters, and legal requirements.
4. Disclose potential conflicts that cannot be avoided.

Recommended Procedures (Best Practices):

• Maintain detailed investment policy statements (IPS) for each client.
• Keep documentation of all client communications and approvals.
• Train staff on fiduciary obligations and decision-making standards.
• Periodically review portfolios for alignment with objectives and mandates.

Example:
An advisor must avoid favoring higher-fee products for personal benefit if they don’t serve the client’s best interest.

III(B) Fair Dealing

Guidance (What It Means):

• Members and candidates must deal fairly and objectively with all clients when providing investment recommendations, disseminating material information, and executing trades.
• Fairness doesn’t mean identical treatment; different levels of service may exist (e.g., retail vs. institutional), but opportunities and access to information must be equitable.

Required Actions (Must-Do):

1. Disseminate investment recommendations simultaneously to all clients for whom they are suitable.
2. Allocate trades pro-rata and fairly among accounts, without favoritism.
3. Avoid selective disclosure of material, nonpublic information.

Recommended Procedures (Best Practices):

• Establish written policies for trade allocation, order handling, and recommendation dissemination.
• Maintain time-stamped records of recommendations and client notifications.
• Review allocations regularly to ensure consistency and fairness.
• Disclose differences in service levels to clients upfront.

Example:
A broker must not give a large institutional client advance notice of a new buy recommendation before notifying other clients.

III(C) Suitability

Guidance (What It Means):

• Before making a recommendation or taking action, members and candidates must make a reasonable inquiry into the client’s investment experience, objectives, risk tolerance, and financial circumstances.
• All recommendations and portfolio actions must be suitable based on this information.
• Suitability is judged at the portfolio level, not for each security in isolation.
• Client information must be updated periodically and after significant changes.

Required Actions (Must-Do):

1. Gather complete client data: return objectives, risk profile, time horizon, tax issues, liquidity needs, and legal constraints.
2. Ensure recommendations are consistent with this data.
3. Update the client profile regularly, particularly after major changes.

Recommended Procedures (Best Practices):

• Prepare a written Investment Policy Statement (IPS) for every client, with explicit return and risk goals.
• Implement a review schedule to update IPS and suitability assessments.
• Use suitability checklists and approval steps for unusual transactions.

Example:
A manager cannot recommend a highly leveraged hedge fund to a conservative, income-seeking retiree.

III(D) Performance Presentation

Guidance (What It Means):

• Members and candidates must ensure that investment performance information presented to clients is fair, accurate, and complete.
• Must not cherry-pick best-performing accounts, mislead with selective results, or present returns without context.
• Encouraged to comply with GIPS standards for consistency and credibility.

Required Actions (Must-Do):

1. Present returns that are not false, misleading, or distorted.
2. Include all material facts (time periods, benchmarks, methodology).
3. Disclose if results include simulated, back-tested, or partial data.

Recommended Procedures (Best Practices):

• Follow the Global Investment Performance Standards (GIPS) where possible.
• Use consistent, well-documented calculation methods.
• Keep records of all performance data, methodologies, and disclosures.

Example:
A firm must not only present results from its best-performing fund when marketing its track record.

III(E) Preservation of Confidentiality

Guidance (What It Means):

• Members and candidates must keep information about current, former, and prospective clients confidential, unless:
  1. The client or prospective client gives permission,
  2. Disclosure is required by law, or
  3. The information concerns illegal activities by the client.
• Confidentiality covers all forms of client data, including personal, financial, and transactional information.

Required Actions (Must-Do):

1. Do not disclose any client information without proper authorization or legal requirement.
2. Secure client data physically and electronically.
3. Share information internally only with those who need it for professional purposes.

Recommended Procedures (Best Practices):

• Establish firm-wide confidentiality policies and secure systems for data storage.
• Provide training on handling sensitive information.
• Use encryption and access controls for electronic data.

Example:
An advisor cannot discuss a client’s portfolio publicly, even casually, unless permitted or required by law.

Standard IV – Duties to Employers

IV(A) Loyalty

Guidance (What It Means):

• Members and candidates must act for the benefit of their employer and avoid actions that harm the firm.
• Must not divert opportunities, clients, or resources for personal gain.
• Preparing to leave an employer (e.g., setting up a legal entity) is allowed, but soliciting clients or staff before resigning is prohibited.
• Loyalty does not prevent members from seeking other employment but requires that they protect the employer’s interests while employed.

Required Actions (Must-Do):

1. Place employer’s interests above personal business interests while employed.
2. Do not misappropriate trade secrets, client lists, or confidential information when leaving.
3. Obtain written consent before taking on outside compensated work that competes with or could conflict with the employer.

Recommended Procedures (Best Practices):

• Review employment agreements and firm policies on outside activities.
• Maintain clear policies for resignations and transitions, including returning confidential information.
• Disclose any outside consulting or part-time work and seek formal approval.

Example:
A portfolio manager planning to start her own firm prepares a business plan while still employed but waits to approach clients until after officially resigning.

IV(B) Additional Compensation Arrangements

Guidance (What It Means):

• Members and candidates must not accept gifts, benefits, compensation, or consideration from clients or other parties that could create a conflict with their employer’s interests, unless they obtain written consent from all parties involved.
• Applies to cash and non-cash benefits, contingent fees, and referral arrangements.

Required Actions (Must-Do):

1. Disclose to and obtain written consent from the employer before accepting any outside compensation.
2. Ensure the additional arrangement does not interfere with loyalty or job performance.

Recommended Procedures (Best Practices):

• Keep a registry of all approved outside compensation agreements.
• Require employees to certify annually that they have disclosed any such arrangements.
• Regularly review any outside contracts for conflicts.

Example:
A portfolio manager is offered a performance bonus from a client for exceeding return targets. She obtains written approval from her employer before accepting it.

IV(C) Responsibilities of Supervisors

Guidance (What It Means):

• Members and candidates with supervisory duties must make reasonable efforts to prevent and detect violations of laws, regulations, and the CFA Standards by those they supervise.
• If the firm lacks adequate compliance systems, supervisors must either implement appropriate controls or decline supervisory responsibility.
• Supervisors must act immediately when they suspect or discover violations, including initiating investigations and escalating to compliance.

Required Actions (Must-Do):

1. Ensure compliance procedures are established, communicated, and enforced within the supervised team.
2. Act promptly when a potential violation is discovered, including halting activities if necessary.
3. Decline supervisory responsibility if no adequate compliance systems exist and the supervisor lacks authority to implement them.

Recommended Procedures (Best Practices):

• Develop a written compliance manual and conduct regular staff training.
• Implement monitoring systems for trading, communications, and client interactions.
• Establish clear escalation protocols for reporting misconduct internally and to regulators if required.
• Document all supervisory reviews and actions for accountability.

Example:
A research department head discovers suspicious trading by an analyst. She immediately escalates the issue, suspends the analyst’s trading authority, and works with compliance to investigate.

Standard V – Investment Analysis, Recommendations, and Actions

V(A) Diligence and Reasonable Basis

Guidance (What It Means):

• Members and candidates must exercise diligence, independence, and thoroughness when conducting research, making investment recommendations, or taking investment actions.
• Recommendations must be based on a reasonable and adequate foundation, supported by appropriate research and investigation.
• The scope and depth of the research should be proportional to the complexity and risk of the investment.

Required Actions (Must-Do):

1. Use appropriate research methods, verifying accuracy of data and models.
2. Ensure recommendations are supported by a sound basis before dissemination or action.
3. Maintain records supporting all analyses, conclusions, and decisions.
4. Update research promptly when material new information becomes available.

Recommended Procedures (Best Practices):

• Develop internal research standards and documentation guidelines.
• Archive all data sources, models, and notes for each recommendation.
• Conduct periodic reviews and stress tests of models and assumptions.
• Provide training on proper analytical rigor and bias mitigation.

Example:
An analyst runs full discounted cash flow (DCF) and peer analysis before issuing a buy rating, ensuring the conclusion is well-documented.

V(B) Communication with Clients and Prospective Clients

Guidance (What It Means):

• Members and candidates must fully disclose to clients and prospects the basic format and general principles of the investment processes used.
• Must communicate significant risks and limitations of strategies and models, and any material changes in investment processes.
• Must clearly distinguish between factual information and opinions in communications.

Required Actions (Must-Do):

1. Explain methodologies, strategies, and underlying assumptions.
2. Disclose risks, limitations, and material changes to the investment process.
3. Clearly label statements as facts or opinions in all reports.

Recommended Procedures (Best Practices):

• Use standardized disclosures in reports, fact sheets, and presentations.
• Train staff to maintain clear, transparent communication with clients.
• Maintain templates for risk and methodology disclosures.

Example:
A portfolio manager notifies clients when the fund’s asset allocation strategy shifts from value stocks to growth stocks due to market changes.

V(C) Record Retention

Guidance (What It Means):

• Members and candidates must maintain records to support their investment analyses, recommendations, actions, and other communications.
• If no specific regulation exists, retain records for at least seven years.
• Records are the property of the firm, not the individual, unless agreed otherwise.

Required Actions (Must-Do):

1. Retain all records, models, source data, and research notes per legal or firm requirements (minimum 7 years if no regulation).
2. Upon leaving a firm, do not take proprietary records without written permission.

Recommended Procedures (Best Practices):

• Centralize research archives to ensure easy access and auditability.
• Implement firm-wide record retention policies.
• Periodically review records for completeness and compliance.

Example:
An analyst leaves a firm and requests approval to copy certain models they developed; without permission, they cannot take the files.

Standard VI – Conflicts of Interest

VI(A) Disclosure of Conflicts

Guidance (What It Means):

• Members and candidates must make full and fair disclosure of all matters that could impair their independence and objectivity or create conflicts of interest.

• Disclosures must be in plain, understandable language so clients, employers, and other stakeholders can evaluate the significance.

• Includes: ownership interests, compensation structures, external relationships, or any situation that may bias recommendations.

Required Actions (Must-Do):

1. Fully disclose to clients and employers any personal or firm interests that could affect analysis, recommendations, or actions.

2. Disclosures must be timely, prominent, and clear enough for the recipient to judge.

3. Update disclosures when circumstances change.

Recommended Procedures (Best Practices):

• Use standardized conflict disclosure templates in all reports and communications.

• Maintain a public or client-accessible log of material conflicts.

• Train staff to identify and document potential conflicts early.

Example:
An equity analyst who owns shares in a company they cover must disclose this ownership in every research report.

VI(B) Priority of Transactions

Guidance (What It Means):

• Investment transactions for clients and the employer must take precedence over personal trades of members and candidates.

• Personal investing is allowed but cannot disadvantage clients, involve front-running, or conflict with client transactions.

Required Actions (Must-Do):

1. Execute client and employer trades first before any personal trades.

2. Pre-clear all personal transactions if required by firm policy.

3. Avoid trading on information about pending client orders.

Recommended Procedures (Best Practices):

• Maintain pre-clearance systems for personal trades.

• Establish restricted lists for securities where conflicts exist.

• Require employee trade reporting and monitoring.

Example:
A portfolio manager cannot buy stock in a company just before placing a large buy order for a client fund, as that would constitute front-running.

VI(C) Referral Fees

Guidance (What It Means):

• Members and candidates must disclose to their employer, clients, and prospective clients any compensation, consideration, or benefit received from or paid to others for recommending products or services.

• This includes cash, non-cash benefits, and referral arrangements, as they may influence objectivity.

Required Actions (Must-Do):

1. Disclose nature, amount, and terms of referral fees to all relevant parties before a transaction or engagement.

2. Obtain employer approval if the arrangement could affect job performance or loyalty.

Recommended Procedures (Best Practices):

• Document all referral arrangements in writing and make them accessible for audit.

• Require annual employee attestations regarding referral fee disclosures.

• Standardize disclosure language for consistency.

Example:
A financial advisor must inform both the client and their firm when receiving a commission for directing clients to a particular investment fund.

Standard VII – Responsibilities as a CFA Institute Member or Candidate

VII(A) Conduct as Participants in CFA Institute Programs

Guidance (What It Means):

• Members and candidates must not engage in any conduct that compromises the integrity, validity, or security of CFA Institute programs, including the CFA Exam.
• Prohibited conduct includes:
  • Cheating or attempting to cheat on exams.
  • Disclosing exam content or questions.
  • Falsifying or misrepresenting information on program applications or professional qualifications.
• The integrity of the CFA designation and program depends on members and candidates upholding strict ethical behavior during all interactions with CFA Institute.

Required Actions (Must-Do):

1. Do not cheat, assist others in cheating, or disclose CFA exam content (before, during, or after exams).
2. Provide accurate and truthful information on all CFA Institute-related applications and documents.
3. Refrain from any behavior that would harm the reputation of the CFA program or the designation.

Recommended Procedures (Best Practices):

• Review and stay updated on CFA Institute program rules annually.
• Avoid discussing any specific exam questions, even after the exam, except where CFA Institute permits (e.g., general experience discussions).
• Report any observed violations to CFA Institute through proper channels.

Example:
A Level II candidate discusses actual exam questions on an online forum after the test. This violates the CFA Standards by compromising exam integrity.

VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program

Guidance (What It Means):

• Members and candidates must present the CFA designation and their participation in the CFA Program accurately and truthfully.
• Must not misrepresent or exaggerate:
  • The meaning or implications of holding the CFA designation.
  • The status as a candidate (e.g., claiming “CFA charterholder” while still only a candidate).
  • The intent, rigor, or exclusivity of the program.
• Cannot use the CFA marks in a way that misleads clients or the public, such as implying superior investment performance simply because of the designation.

Required Actions (Must-Do):

1. Only use the marks “CFA” or “Chartered Financial Analyst” as adjectives, not nouns (e.g., “CFA charterholder,” not “I am a CFA”).
2. Only claim “CFA candidate” when currently enrolled and registered for an exam (or waiting for results).
3. Avoid suggesting that the designation or program guarantees superior performance, skill, or ethics beyond what the designation conveys (competence and commitment to ethical standards).

Recommended Procedures (Best Practices):

• Follow the CFA Institute Guidelines for the Use of the CFA Marks (available on CFA Institute’s website).
• Use standardized disclosure language when referring to candidacy or charter status.
• Train marketing and communications teams to avoid improper usage in promotional materials.

Example:
A financial advisor advertises as “John Smith, CFA – Guaranteed Market-Beating Returns.” This violates CFA Standards because it misrepresents what the designation implies.

Global Investment Performance Standards (GIPS)

1. Purpose and Importance of GIPS

Guidance (What It Means):

• GIPS are global ethical standards for calculating and presenting investment performance, ensuring fair representation and full disclosure.
• They allow investors to compare investment managers on a consistent basis.
• Adoption is voluntary, but widely considered best practice for credibility and transparency.

Required Elements:

• Firms must present performance that is consistent, comparable, and not misleading.
• Composites must include all actual, fee-paying, discretionary portfolios that meet specific strategies or mandates.
• Returns must be calculated using prescribed methods (e.g., time-weighted returns, asset-weighted composites).

Recommended Practices:

• Firms should seek independent verification of their GIPS compliance.
• Maintain clear, documented policies for data input, calculation, and reporting.
• Educate staff and marketing teams on the proper application of GIPS.

Example:
A global asset manager claims GIPS compliance by ensuring every strategy’s performance is reported as a composite with full disclosures, allowing prospective clients to compare results fairly.

2. Composites

Guidance (What It Means):

• A composite is a group of portfolios with similar investment strategies, objectives, or mandates, presented as a single performance track record.
• Composites prevent “cherry-picking” by ensuring performance includes all relevant accounts, not just top-performing ones.

Required Elements:

• Include all actual, fee-paying, discretionary portfolios in at least one composite.
• Portfolios must be assigned to a composite before performance is known.
• Composites must be asset-weighted, not simple averages.

Recommended Practices:

• Review portfolios regularly to ensure proper composite inclusion.
• Maintain written composite definitions for consistency.
• Create composites for any distinct strategy marketed to clients.

Example:
A firm manages five global equity portfolios under the same strategy. All five must be grouped into one “Global Equity Composite” for reporting, rather than only showing the two best performers.

3. Verification

Guidance (What It Means):

• Verification is an independent third-party review of a firm’s GIPS compliance.
• While optional, it increases the credibility of the firm’s claim.
• Verification checks:
  1. Whether the firm has complied with all GIPS requirements, and
  2. Whether its policies and procedures are designed to achieve compliance.

Required Elements:

• A firm cannot state it is “verified” unless the entire firm (not just composites) undergoes verification.
• Verification must be conducted by a qualified independent party.

Recommended Practices:

• Pursue verification annually for client confidence.
• Publicly disclose verification status in marketing materials.

Example:
An investment firm hires a CPA firm to verify GIPS compliance annually and notes this in presentations to prospective institutional clients.

4. Major Sections of GIPS (Summary)

GIPS is organized into eight key sections (firms must comply with those that apply):

1. Fundamentals of Compliance – Firms must meet all core requirements to claim compliance.
2. Input Data and Calculation Methodology – Data must be accurate; returns must use consistent, prescribed methods (e.g., time-weighted).
3. Composite and Pooled Fund Maintenance – All relevant portfolios must be grouped properly and consistently.
4. Composite Time-Weighted Return Reports – Required reporting for composite-level performance using time-weighted returns.
5. Composite Money-Weighted Return Reports – Optional but must follow specific rules if presented.
6. Pooled Fund Time-Weighted Return Reports – For pooled investment vehicles marketed broadly.
7. Pooled Fund Money-Weighted Return Reports – Optional, if applicable, following GIPS rules.
8. GIPS Advertising Guidelines – Requirements for marketing and promotional materials claiming compliance.

Required Elements:

• Firms must follow all applicable sections to claim GIPS compliance.
• If advertising GIPS compliance, they must adhere to the advertising guidelines.

Recommended Practices:

• Firms should train staff on which sections apply to their business.
• Maintain standardized templates for reports and advertising to ensure compliance.

Example:
A private equity firm producing a money-weighted return report must also include time-weighted returns and disclosures to remain GIPS-compliant when marketing performance.

Ethics Application

Purpose of Ethics Application

Guidance (What It Means):

• Understanding the Code and Standards isn’t enough — candidates must apply them to real-world cases, which is a core part of the CFA exam.
• The goal is to analyze situations, identify violations (or the absence of them), and determine appropriate actions.
• Scenarios often involve conflicts of interest, market integrity, professionalism, and client duties.

Required Actions (Must-Do):

1. Always analyze a situation by considering who is affected (clients, employers, market).
2. Identify which Standard(s) apply and whether any law or regulation is also relevant.
3. If multiple standards apply, follow the most stringent rule.
4. Document the reasoning and ensure any action protects client interests and market integrity.

Recommended Procedures (Best Practices):

• Use the Ethical Decision-Making Framework (identify facts, duties, and options; choose the most ethical course).
• Discuss gray areas with compliance, supervisors, or peers before acting.
• Maintain records of decisions when ethical judgment is involved.

Common Areas Tested in Scenarios

1. Insider Trading and Material Nonpublic Information (Standard II)
   • Look for subtle clues: selective disclosure, overheard conversations, early access to earnings.
   • Example: An analyst gets confidential M&A details at a private dinner — must not trade or disclose.
2. Misrepresentation and Plagiarism (Standard I(C))
   • Copying research or exaggerating performance without attribution is a frequent violation.
   • Example: Using another firm’s report in a client deck without citing the source.
3. Conflicts of Interest (Standard VI)
   • Hidden ownership stakes, undisclosed referral fees, or front-running client trades.
   • Example: A portfolio manager buys stock for themselves before a large client purchase.
4. Duties to Clients (Standard III)
   • Prioritizing clients, ensuring suitability, and fair dealing.
   • Example: Recommending a complex structured product to a conservative retiree is unsuitable.
5. Misconduct (Standard I(D))
   • Any activity that harms professional integrity, even outside the office, can be a violation.
   • Example: Fraud in personal finances reflecting poorly on professional reputation.

How to Approach Ethics Scenarios (Exam Technique)

Step 1: Identify the actors and affected parties (clients, firm, market, public).
Step 2: Determine the relevant Standards and laws.
Step 3: Ask: Does the action protect clients and uphold market integrity, even if legal?
Step 4: Choose the action that avoids or discloses conflicts, prevents harm, and documents decisions.
Step 5: Remember — following the stricter standard (CFA or law) always wins.