Chartered Financial Analyst (CFA) Ethical and Professional Standards Syllabus

Ethical and Professional Standards syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Ethical and Professional Standards in Chartered Financial Analyst (CFA), not a summary of it.

1. 1

   Code of Ethics and Standards of Professional Conduct

   7 topics

   • Structure of the CFA Institute Professional Conduct Program
     • The six components of the Code of Ethics
     • Professional Conduct Program and Disciplinary Review Committee
     • Consequences of violations and CFA designation enforcement
   • Standard I: Professionalism
     • Knowledge of the Law and dealing with conflicting legal requirements
     • Independence and Objectivity (gifts, sponsored research)
     • Misrepresentation and plagiarism
     • Misconduct affecting professional reputation
   • Standard II: Integrity of Capital Markets
     • Material Nonpublic Information and the mosaic theory
     • Market Manipulation (information-based and transaction-based)
   • Standard III: Duties to Clients
     • Loyalty, Prudence, and Care (fiduciary duty)
     • Fair Dealing across clients
     • Suitability and IPS requirements
     • Performance Presentation and Preservation of Confidentiality
   • Standard IV: Duties to Employers
     • Loyalty and competing with an employer
     • Additional Compensation Arrangements
     • Responsibilities of Supervisors
   • Standard V: Investment Analysis, Recommendations, and Actions
     • Diligence and Reasonable Basis
     • Communication with Clients and Prospective Clients
     • Record Retention
   • Standards VI and VII: Conflicts and Responsibilities as a Member
     • Disclosure of Conflicts and Priority of Transactions
     • Referral Fees
     • Conduct as Participants in CFA Programs and reference to CFA designation
2. 2

   Global Investment Performance Standards (GIPS)

   3 topics

   • Purpose and Scope of GIPS
     • Voluntary standards and the role of the firm
     • Fundamentals of compliance and definition of the firm
   • Composite Construction and Presentation
     • Defining discretion and composite inclusion
     • Required and recommended disclosures
   • Pooled Funds and Verification
     • GIPS reports for pooled funds
     • Independent verification process
3. 3

   Ethical Decision-Making and Applications

   3 topics

   • An Ethical Decision-Making Framework
     • Identify, consider, decide, act, reflect
     • Situational influences and behavioral biases in ethics
   • Applying the Code and Standards to Cases
     • Soft dollar arrangements and trade allocation
     • Insider trading scenarios and firewalls
   • Professionalism in the Investment Industry
     • Trust, professionalism, and the social contract
     • Asymmetric information and client protection

Ethical and Professional Standards flashcards for Chartered Financial Analyst (CFA)

22 of 51 cards from the Ethical and Professional Standards deck — real questions with worked answers.

1. What are the two interrelated documents that constitute the foundation of the CFA Institute ethical framework?

   The Code of Ethics (general statements of conduct) and the Standards of Professional Conduct (seven specific Standards that detail required behavior).

2. Within the CFA Institute, which body is responsible for enforcing the Code and Standards through the Professional Conduct Program (PCP)?

   The Disciplinary Review Committee (DRC), supported by the Professional Conduct staff, which conducts investigations and imposes sanctions.

3. Name the four main sources that can trigger a CFA Institute Professional Conduct inquiry.

   (1) Self-disclosure on the annual Professional Conduct Statement, (2) written complaints, (3) evidence of misconduct from media or other sources, and (4) a CFA exam proctor report or analysis of exam scores/answers.

4. What is the role of the Designated Officer in the Professional Conduct Program?

   The Designated Officer conducts the investigation; after review may conclude no disciplinary action, issue a cautionary letter, or propose a disciplinary sanction to the member.

5. If a member rejects a sanction proposed by the Designated Officer, what happens next in the PCP process?

   The matter is referred to a disciplinary review panel (a hearing panel of DRC members and volunteers) for a hearing.

6. List the six components of the CFA Institute Code of Ethics (the obligations members must uphold).

   Act with integrity/competence/respect; place client and employer interests above own; use reasonable care and independent professional judgment; practice and encourage others to practice ethically; promote integrity of capital markets; and maintain/improve professional competence.

7. What are the four sub-sections of Standard I: Professionalism?

   I(A) Knowledge of the Law, I(B) Independence and Objectivity, I(C) Misrepresentation, and I(D) Misconduct.

8. Under Standard I(A) Knowledge of the Law, what must a member do when the applicable law and the Code and Standards differ?

   Comply with the more strict of the applicable law or the Code and Standards (always follow the higher/stricter standard).

9. Under Standard I(A), what is a member required to do upon knowledge of a violation, and what is NOT required?

   Required: dissociate from the illegal/unethical activity (and may seek legal advice). Not required (by the Standard) but encouraged: reporting violators to authorities. Members are not required to report to CFA Institute but encouraged to.

10. Under Standard I(B) Independence and Objectivity, how should a member handle a modest gift versus payment for travel from a client?

    A modest, customary gift may be accepted with disclosure; accepting paid travel/transportation from a company an analyst covers can compromise independence, so the analyst should pay their own commercial travel where feasible.

11. Distinguish Standard I(C) Misrepresentation from Standard I(D) Misconduct.

    I(C) Misrepresentation prohibits untrue statements about investments/services and plagiarism. I(D) Misconduct prohibits dishonesty, fraud, or deceit reflecting adversely on professional reputation, integrity, or competence (covers personal conduct like alcohol abuse affecting work).

12. What are the two sub-sections of Standard II: Integrity of Capital Markets?

    II(A) Material Nonpublic Information and II(B) Market Manipulation.

13. Define 'material' information in the context of Standard II(A) Material Nonpublic Information.

    Information is material if its disclosure would likely affect the price of a security or if reasonable investors would want to know it before making an investment decision.

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

    An analyst may reach an investment conclusion by combining material public information with nonmaterial nonpublic information; trading on such conclusions does not violate the Standard even though no single piece is both material and nonpublic.

15. Under Standard II(B) Market Manipulation, what two types of manipulation are prohibited?

    (1) Information-based manipulation (spreading false rumors) and (2) transaction-based manipulation (trades that distort prices or create artificial volume/'pump and dump').

16. What are the three sub-sections of Standard III: Duties to Clients dealing with loyalty, fair dealing, and suitability?

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

17. List all five sub-sections 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.

18. Under Standard III(A), what does 'soft dollar' or client brokerage entail and to whom does it belong?

    Client brokerage (soft commissions) must be used to benefit the client and belongs to the client; it should be used to purchase goods/services that benefit the client, not the manager.

19. Under Standard III(B) Fair Dealing, how must a member treat clients when disseminating investment recommendations?

    Members must deal fairly and objectively with all clients—'fairly' (not equally) means no client is favored; all clients should have a fair opportunity to act on recommendations and changes.

20. Under Standard III(C) Suitability, what must a manager do before making a recommendation for a client with an investment policy statement (IPS)?

    Determine that the investment is suitable to the client's financial situation and consistent with the client's written objectives, mandates, and constraints (the IPS), updated regularly (at least annually).

21. Under Standard III(E) Preservation of Confidentiality, what is the key exception to keeping client information confidential?

    Information may be disclosed if it concerns illegal activities by the client, disclosure is required by law, or the client permits disclosure.

22. What are the two sub-sections of Standard IV: Duties to Employers?

    IV(A) Loyalty, IV(B) Additional Compensation Arrangements, and IV(C) Responsibilities of Supervisors (three total).

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