2012 CFA l2 workbook 1

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2 Study Session
1
Ethical and Professional Standards
Study
Session
1
Ethical and Professional Standards
1.
Code of Ethics and Standards of Professional
Conduct
2.
Guidance for Standards I
-
VII
3.
CFA lnstitute Soft Dollar Standards
4.
CFA lnstitute Research Objectivity Standards
Ethical and Professional
Standards
1.
Code of Ethics and Standards
of Professional Conduct

2.
Guidance for Standards I
-
VII
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Study Session
1
Ethical and Professional Standards
5
Standard
I:
Professionalism
Standard
I:
Professionalism
The Standard
A.
Knowledge of the Law
H
Understand and comply with all laws, rules,
and regulations (including Code and Standards)
of any government, regulatory agency, or
association governing professional activities
H
Comply with more
strict
law, rule, and

regulation
H
Do not knowingly assist in violation, otherwise
dissociate from activity
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lnc.
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6
Study Session
1
Ethical and Professional Standards
Standard I: Professionalism
Guidance
A. Knowledge of the Law
.
Most strict
.
First, notify supervisor or compliance
.
May confront wrongdoer directly
Dissociate if necessary
.
Inaction may be construed as participation
.
No requirement to report violations to
governmental authorities, but this may be
appropriate in certain cases

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Standard I: Professionalism
Recommended Procedures
A.
Knowledge of the Law
E
Keep informed, regularly review written
compliance procedures, maintain files
I
.
Seek compliance/legal advice as needed
Encourage firms to adopt code of ethics
02011 Kaplan, lnc.
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Study Session
1
Ethical and Professional Standards
Standard I: Professionalism
Recommended Procedures
A.
Knowledge of the Law
Distribute information internally on
applicable laws and regulations
'
Have written procedures for reporting
I
suspected violations

Members strongly encouraged to report
violations by other members
1
02011 Kaplan, lnc.
lo
1
Standard I: Professionalism
The Standard
B.
Independence and Objectivity
Use reasonable care, judgment to
achieve and maintain independence in
professional activities
Do not offer, solicit, or accept any
compensation that could compromise
independence or objectivity
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8
Study Session
1
Ethical and Professional Standards
Standard I: Professionalism
Guidance
B.
lndependence and Objectivity
Modest gifts okay
Distinguish between gifts from clients and

gifts from entities trying to influence a
member's behavior
May accept gift from clients-disclose to
employer-get permission if gift is for future
performance
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Standard I: Professionalism
Guidance
B.
lndependence and Objectivity
Members responsible for hiring outside
managers should not accept travel, gifts, or
entertainment that could impair their
objectivity
Investment banking relationships-do not
bow to pressure to issue favorable research
For issuer-paid research, flat fee structure is
preferred; must disclose
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Study
Sessior~
1
Ethical
and
Professior~al
Standards

9
Standard I: Professionalism
Guidance
B.
lndependence and Objectivity
Members working for credit rating firms
should avoid influence by issuing firms
Users of credit ratings should be aware of
this potential conflict
Best practice is for analysts to pay for their
own commercial travel to firms being
analyzed or to firm events
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Standard I: Professionalism
Recommended Procedures
B.
lndependence and Objectivity
Protect integrity of opinions-reports
should reflect unbiased opinion
Create a restricted list
Restrict special cost arrangements
Limit gifts; clear value limits by firm
Be careful with IPO share allocations
02011 Kaplan, lnc. 15
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10
Study Session
1
Ethical and Professional Standards

Standard
I:
Professionalism
The Standard
C.
Misrepresentation
Do not make misrepresentations
relating to investment analysis,
recommendations, actions, or other
professional activities
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Standard
I:
Professionalism
Guidance
C.
Misrepresentation
Standard covers oral, written, or electronic
communications
Do not misrepresent qualifications, services of
self or firm, or performance record,
characteristics of an investment
Do not guarantee a certain return
No plagiarism-written, oral, or electronic
communications
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Study Sessior~

1
Ethical and Professional Standards
11
Standard I: Professionalism
Recommended Procedures
C.
Misrepresentation
Firms can assist employees by providing
written list of the firm's available services and
a description of the firm's qualifications
Maintain records of materials used to prepare
research reports, and quote source, except
for "recognized financial and statistical
reporting services"
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Standard
I:
Professionalism
Recommended Procedures
C. Misrepresentation
Models and analysis of others at the
firm may be used without attribution
Should encourage firm to establish
procedures for verifying marketing
claims of third parties recommended to
clients
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12
Study Session
1
Ethical and Professional Standards
Standard I: Professionalism
The Standard
D. Misconduct
Do not engage in any professional
conduct involving dishonesty, fraud,
~
deceit, or commit any act that reflects
adversely on professional reputation,
integrity, or competence
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Standard
I:
Professionalism
Guidance
D. Misconduct
This Standard covers conduct that may
not be illegal, but could adversely affect
a member's
ability to perform duties
02011 Kaplan, Inc. 2 1
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Study Session
1
Ethical and Professional Standards

13
Standard I: Professionalism
Recommended Procedures
D.
Misconduct
Adopt a code of ethics to which every
employee must adhere
Disseminate a list of potential violations
and associated disciplinary sanctions
Conduct background checks on potential
employees-look for good character and
eligibility to work in the investment industry
02011 Kaplan, Inc. 22
Standard II:
Integrity
of
Capital
Markets
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16
Study Session
1
Ethical and Professional Standards
Standard II: Integrity
of
Capital Markets
Recommended Procedures
A. Material Nonpublic lnformation
H
lnformation barrier or "firewall" is

recommended to control
interdepartmental communications
H
lnformation barrier includes use of
restricted list
H
Review employee trades
1
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1
Standard II: Integrity
of
Capital Markets
Recommended Procedures
A. Material Nonpublic lnformation
H
Increase reviewlrestrict proprietary
trading while firm is in possession of
material nonpu blic information
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Study Session
1
Ethical and Professional Standards
17
Standard II: Integrity
of
Capital Markets

The Standard
B.
Market Manipulation
Do not engage in practices that distort
prices or
artificially inflate trading
volume with
intent to mislead
market
participants
02011 Kaplan, Inc.
Standard II: Integrity
of
Capital Markets
Guidance
6.
Market Manipulation
Do not engage in transaction-based
manipulation-give false impression of
activitylprice movement; gain dominant
position in an asset to manipulate price of
the asset or a related derivative
Do not distribute false, misleading
information
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18
St~ldy Session

1
Ethical and Professiorlal Star~dards
Standard Ill:
Duties to Clients and
Prospective Clients
Standard Ill: Duties to Clients
The Standard
A.
Loyalty, Prudence, and Care
Duty of loyalty to clients-act with reasonable
care and exercise prudent judgment
Act for benefit of clients and place their
interests before employer's or own interests
Determine and comply with any applicable
fiduciary duty
02011
Kaplan, lnc.
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Study Session
1
Ethical and Professional Standards
19
Standard Ill: Duties to Clients
Guidance
A.
Loyalty, Prudence, and Care
Take investment actions in client's best
interests

Exercise prudence, care, skill, and diligence
that a person familiar with such matters would
use
"Client" may be investing public
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Standard Ill: Duties to Clients
Guidance (continued)
A.
Loyalty, Prudence, and Care
Manage pools of client assets according to
terms of governing documents
Make investment decisions in context of total
portfolio
Vote proxies responsibly and disclose proxy
voting policies to clients
"Soft dollars" must benefit client
02011 Kaplan, Inc.
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20
Study Session
1
Ethical and Professional Standards
Standard Ill: Duties to Clients
Recommended Procedures
A.
Loyalty, Prudence, and Care
w
Follow rules and laws
w

Establish client investment objectives
w
Diversify
w
Deal fairly with clients-investment actions
w
Disclose all possible conflicts
w
Vote proxies in best interest of clients and
ultimate beneficiaries
02011 Kaplan, Inc.
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Standard Ill: Duties to Clients
Recommended Procedures (continued)
A.
Loyalty, Prudence, and Care
Keep client information confidential
Seek best trading execution for clients
Place client interests first
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