CFA Standards of Professional Conduct

Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

Read this lesson to learn the standards the CFA has set into place with the mission to make investing an ethical and professional business. You'll also learn the reasoning behind the standards.

CFA Standards

The Standards of Professional Conduct are standards written by the CFA (Chartered Financial Analyst) Institute to encourage investment managers to invest in an ethical and professional manner. This institute offers several different programs that investors can qualify for that show that the investor is actively managing his investments in an ethical and professional manner. The standards were updated in 2006 to incorporate the way the investment world has changed since the 1990s. The Standards of Professional Conduct are actually a part of the whole CFA Program that also includes the Code of Ethics. This lesson, though, is specifically about the standards.

Seven Standards

There are seven standards that make up the CFA Standards of Professional Conduct:

I. Professionalism
II. Integrity of Capital Markets
III. Duties to Clients and Prospective Clients
IV. Duties to Employers
V. Investment Analysis, Recommendations, and Action
VI. Conflicts of Interest
VII. Responsibilities as a CFA Institute Member or CFA Candidate

Reasoning

Standard I sets up the basics for conduct as CFA members and candidates. It covers all business situations.

Standards II to VII cover more specific topics. These guide decisions that may affect the integrity of the investment profession.

The reason behind all of these standards is to keep a high ethical standard for the profession. This is important, as history has shown the negative effects from unethical investing. For example, in 2008, a financial crisis occurred when lender after lender entered bankruptcy. The lending of money and the U.S. and some foreign economies almost froze. The CFA Standards aim to prevent things like that from happening.

Inside the Standards

Let's go a bit deeper into the standards.

The first standard, 'Professionalism,' has 4 subcategories. The first subcategory, 'Knowledge of the Law,' says that all CFA members and candidates must follow all applicable laws and rules that relate to their investing business. The second subcategory, 'Independence and Objectivity,' maintains that CFA members and candidates use care and judgment, so they can make independent and objective decisions. The third subcategory is 'Misrepresentation.' This subcategory says that knowingly misrepresenting anyone or anything related to the investment business is not allowed. The fourth subcategory, 'Misconduct,' prevents members and candidates from engaging in any activities that would adversely affect their careers, such as dishonesty and fraud. So, a CFA member or candidate following the first standard would not encourage you to buy a particular stock if the only thing he knew about it was that he would benefit if you bought it.

The second Standard, 'Integrity of Capital Markets,' has two subcategories. The first subcategory is 'Material Nonpublic Information.' This subcategory is here to prevent members or candidates from acting on or giving advice based on private information that could change the price of a particular stock. The second subcategory, 'Market Manipulation,' prevents members and candidates from engaging in any practices that artificially distort prices on the stock market with the purpose of misleading others. So, for example, a CFA member who follows the second standard will not use insider information in making his or her investment decisions.

The third standard, 'Duties to Clients,' has five subcategories. The first, 'Loyalty, Prudence, and Care,' says that members and candidates have a loyalty to their clients and must act with care to the benefit of the client rather than themselves. The second, 'Fair Dealing,' says that client dealings need to be fair and objective when making recommendations and in any other professional action. The third, 'Suitability,' says that members and candidates must do enough research so they become familiar with the client's investing style and experience, then make investments that will benefit the client. The fourth is 'Performance Presentation.' This one says that communications need to be complete, fair and accurate. The fifth is 'Preservation of Confidentiality.' This one says that unless required by law, client information is confidential. So, a CFA candidate who follows the third standard will communicate everything you need to know about investing in a particular stock in ways that you can understand, and he won't hide any information from you.

For the next standard, the fourth, 'Duties to Employers,' there are three subcategories. 'Loyalty' is the first subcategory, and it says that members and candidates are to give their employers the best of their skills and not give out confidential information. The second, 'Additional Compensation Arrangements,' does not allow gifts or any other type of compensation that could result in a conflict of interest unless there is written consent. Under the third subcategory, 'Responsibilities of Supervisors,' managers are required to find and prevent anyone under their supervision from acting unlawfully. A CFA member following the fourth standard will not enter into work that will create a conflict of interest unless his employer has approved it.

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