Ethical and Professional Standards
What you must know
The Code of Ethics is aspirational; the seven Standards of Professional Conduct are enforceable and are the source of most exam questions. Know each standard and its subsections: I Professionalism (knowledge of the law, independence and objectivity, misrepresentation, misconduct); II Integrity of Capital Markets (material nonpublic information, market manipulation); III Duties to Clients (loyalty, prudence and care; fair dealing; suitability; performance presentation; confidentiality); IV Duties to Employers (loyalty, additional compensation, supervisory responsibility); V Investment Analysis, Recommendations and Actions (diligence and reasonable basis, communication with clients, record retention); VI Conflicts of Interest (disclosure of conflicts, priority of transactions, referral fees); VII Responsibilities as a CFA Institute Member or Candidate.
Traps
(a) The mosaic theory permits combining public and nonmaterial nonpublic information; acting on material nonpublic information never is. (b) When local law conflicts with the Code, follow the stricter. (c) Fair dealing concerns the order and fairness of dissemination, not equal outcomes for all clients. (d) Priority of transactions puts clients and the employer ahead of the member's personal account. (e) 'Must' and 'should' are not interchangeable - disclosure of referral fees to employer and client is required.
Worked example
A member is offered a lavish dinner and an IPO allocation by a broker whose research she uses. Accepting the allocation creates a benefit that could compromise objectivity and is effectively additional compensation; she should decline it and disclose the relationship to her employer. Merely ignoring the research does not cure the undisclosed conflict.