CFA (Chartered Financial Analyst) Ethical and Professional Standards Syllabus

What is the 'mosaic theory' under Standard II(A)?

An analyst may combine public information with nonmaterial nonpublic information to reach an investment conclusion and act on it, even if that conclusion would be material if disclosed by the company.

What control is recommended to prevent misuse of MNPI within a firm?

Establishing 'information barriers' (firewalls) between departments and maintaining restricted/watch lists to control the flow of MNPI.

What does Standard II(B) Market Manipulation prohibit?

Practices that distort prices or artificially inflate trading volume with the intent to mislead market participants, including information-based and transaction-based manipulation.

Distinguish the two types of market manipulation under Standard II(B).

Information-based manipulation: spreading false rumors or misleading information; Transaction-based manipulation: trades that deceive (e.g., wash trading, 'pump and dump', securing a controlling position to distort prices).

What are the sub-standards of Standard III: Duties to Clients?

III(A) Loyalty, Prudence, and Care; III(B) Fair Dealing; III(C) Suitability; III(D) Performance Presentation; III(E) Preservation of Confidentiality.

What does Standard III(A) Loyalty, Prudence, and Care require?

Members must place clients' interests before their own and their employer's, act for the benefit of clients, exercise reasonable care, and act as prudent fiduciaries.

Under Standard III(A), to whom is loyalty owed when managing a pension or trust?

To the ultimate beneficiaries of the fund, not merely to the person who hired the manager.

How should soft commissions (soft dollars) be handled under Standard III(A)?

Brokerage is an asset of the client and must be used to benefit the client; client commissions should be directed to obtain best execution and research that benefits the client.

What does Standard III(B) Fair Dealing require?

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

Does 'fair dealing' under Standard III(B) mean 'equal' dealing?

No. It requires fair treatment, not identical treatment; clients may receive differentiated service levels as long as disclosed and not disadvantaging others, and material changes/recommendations must be communicated fairly.

What is required for the dissemination of a new recommendation under Standard III(B)?

All clients should have a fair opportunity to act; recommendations must be communicated to all eligible clients simultaneously/fairly before the firm or its personnel trade.

What does Standard III(C) Suitability require for members in an advisory relationship?

Make reasonable inquiry into the client's investment experience, risk and return objectives, and constraints; reassess via an updated Investment Policy Statement (IPS); ensure investments suit the client's objectives and the portfolio context.

How is suitability judged for a single security under Standard III(C)?

Suitability is judged in the context of the total portfolio, not in isolation; a risky security may be suitable if it fits the overall portfolio's objectives and constraints.

What is the suitability obligation when managing to a stated mandate or index?

Investments must be consistent with the stated objectives, mandate, and constraints of the portfolio (e.g., an index fund must track its index), regardless of individual client circumstances.

What does Standard III(D) Performance Presentation require?

Members must make reasonable efforts to ensure investment performance information is fair, accurate, and complete, and must not misrepresent past performance or expected results.

How can a member best comply with Standard III(D) Performance Presentation?

Present performance over a reasonable period, include all relevant accounts (no cherry-picking), disclose whether figures are gross or net of fees, and consider compliance with GIPS (Global Investment Performance Standards).

What does Standard III(E) Preservation of Confidentiality require?

Members must keep information about current, former, and prospective clients confidential unless it concerns illegal activities, disclosure is required by law, or the client permits disclosure.

What is a key exception that overrides client confidentiality under Standard III(E)?

Disclosure is permitted/required when the information concerns illegal client activities or when compelled by law, and members may provide client information to CFA Institute's Professional Conduct Program (PCP) investigations.

Name the sub-standards of Standard IV: Duties to Employers.

IV(A) Loyalty; IV(B) Additional Compensation Arrangements; IV(C) Responsibilities of Supervisors.

What does Standard IV(A) Loyalty (to employers) require?

Members must act for the benefit of their employer, not deprive it of their skills/abilities, divulge confidential information, or otherwise cause harm; independent practice and competing must have employer consent.

Under Standard IV(A), what may a departing employee take or do?

They may use experience and knowledge gained, but must not take confidential firm property (client lists, records, files) and must not solicit clients before leaving; simple knowledge in memory is generally permissible.

What does Standard IV(B) Additional Compensation Arrangements require?

Members must not accept gifts, benefits, compensation, or consideration that competes with or creates a conflict with their employer's interest unless they obtain written consent from all parties involved.

What does Standard IV(C) Responsibilities of Supervisors require?

Members with supervisory authority must make reasonable efforts to detect and prevent violations of laws, rules, regulations, and the Code and Standards by anyone under their supervision.

How can a supervisor discharge duties under Standard IV(C)?

By establishing and enforcing reasonable, effective compliance procedures; a supervisor may delegate but remains responsible, and should decline supervisory responsibility if no adequate compliance system exists.

Name the sub-standards of Standard V: Investment Analysis, Recommendations, and Actions.

V(A) Diligence and Reasonable Basis; V(B) Communication with Clients and Prospective Clients; V(C) Record Retention.

What does Standard V(A) Diligence and Reasonable Basis require?

Members must exercise diligence, independence, and thoroughness, and have a reasonable and adequate basis (supported by appropriate research and investigation) for any analysis, recommendation, or action.

What does Standard V(B) Communication with Clients require?

Disclose the basic format and general principles of the investment process; distinguish fact from opinion; disclose significant limitations/risks; and communicate material changes promptly.

What does Standard V(C) Record Retention require?

Members must develop and maintain appropriate records (supporting documentation) to substantiate their investment analyses, recommendations, and actions; CFA Institute recommends a minimum retention of seven years.

Name the sub-standards of Standard VI: Conflicts of Interest.

VI(A) Disclosure of Conflicts; VI(B) Priority of Transactions; VI(C) Referral Fees.

What does Standard VI(A) Disclosure of Conflicts require, and what is its core principle?

Members must make full and fair disclosure of all matters that could impair their independence and objectivity or interfere with duties to clients and employer; disclosures must be prominent, in plain language, and effective (e.g., ownership of the securities they recommend).

What do Standard VI(B) Priority of Transactions and VI(C) Referral Fees require?

VI(B): Client transactions take priority over those of the member or firm (clients first, then employer, then self). VI(C): Members must disclose to clients/employer any compensation or benefit received from, or paid to, others for the recommendation of products or services (referral fees).