Reading 90

The CFA Institute Professional Conduct Program is governed by the CFA Institute Bylaws and the Rules of Procedure for Proceedings Related to Professional Conduct. The Program is built on two principles: fairness of the process to members and candidates, and confidentiality of the proceedings.

• The CFA Institute Board of Governors has overall responsibility for the Professional Conduct Program.
• The Disciplinary Review Committee is responsible for enforcing the Code and Standards.
• The Professional Conduct staff conducts inquiries.

Several circumstances can prompt a Professional Conduct inquiry:

1. Self-disclosure by members or candidates on their annual Professional Conduct Statements (e.g., civil litigation, criminal investigation, or being the subject of a written complaint).
2. Written complaints about a member or candidate's professional conduct received by the Professional Conduct staff.
3. Evidence of misconduct received by the staff through public sources, such as a media article or broadcast.
4. A report by a CFA exam proctor of a possible violation during the examination.
5. Analysis of exam materials and monitoring of social media by CFA Institute.

Once an inquiry has begun, the Professional Conduct staff may request (in writing) an explanation from the subject member or candidate, and may:

1. Interview the subject member or candidate;
2. Interview the complainant or other third parties;
3. Collect documents and records relevant to the investigation.

After investigation, the Professional Conduct staff may decide:

1. That no disciplinary sanctions are appropriate;
2. To issue a cautionary letter; or
3. To discipline the member or candidate.

If a violation is found and a sanction is proposed, the member or candidate may accept or reject the sanction. If rejected, the matter is referred to a disciplinary review panel of CFA Institute members for a hearing. Sanctions may include condemnation by peers or suspension of a candidate's continued participation in the CFA Program.

Code of Ethics — Six Components

Members of CFA Institute (including CFA charterholders) and candidates for the CFA designation ("Members and Candidates") must:

1. Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets.
2. Place the integrity of the investment profession and the interests of clients above their own personal interests.
3. Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.
4. Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.
5. Promote the integrity and viability of the global capital markets for the ultimate benefit of society.
6. Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.

Standards of Professional Conduct — Seven Standards

I. Professionalism

• I(A) Knowledge of the Law. Understand and comply with all applicable laws, rules, and regulations (including the Code and Standards). In conflict, comply with the stricter rule. Do not knowingly participate in or assist any violation, and must dissociate from such violations.
• I(B) Independence and Objectivity. Use reasonable care and judgment to maintain independence and objectivity. Do not offer, solicit, or accept any gift, benefit, compensation, or consideration that could reasonably be expected to compromise independence and objectivity (own or another's).
• I(C) Misrepresentation. Do not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities.
• I(D) Misconduct. Do not engage in any professional conduct involving dishonesty, fraud, or deceit, or commit any act that reflects adversely on professional reputation, integrity, or competence.
• I(E) Competence. Act with and maintain the competence necessary to fulfill professional responsibilities.

II. Integrity of Capital Markets

• II(A) Material Nonpublic Information. If in possession of material nonpublic information that could affect investment value, do not act or cause others to act on it.
• II(B) Market Manipulation. Do not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.

III. Duties to Clients

• III(A) Loyalty, Prudence, and Care. Owe a duty of loyalty to clients; act with reasonable care and prudent judgment; place clients' interests before employer's or own interests.
• III(B) Fair Dealing. Deal fairly and objectively with all clients in providing analysis, recommendations, action, and other professional activities.
• III(C) Suitability.
  • In an advisory relationship: (a) make a reasonable inquiry into client's experience, risk/return objectives, and financial constraints, and reassess regularly; (b) determine investment is suitable to client's situation and consistent with written objectives, mandates, and constraints; (c) judge suitability in the context of the client's total portfolio.
  • When managing a portfolio to a specific mandate, strategy, or style: make only recommendations or take only actions consistent with the stated objectives and constraints.
• III(D) Performance Presentation. Make reasonable efforts to ensure performance information is fair, accurate, and complete.
• III(E) Preservation of Confidentiality. Keep information about current, former, and prospective clients confidential unless: (1) the information concerns illegal activities by the client; (2) disclosure is required by law; or (3) the client permits disclosure.

IV. Duties to Employers

• IV(A) Loyalty. In matters related to employment, act for the benefit of the employer; do not deprive employer of the advantage of one's skills and abilities, divulge confidential information, or otherwise cause harm.
• IV(B) Additional Compensation Arrangements. Do not accept gifts, benefits, compensation, or consideration that competes with or could reasonably create a conflict of interest with the employer's interest, unless written consent from all parties is obtained.
• IV(C) Responsibilities of Supervisors. Make reasonable efforts to ensure anyone subject to one's supervision or authority complies with applicable laws, rules, regulations, and the Code and Standards.

V. Investment Analysis, Recommendations, and Actions

• V(A) Diligence and Reasonable Basis. (1) Exercise diligence, independence, and thoroughness in analysis, recommendations, and actions; (2) have a reasonable and adequate basis, supported by appropriate research and investigation.
• V(B) Communication with Clients and Prospective Clients.
  1. Disclose the nature of services provided and associated costs.
  2. Disclose the basic format and general principles of the investment processes used; promptly disclose changes that could materially affect those processes.
  3. Disclose significant limitations and risks associated with the investment process.
  4. Use reasonable judgment in identifying important factors and include them in communications.
  5. Distinguish between fact and opinion in presenting analysis and recommendations.
• V(C) Record Retention. Develop and maintain appropriate records to support investment analysis, recommendations, actions, and other client communications.

VI. Conflicts of Interest

• VI(A) Avoid or Disclose Conflicts. Avoid or make full and fair disclosure of all matters that could reasonably be expected to impair independence and objectivity or interfere with duties to clients, prospective clients, and employer. Disclosures must be prominent, in plain language, and effectively communicated.
• VI(B) Priority of Transactions. Investment transactions for clients and employers must have priority over transactions in which a Member or Candidate is the beneficial owner.
• VI(C) Referral Fees. Disclose to employer, clients, and prospective clients (as appropriate) any compensation, consideration, or benefit received by, or paid to, others for the recommendation of products or services.

VII. Responsibilities as a CFA Institute Member or CFA Candidate

• VII(A) Conduct as Participants in CFA Institute Programs. Do not engage in conduct that compromises the reputation or integrity of CFA Institute, the CFA designation, or the integrity, validity, or security of CFA Institute programs.
• VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program. Do not misrepresent or exaggerate the meaning or implications of CFA Institute membership, holding the CFA designation, or candidacy in the CFA Program.