CFA 2018 level 3 gostudy ethics 2016

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Go Study’s
CFA Exam Level 3
®

2016 Guided Notes
Ethics
by GoStudy™
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Everything you need to pass & nothing you don’t

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Guided Notes for CFA® Level 3 – 2016
Copyright © 2016 by Go Study LLC.® All Rights Reserved. Published in 2016

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following is the copyright disclosure for those materials: “Copyright, 2016, CFA Institute.
Reproduced and republished from 2016 Learning Outcome Statements, Level III CFA® Program
Materials, CFA Institute Standards of Professional Conduct, and CFA Institute’s Global
Investment Performance Standards with permission from CFA Institute. All rights reserved.”

Disclaimer: These guided notes condense the original CFA Institute study material into 240
pages. It is not designed to replace those notes, but to be used in conjunction with them. While

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Ethics (Study Session 1, Reading 1 & 2)
Ethics will show up in an afternoon selected response item set. It will count for about 10-15%.
Having gone through Level 1 and Level 2, you already know that Ethics is a unique section in
that there is comparatively little to memorize. For example, the CFA exam is not going to ask
you to know what Standard I(a) is versus Standard II(b) by those names. There will, however, be
questions that ask you to choose which standard (or standards) is violated based on a passage
and then list the different standards as the multiple choice options.
Past Level III exams have seen more questions on compliance, portfolio management, and the

asset manager code of conduct than L1 and L2. Questions around suitability and fiduciary duty
have been especially prominent, perhaps reflecting the core focus of L3.
The bottom line: Basic knowledge is assumed, and it is probably worth at least one read through
the Institute’s official ethics guide within a month or so of the exam, but for the most part you are
better off doing lots of practice problems to get a feel for how to answer these questions. That’s
why we keep our overview of Ethics very high level and in outline form.

Basic Principles for Answering Ethics Questions
Knowing which questions to ask when faced with an Ethics question can help you sort through
the different options to arrive at the right answers. Here are three key questions and two
guidelines to help you:
Questions
1. All CFA Institute members and candidates are required to comply with the Code and
Standards. So …does the action uphold the profession?
2. If you were the client would you agree with the course of action?
3. Would a moral person, or leader, follow this course of action?
Principles
1. When in doubt err towards the more strict guideline/regulation
2. There are differences between requirements as laid out in the Standards and
recommended practice or guidance. This distinction is often tested.
Ethics boils down to the golden rule. How would you want your financial advisor to act? What
actions should they take with respect to you and your portfolio?
Chances are you’d want them to act in your interests and not those of someone else paying them.
You would want them to communicate what they’re doing and explain why, to be honest in
reporting results, and to do it frequently enough that you don’t worry about what’s going on.
Finally, an investment professional should also uphold the integrity of capital markets, (which
you can think of as the greater good), even at their own expense.1
Always remember, there is a simple order of priority that should guide your actions—capital
markets, clients, employer, then you.
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Think Spiderman, with great power (you CFA Charterholder) comes great responsibility.

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One Page Ethics Tear Sheet
Summarizing the Code of Ethics -PEJMAR2
Priority - Your client's interests always come first (then your employer, then you).
Encourage - Practice and encourage others to act professionally and ethically to reflect credit on yourself and the
profession.
Judgment - Use reasonable care and judgment when performing all professional activities.
Maintain - Keep your knowledge up to date and encourage other professionals to do the same.
Actions - Employ integrity, competence, diligence, and respect in an ethical manner with everyone.
Rules - Promote the integrity of capital markets by following the rules.
Standards of Professional Conduct
1. Professionalism
a. Knowledge of the Law: Have to know them, comply with stricter of CFA, local, home law
b. Independence and Objectivity: Reasonable care, compensation ??s/issuer paid research
c. Misrepresentation: Knowingly misrepresenting/omitting information, commit plagiarism
d. Misconduct: Fraud, Negative light on profession. Distinction btwn personal/professional
2. Integrity of Capital Markets
a. Material nonpublic information: Can’t trade on it or cause others too. MOSIAC theory
b. Market Manipulation: Artificially distort price or volume with intent to deceive
3. Duties to Clients
a. Loyalty, prudence, and care: Act for benefit of client above employer/you. Fiduciary duty
b. Fair Dealing: Fair and objective. Disclose different levels of service (OK w/ no negative)
c. Suitability: In context of Risk constraints from IPS. Evaluate on portfolio level vs. risk of just 1
security (prudent investor rule)

d. Performance and Presentation: Fair, accurate, fact vs. opinion. Recommend keep records for 7
years
e. Preservation of Confidentiality: Always for past/present clients unless illegal, required, or for
CFA institute investigation
4. Duties to Employers
a. Loyalty: Employer before you. Questions around quitting and taking client info/models often get
tested
b. Additional Compensation Arrangements: Disclose first. Written consent from all parties is
required.
c. Responsibilities of Supervisors: Reasonable effort to detect/disclose violations. 2015 has moved to
slightly more proactive duty to educate.
5. Investment Analysis, Recommendations, and Actions
a. Diligence and Reasonable Basis: Cover basis for investment, thorough, disagreeing on a group
recommendation is OK
b. Communications with clients/ prospective clients: Would you want to know something if you were
the client? If yes, then disclose it.
c. Record retention: Electronic OR paper OK. Recommendation: Keep records for 7 years
6. Conflicts of Interest
a. Disclosure of Conflicts: Disclose anything that would interfere with independence and objectivity
b. Priority of Transactions: Clients > Employers > You. Treat paying family the same as other
clients.
c. Referral Fees: Full disclosure so clients can judge potential biases. Often in SD 3 context.
7. Responsibilities as a CFA Institute Member/Candidate
a. Conduct: Don’t cast negative light on profession or capital markets via your actions

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The Code of Ethics4
1. Investment professionals should act with integrity, competence, diligence, and respect. They
should convey their actions in an ethical manner to their clients, potential clients, and
employers
2. Investment professionals should place personal interests below the interest of clients and the
integrity of the investment profession.
3. Investment professionals should act with care and maintain independent judgment when
applying investment analysis, recommendations, and actions. Analysts must use independent
judgment when engaging in activities that will ultimately affect client interests.
4. Analysts should not only act in an ethical manner, but should promote ethical actions of
others within the profession.
5. Investment professionals should contribute to well-functioning markets by respecting the
applicable rules and promoting those rules to others.
6. Investment professionals should strive to maintain and improve their professional
competence, as well as the competence of others within the investment profession.
Standard I: Professionalism
1. Knowledge of the Law
Keys: Know the rules. Comply with the more strict law, regulation, or CFA standard.
Disassociate from any violations.
a. You have to know, stay up-to-date and comply with the law. No excuses.
2. Independence and Objectivity
Keys: Reasonable Care and judgment, don’t accept compensation that can impact objectivity.
a. Maintain independence and objectivity in all professional activities
i. No Gifts that can compromise even appearance of objectivity. Modest

gifts OK. Gifts from clients are more OK than those seeking influence
ii. No invites to lavish entertainment/functions/tickets (often tests the
distinction between lavish and reasonable accommodation to go do
research on a company)
iii. No favors/job referrals/or participation in oversubscribed IPOs
iv. Potential pressure from sell-side to have buy side issue favorable reports
(Guidance: establish effective firewalls, restricted securities, limit gifts to
nominal amounts)
Note on Issuer Paid Research: Research must be thorough, unbiased, and independent. The
analyst must FULLY DISCLOSE conflicts and compensation structure. A flat fee that is
independent of the report’s conclusions is recommended but not required.
3. Misrepresentation
a. Must not knowingly give false impression in written, oral, advertising, or
electronic communication. This includes omitting facts.
b. Must not misrepresent:
i. Credentials
ii. Services offered
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From CFA Institute Official Code of Ethics…

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iii. Performance record
iv. Investment characteristics (or guarantee a return)
v. Plagiarism
1. Cannot plagiarize. Can use common sources like US treasury
without attribution however (and this is commonly tested).

4. Misconduct
a. Don’t do it! Nothing dishonest, fraudulent, or with an adverse impact on
profession or professional reputation. Note the CFAI is very concerned with the
!! Often test
reputation of capital markets and its own self. Anything that makes them look bad
professional versus
in a professional setting is probably a violation.
personal
misconduct
Standard II: Integrity of Capital Markets
1. Material Nonpublic Information
a. If you have material nonpublic information (info that could affect an investment’s
value) you CANNOT act or CAUSE ANOTHER to act on that information
i. Material: Material if disclosure would impact security price or is
something a reasonable investor would want to know about the company
ii. Nonpublic until made available to entire marketplace (NOT just analysts)
iii. MOSIAC THEORY
1. Mosaic theory involves collecting public and non-public nonmaterial information about a company in order to piece together a
conclusion about its price. If disparate sources of acceptable
information lead to putting together the puzzle that’s ok. That’s
what analysts get paid to do after all.
2. Market Manipulation
a. Do not artificially distort price or volume with an intent to mislead market
participants including through releasing false information. Variations of this are
frequently tested.
Standard III: Duties to Clients
1. Loyalty, Prudence, and Care
1. Act with reasonable care and exercise prudent judgment
2. Act for benefit of client, place employer interests ahead of your own
3. Must comply with all fiduciary duties

2. Fair Dealing
1. Be fair and objective around analysis, recommendations, and professional activity
i. Service Levels: Different levels of service are OK but only if disclosed and
!! If conflict
does not disadvantage any clients. EX: I can offer more research to a set
exists between
of clients that pay more, but I can’t release trade recommendations to
written IPS and
them earlier.
client wishes,
ii. Allow clients a fair chance to act on recommendations and notify them of
follow IPS
changes to recommendations before executing a client trade
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3. Suitability
1. Know client’s Risk and Return (think IPS constraints) and take action consistent
with those constraints. Suitability is from a PORTFOLIO perspective not that of
an individual security. Invest to the fund mandate if managing a fund.
4. Performance Presentation
1. Fair, accurate, and complete (will most likely be tested with GIPS not in Ethics)
i. Do not guarantee performance or misstate past performance
5. Preservation of Confidentiality
1. Keep Client (and former client) info confidential unless:
i. Illegal activities are suspected
ii. Disclosure is required by law
iii. Client or prospect allows disclosure

2. Providing information to CFA Institute for investigation is not a violation of this
standard
Standard IV: Duties to Employers
1. Loyalty
1. Act for the benefit of the employer
i. If also practicing independently then written permission from employer is
required
ii. When leaving employer
1. Act in their best interest until gone
2. Do not take records without permission (just knowing names and
contacting once gone is OK)
iii. Whistle blowing: OK if it protects client or capital markets not OK for
personal gain
2. Additional compensation
i. No gifts/compensation that interfere with duty to employer or creates
conflict of interest UNLESS written permission obtained from ALL
parties (email is acceptable)
3. Responsibilities of Supervisors
1. Must make reasonable efforts to detect and prevent violations
Standard V: Investment Analysis, Recommendations, and Actions
1. Diligence and Reasonable Basis
a. Reasonable and adequate basis supported by research for analysis or
recommendation
i. Cover all relevant issues and document when making investment
Guidanc
recommendation
e 
ii. Determine soundness of third-party research
iii. In groups, OK to disagree and not disassociate as long as basis is sound
2. Communication with Clients and Prospective Clients

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Key: Would you want to know the information is the situation was reversed? If yes, then
disclose.
a. Disclose format and principals of investment processes & any changes to process
b. Include important factors for recommendations in communication (like basic
characteristics of the security)
c. Distinguish clearly between fact and opinion
3. Record Retention
a. Develop & maintain appropriate records with support for decisions (guidance is to
keep 7 years in either electronic or paper form). Records are firm property.
Standard VI: Conflicts of Interest
1. Disclosure of Conflicts
a. Must make full, fair disclosure to clients, prospects, and/or employer on any
matter that could reasonably be expected to interfere with independence or
objectivity. Disclosure is important to:
i. Allow clients to judge motives (e.g. relationship with broker, stock
ownership)
ii. So employers can judge any financial pressures that could influence your
decision as an advisor (non-financial compensation is often referenced, it
counts too)
2. Priority of Transactions
a. Clients first, then employers, then and only then your transactions (no frontrunning)
i. Family member accounts with firm MUST be treated like any other
account. Giving worse treatment to family is a violation. They are a client
too.
3. Referral Fees
a. Disclose all fees so clients can evaluate full cost and potential biases

Standard VII: Responsibilities of a CFA Institute Member or CFA Candidate
1. Must not engage in any conduct that compromises reputation or integrity of CFA Institute
or the CFA designation or exams
a. Cheating on exam, disregarding policies, giving confidential info away, improper
use of CFA designation, misrepresenting the CFA program are all examples of
such conduct
2. Referring to the CFA Institute, Designation, or Program
a. Must not misrepresent or exaggerate the meaning or implications of membership
i. May reference participation but not a “partial designation”
ii. May say passed all 3 on first attempt, but NOT indicate superior
performance or ability because of this

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iii. Chartered Financial Analyst and CFA marks always come after a charter
holder’s name or are used as adjectives not nouns

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