Adopting Release
Revisions to the CFA Institute
Code of Ethics and Standards of Professional Conduct
For over 40 years, CFA Institute members and candidates in the CFA Program have been
required to abide by the organization’s Code of Ethics and Standards of Professional Conduct
(Code and Standards). Periodically, CFA Institute has revised and updated its Code and
Standards to ensure that they remain relevant to the changing nature of the investment profession
and representative of the “highest standard” of professional conduct.
After a long review process, several revisions, careful consideration and solicitation of public
comment from its members, candidates, and investment professionals, CFA Institute is
publishing the latest version of the Code and Standards. The changes include a reorganization of
the standards, adoption of new standards, and revisions to existing standards. CFA Institute
believes that the revisions will clarify the requirements of the Code and Standards and effectively
convey to its global membership what constitutes “best practice” in a number of areas relating to
the investment profession.
These new standards will become effective 1 January 2006. CFA Institute will publish the 9th
edition of the Standards of Practice Handbook to offer guidance, interpretation, applications, and
recommended procedures for compliance for the new standards. CFA Institute also plans to
publish this guidance on its website.
Summary of Proposed Changes
Reorganization of Standards. The current organization of the Standards is based on a member
and candidate’s responsibilities to various constituencies: the public, the client, the employer, or
the profession. This structure has led to repetition of concepts across these categories and
reduced clarity and comprehension. The new Standards are reorganized in a manner that will
better focus users on the substantive ethical concepts contained in the document.
Revising Current Standards. CFA Institute expanded the current standards (e.g.,
misrepresentation, duty to employer, suitability, duty of loyalty to clients, disclosure of conflicts,
and material nonpublic information) to better address the current state of the investment
profession and establish clear “best practices” in these areas.
Clarifying Requirements. In some instances, the guidance currently in the 8th edition of the
Standards of Practice Handbook (SOPH) contains “requirements” with which all members and
candidates must comply, even though this conduct is not specifically set forth in the Standards
themselves. For example, the SOPH guidance for the current standard on independence and
objectivity prohibits acceptance of gifts over a specific dollar amount, even though the specific
prohibition is not found in the Standard. CFA Institute has incorporated these requirements into
the Standards as appropriate so that members and candidates are clearly on notice about what
conduct the Code and Standards requires or prohibits. Any guidance included in the 9th edition
of the SOPH only expands on the requirements set forth in the Code and Standards. The
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guidance in the 9th edition provides authoritative interpretations of the Code and Standards as
they apply to specific circumstances and suggest recommended procedures for compliance.
Drafting New Standards. CFA Institute added standards relating to market manipulation and
record retention to better address the current state of the investment profession and establish
clear “best practices” in these areas.
Maintaining Relevance to a Global Membership. In some areas (e.g., use of material nonpublic
information and fiduciary duty) the current Code and Standards were based on U.S. law and
regulation and may not reflect best practice in the global investment industry. Therefore, CFA
Institute has revised these Standards to make them less U.S.-centric to maintain the highest
ethical standard on a global basis.
Text Revisions. As the investment industry and, as a result, CFA Institute membership has
become more global, it is critical that the Code and Standards use language that, to the extent
possible, can be easily understood and translated into different languages. Therefore, in some
instances CFA Institute has eliminated, modified, or added language for clarity, even though it is
not the intent to change the meaning of a particular provision.
Background
Ethical practices benefit all market participants and stakeholders and lead to increased investor
confidence in global capital markets. Clients are reassured that the investment professionals they
hire have the clients’ best interest in mind and investment professionals benefit from the
“reputational capital” such integrity generates. Ethical practices instill a public trust in the
fairness of markets, allowing them to function efficiently. In short, good ethics is a fundamental
requirement of the investment profession.
An important goal of CFA Institute is to ensure that the organization and its members develop,
promote, and follow the highest ethical standards in the investment industry. The CFA Institute
Code of Ethics and Standards of Professional Conduct are the foundation supporting the
organization’s quest to advance the interests of the global investment community by establishing
and maintaining the highest standards of professional excellence and integrity. The Code of
Ethics is a set of principles that define the professional conduct CFA Institute expects from its
members. The Code works in tandem with the Standards of Professional Conduct. The
Standards outline what constitutes fair and ethical business practices.
The Code and Standards date back to 1962. Since then, CFA Institute and its predecessor
organizations have revised the Code and Standards on a periodic basis to keep pace with the ever
changing nature of the investment industry. These revisions have come in conjunction with the
update of the Standards of Practice Handbook (SOPH), the CFA Institute publication that
provides guidance and interpretation on the Code and Standards for CFA Institute members and
candidates for the CFA designation.
Generally the changes to the Code and Standards have been minor. CFA Institute revised the
language of the Standards and occasionally tacked on a new standard addressing prominent
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issues of the day. For instance, in 1992 CFA Institute added the standard addressing
performance presentation to the existing list of standards. The last major changes came in 1996,
and were mostly structural in nature. CFA Institute reorganized the Standards under their current
headings, designed to coincide with the constituencies of investment professionals – clients,
employers, investors, the public, and the profession.
Standards of Practice Council Review
The CFA Institute Standards of Practice Council (SPC), a group currently consisting of 15 CFA
Charterholder volunteers from nine different countries, is charged with maintaining and
interpreting the Code and Standards and ensuring that they are effective. Reviewing and
updating the language of the Code and Standards, as well as the guidance in the SOPH, is critical
to this process. The SPC continually evaluates the Code and Standards to ensure that they are:
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Representative of the “highest standard” of professional conduct,
Relevant to the changing nature of the investment profession,
Globally applicable,
Sufficiently comprehensive, practical, and specific,
Enforceable, and
Testable for the CFA Program.
Over the last two years, the SPC has reviewed and discussed the current Code and Standards as
part of the planned publication of the 9th edition of the SOPH. The SPC believes that it is
imperative that the Code and Standards be updated if they are to be effective and represent the
highest ethical standards in the global investment industry. The SPC after fully deliberating and
debating the substance and structure of the Code and Standards recommended that the following
changes be made:
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Reorganize the structure and revise the Code and Standards to improve clarity and
comprehension,
Make substantive revisions to explicitly address current industry issues and promote
investment industry “best practice” on a global basis,
Revise standards to enhance global relevance,
Revise the text to make translations easier and to clarify language for the global audience
of the CFA Institute.
The SPC strongly believes that the revisions and reorganization of the Code and Standards that
the it recommended are not undertaken for cosmetic change but will add value by addressing
legitimate concerns and improving comprehension.
Changes to the Code and Standards have far reaching implications for CFA Institute
membership, the CFA Program, and the investment industry as a whole. Unlike other voluntary
ethical standards promulgated by the organization (the GIPS standards, Soft Dollar Standards,
Trade Management Guidelines, Research Objectivity Standards, Best Practice Guidelines
Governing Analyst and Corporate Issuer Relations, Asset Manager Code of Professional
Conduct), members and CFA Candidates are required to adhere to the Code and Standards. In
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addition, the Code and Standards are increasingly being adopted, in whole or in part, by firms
and regulatory authorities. Their relevance goes well beyond CFA Institute members and CFA
candidates.
Public Comment
CFA Institute first issued the proposed new Code and Standards for a period of public comment
from July to October 2003. The SPC reviewed and analyzed the comments received and revised
the original proposal as appropriate. The SPC then developed detailed guidance for each revised
Standard and issue the revised Standards and accompanying guidance for public comment.
Because of the volume of material, the guidance was released for public comment in two parts.
The guidance for revised Standards I, II, V, and IV was out for public comment from March to
July 2004 and guidance for revised Standards III, IV, and VI was out for public comment from
November 2004 to March 2005. As a result, CFA Institute members had multiple opportunities
to comment on the Code and Standards as well as the guidance for each Standard. This public
comment process is the first time that CFA Institute has circulated revisions to the Code and
Standards and guidance for public comment. Previously recommended revisions were
considered by the Board of Governors and adopted with no input from CFA Institute members or
the investment industry.
The revised Code and Standards will become effective 1 January 2006. The SPC has rewritten
the guidance to the Code and Standards and it is available on the CFA Institute website. In the
near future, the guidance will be published as the 9th edition of the Standards of Practice
Handbook. The new Code and Standards will be incorporated into the CFA Program curriculum
for the 2006 exam year.
General Changes to the Code and Standards
Reorganization of the Standards
The current organization of the Standards is based on the CFA Institute member and candidate’s
responsibilities to various constituencies: the public, the client, the employer, and the profession.
This leads to repetition of concepts in an attempt to fit broad substantive ideas into specific
categories even though they have general application. For example, disclosure of conflicts of
interest is addressed in two separate standards, one dealing with disclosure of conflicts to
employers, the other dealing with disclosure of conflicts to clients. Also, misrepresentation is
addressed in several standards relating to investment recommendations, performance and
credentials. Multiple references to similar ideas detracts from clarity and comprehension of the
ethical concepts contained in the Code and Standards.
The revised Standards are organized by topic to streamline the structure and improve
comprehension. Instead of five standards that discuss member and candidate conduct as it
relates to clients, prospective clients, employers, the public and the profession, the new
Standards are organized into seven general topics:
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Professionalism
Integrity of Capital Markets
Duties to Clients
Duties to Employers
Investment Analysis, Recommendations, and Action
Conflicts of Interest
Responsibilities as CFA Institute Members or CFA Candidates
As a result, all provisions related to conflicts of interest are contained in one standard, Standard
VI – Conflicts of Interest. All the provisions relating to misrepresentation are found in one
standard, Standard I(C) – Misrepresentation.
Applicability to Members and Candidates
Currently the Code and Standards state that “Members must…” even though the requirements of
the Code and Standards have always also been applicable to candidates in the CFA Program. To
clarify the applicability of the document to candidates as well as CFA members, the wording of
the requirements now states, “Members and Candidates must….”
Specific Changes to the Code and Standards
The following is a detailed explanation of all the major substantive changes to the Standards
describing each significant revision along with the rationale of CFA Institute for those changes.
Preamble
The CFA Institute Code of Ethics and Standards of Professional Conduct (Code and
Standards) are fundamental to the values of CFA Institute values and essential to
achieving its mission to lead the investment profession globally by setting high standards
of education, integrity, and professional excellence. High ethical standards are critical
to maintaining the public’s trust in financial markets and in the investment profession.
Since their creation in the 1960s, the Code and Standards have promoted the integrity of
CFA Institute members and served as a model for measuring the ethics of investment
professionals globally, regardless of job function, cultural differences, or local laws and
regulations. All CFA Institute members (including holders of the Chartered Financial
Analyst® (CFA®) designation) and CFA candidates must abide by the Code and
Standards. Violations may result in disciplinary sanctions by CFA Institute. Sanctions
can include revocation of membership, candidacy in the CFA Program, and the right to
use the CFA designation.
Historically, when printing of the Code and Standards, the organization had included the Board
of Governor’s resolution adopting the Code and Standards and making them applicable to the
membership of CFA Institute (and its predecessor organizations). This adopting resolution
stated the motivations and intent of the organization in creating the Code and Standards and
provided some context for their adoption. In 1992, the resolution was dropped from the printing
the Code and Standards.
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Non-CFA Institute related industry participants look to the Code and Standards for guidance in
ethical practices and more and more firms are adopting the Code and Standards as part of the
firm’s code of ethics. CFA Institute believes it is important to restore a brief explanation of the
Code and Standards, the organization’s intent in adopting the Code and Standards, and who the
document is meant to apply to. Therefore, the language above will accompany the Code and
Standards as the Preamble to more clearly explain their meaning and applicability when printed
as a stand alone document or distributed to the public.
Code of Ethics
Members of CFA Institute (including Chartered Financial Analyst® [CFA®]
charterholders) and candidates for the CFA designation (“Members and Candidates”)
must:
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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.
Place the integrity of the investment profession and the interests of clients above their
own personal interests.
Use reasonable care and exercise independent professional judgment when
conducting investment analysis, making investment recommendations, taking
investment actions, and engaging in other professional activities.
Practice and encourage others to practice in a professional and ethical manner that
will reflect credit on themselves and the profession.
Promote the integrity of, and uphold the rules governing, capital markets.
Maintain and improve their professional competence and strive to maintain and
improve the competence of other investment professionals.
The Code of Ethics is a set of principles that defines the professional conduct CFA Institute
expects from its members and candidates. The Code works in tandem with the Standards of
Professional Conduct which provides guidance to users as to what constitutes fair and ethical
business practices.
CFA Institute added two additional statements of principles relating to 1) placing the interests of
clients and the integrity of the investment profession above members and candidates own
personal interests and 2) promoting the integrity of, and upholding the rules governing, global
capital markets. These are fundamental principles from which several specific standards flow
and should therefore be included in the Code of Ethics.
CFA Institute has made textual changes to clarify the meaning of existing statements of
principles and has reordered the statements in a manner that best reflects the importance of the
concepts.
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Standards of Professional Conduct
Standard I: Professionalism
A. Knowledge of the Law. Members and Candidates must understand and comply with all
applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and
Standards of Professional Conduct) of any government, regulatory organization,
licensing agency, or professional association governing their professional activities. In
the event of conflict, Members and Candidates must comply with the more strict law,
rule, or regulation. Members and Candidates must not knowingly participate or assist in
and must dissociate from any violation of such laws, rules, or regulations.
Standard I(A) – Knowledge of the Law – is based on the current “Fundamental Responsibilities”
standard, and requires members and candidates to obey applicable law and regulation with regard
to their professional activities. Members and candidates must not participate in or assist others in
violations of those laws.
New Standard I(A) includes the additional requirement, currently found in the guidance in the 8th
edition of the SOPH, that members must dissociate from any violation of the law. Members and
candidates must not tacitly or implicitly go along with the conduct of others that members and
candidates know to be in violation of the law. Dissociation would mean taking affirmative steps
to distance oneself from the illegal or unethical activity.
Although the requirement to dissociate from illegal activity is currently explained in the SOPH,
this requirement is now explicit in new Standard I(A) to clearly put members and candidates on
notice that dissociation is required by the Code and Standards.
B. Independence and Objectivity. Members and Candidates must use reasonable care and
judgment to achieve and maintain independence and objectivity in their professional
activities. Members and Candidates must not offer, solicit, or accept any gift, benefit,
compensation, or consideration that reasonably could be expected to compromise their
own or another’s independence and objectivity.
Standard I(B) – Independence and Objectivity – is an expansion of the current “Independence
and Objectivity” standard. Currently, independence and objectivity are addressed in the
Standard dealing with clients and prospects. It is a fundamental responsibility of members and
candidates to maintain independence and objectivity in all of their professional dealings and the
new Standard gives the concept more general applicability by including it in new Standard I –
Professionalism.
CFA Institute has strengthened the Standard by specifically addressing the issue of gifts,
benefits, compensation, or other consideration being offered or accepted in an attempt to
influence members and candidates. Although the guidance regarding gifts is currently explained
in the SOPH, the new Standard makes this prohibition explicit to clearly put members and
candidates on notice of the conduct required by the Code and Standards.
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C. Misrepresentation. Members and Candidates must not knowingly make any
misrepresentations relating to investment analysis, recommendations, actions, or other
professional activities.
In the current Standards, specific aspects of conduct that qualify as misrepresentation are covered
in several Standards. The current “Prohibition against Misrepresentation” standard addresses
misrepresentation regarding credentials, qualifications, or services; the current “Performance
Presentation” standard covers false or misleading statements in performance; and the current
“Reasonable Basis and Representations” standard prohibits misrepresentation regarding research
reports or investment recommendations.
CFA Institute strongly believes that misrepresentation in any context is unethical. Limiting the
prohibition against misrepresentation to certain types of conduct and dividing the references is
confusing and gives the false impression that the Code and Standards condones
misrepresentation in circumstances not mentioned in the Code and Standards. Therefore, CFA
Institute has expanded on the current references to misrepresentation and created new Standard
I(C) – Misrepresentation – that prohibits false and misleading statements in all aspects of a
member or candidate’s professional activities.
The specific instances of misrepresentation cited in the current standards are all covered by
Standard I(C). For instance, the prohibition against plagiarism, currently addressed in its own
separate standard, is now covered by Standard I(C). The guidance to this standard in the 9th
edition of the SOPH will make this clear. Creating a general standard on misrepresentation and
no longer citing specific acts of misrepresentation should not be seen as an indication that CFA
Institute is retreating from its strong stance against these activities.
D. Misconduct. Members and Candidates must not engage in any professional conduct
involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their
professional reputation, integrity, or competence.
Standard I(D) – Misconduct – is taken from the current “Professional Misconduct” standard.
The only significant change is that the current standard prohibits members and candidates from
engaging in any conduct that reflects adversely on their “honesty, trustworthiness, or
professional competence” whereas the new standard prohibits contact that reflects adversely on
their “professional reputation, integrity, or competence.”
While this change is subtle, it is intended to focus the Code and Standards on professional rather
than personal conduct. Although CFA Institute discourages any sort of unethical behavior by
members and candidates, whether in their personal or professional life, the Code and Standards
are aimed at conduct related to a member or candidate’s professional life. Several comments
noted that, a broad standard that appears to regulate personal behavior inappropriately
overreaches by injecting CFA Institute into a member or candidate’s private life. The Standard
continues to state that professional conduct that involves dishonesty, fraud or deceit will violate
the Standard.
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Standard II: Integrity of Capital Markets
A. Material Nonpublic Information. Members and Candidates who possess material
nonpublic information that could affect the value of an investment must not act or cause
others to act on the information.
The current Code and Standards recognize that trading on material non-public information
erodes confidence in capital markets, institutions and investment professionals by supporting the
idea that those with inside and special access can take advantage of the general investing
population. While trading on inside information may lead to short term profitability, in the long
run, individuals and the profession as a whole will suffer as investors shy away from capital
markets perceived to be “rigged” in favor of the knowledgeable insider. As a result, the current
“Prohibition Against Use of Material Nonpublic Information” standard attempts to prohibit
conduct that will damage the integrity of the markets.
However, the current requirements are incomplete and based too much on technical definitions in
U.S. insider trading law. CFA Institute has simplified the Standard and made it more clear by
adopting a straightforward ban on the use of material nonpublic information. New Standard
II(A) – Material Nonpublic Information – states that members and candidates must not act, or
cause others to act, on material nonpublic information in their possession, until that information
is made public. This prohibition will be in effect regardless of whether the information is
obtained in breach of a duty, is misappropriated, or relates to a tender offer. The new Standard
II(A) represents best ethical practice and will maintain a high level of confidence in market
integrity.
B. Market Manipulation. Members and Candidates must not engage in practices that
distort prices or artificially inflate trading volume with the intent to mislead market
participants.
Market manipulation damages the interests of all investors by disrupting the smooth functioning
of financial markets and damaging investor confidence. Although it may be less likely to occur
in more mature financial markets, cross-border investing increasingly exposes all global
investors to the potential for such practices.
Market manipulation can be related to both transactions which deceive market participants by
distorting the price setting mechanism of financial instruments as well as the dissemination of
false or misleading information. Transaction-based manipulation includes transactions that
artificially distort prices or volume to give the impression of activity or price movement in a
financial instrument or securing a controlling, dominant position of financial instruments to
exploit and manipulate the price of a related derivative and/or the underlying asset. Informationbased manipulation includes, but is not limited to, spreading false rumors to induce trading by
others. For example, members must refrain from “pumping” up the price of an investment by
issuing misleading positive information or overly optimistic projections of a security’s worth
only to later “dump” ownership in the investment once the price of the stock, fueled by the
misleading information’s effect on other market participants, reaches an artificially high level.
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CFA Institute has included a standard specifically addressing market manipulation practices.
New Standard II(B) – Market Manipulation – requires members to uphold market integrity by
prohibiting practices that distort security prices or trading volume with the intent to deceive
persons or entities that rely on information in the market. By requiring that conduct include the
intent to mislead by creating artificial price or volume levels, this standard is not meant to
prohibit legitimate trading strategies that exploit a difference in market power, information, or
other market inefficiencies.
Standard III: Duties to Clients
A. Loyalty, Prudence, and Care. Members and Candidates have a duty of loyalty to their
clients and must act with reasonable care and exercise prudent judgment. Members and
Candidates must act for the benefit of their clients and place their clients' interests before
their employer’s or their own interests. In relationships with clients, Members and
Candidates must determine applicable fiduciary duty and must comply with such duty to
persons and interests to whom it is owed.
CFA Institute has expanded the current “fiduciary duty” standard by explicitly stating that
members and candidates have a duty of loyalty to their clients and must act with reasonable care
and prudent judgment in their professional activities. Clients, as defined in the guidance, means
the ultimate individual owners or beneficiaries (for a trust or pension fund), those who have
contracted for investment advice or services (for an investment advisor or research firm), or
those for whom the member or candidate is trading securities (for a broker dealer or investment
banker).
The current fiduciary duty standard only requires members and candidates to determine their
applicable fiduciary duty and comply with that duty. This leaves the actual conduct required by
the Code and Standards vague as the required conduct is dependent upon the circumstances of
each member and candidate. The new Standard maintains this flexibility by continuing to
require members and candidates to understand and comply with their actual fiduciary duty.
However, the standard also imposes a minimum level of conduct in all circumstances. As a
result, new Standard III(A) – Loyalty, Prudence, and Care – requires that members and
candidates use reasonable care and prudent judgment in all circumstances. In addition, new
Standard III(A) explicitly states that members and candidates have a duty of loyalty to their
clients rather than leaving this implied by the language of the standard. Directly addressing the
underlying meaning of the fiduciary duty concept clarifies the requirements of the Standard and
make the language less “legalistic.”
B. Fair Dealing. Members and Candidates must deal fairly and objectively with all clients
when providing investment analysis, making investment recommendations, taking
investment action, or engaging in other professional activities.
New Standard III(B) – Fair Dealing – is largely unchanged from the current “Fair Dealing”
Standard. New Standard III(B) does expand the circumstances in which members and candidates
are expected to deal fairly with clients and prospective clients beyond “disseminating investment
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recommendations” and “taking investment action” to include all aspects of a member and
candidate’s professional activities. The requirement to deal fairly with clients and prospective
clients should apply in any circumstance. The new language broadens the scope of the
requirement and is consistent with language in other Standards meant to cover conduct in
similarly broad circumstances.
C. Suitability.
1. When Members and Candidates are in an advisory relationship with a client, they
must:
a. Make a reasonable inquiry into a client or prospective client’s investment
experience, risk and return objectives, and financial constraints prior to making
any investment recommendation or taking investment action and must reassess
and update this information regularly.
b. Determine that an investment is suitable to the client's financial situation and
consistent with the client’s written objectives, mandates, and constraints before
making an investment recommendation or taking investment action.
c. Judge the suitability of investments in the context of the client’s total portfolio.
2. When Members and Candidates are responsible for managing a portfolio to a specific
mandate, strategy, or style, they must only make investment recommendations or take
investment actions that are consistent with the stated objectives and constraints of the
portfolio.
New Standard III(C) – Suitability – addresses two areas of suitability that have become major
topics of concern in today’s investment environment: suitability of investments for client
portfolios and suitability of investments with respect to the strategy or mandate declared by the
investment professional.
Part 1 of Standard III(C) requires members to take a number of steps to determine suitability of
an investment for a client before taking investment action. This portion of the Standard is taken
from the current “Portfolio Investment Recommendations and Actions” standard. The changes
recommended by the SPC simplifies and clarifies the language of that standard by removing the
“guidance” or explanatory language describing possible methods of determining suitability.
New Standard III(C) includes only the specific conduct requirements.
Part 1.a of the new Standard now requires members to update client information “regularly”
rather than “as necessary, but no less frequently than annually.” Part 1.b of the new Standard
requires a review of a client’s “written objectives” prior to taking investment action, emphasizing
the importance of having written client objectives. Part 1.c emphasizes the importance of an
investment’s suitability to a client’s total portfolio, reinforcing the CFA Program’s adherence to
the “total portfolio theory.”
For members and candidates who are responsible for managing a portfolio or investment vehicle
(such as a mutual fund) to a specific declared mandate, part 2 of Standard III(C) requires that any
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investments made be suitable and appropriate for the vehicle’s investment mandate. This new
provision explicitly prohibits members and candidates who manage a mutual fund, for example,
from making investments that are outside the bounds of the fund’s stated objectives, mandates,
and constraints.
D. Performance Presentation. When communicating investment performance information,
Members or Candidates must make reasonable efforts to ensure that it is fair, accurate,
and complete.
New Standard III(E) – Performance Presentation, is taken from part 1 of the current
“Performance Presentation” standard and simply restates the requirements of the current
provision in a more straightforward manner. Part 2 of the current standard, relating to
misrepresentation, is covered under new Standard I(B) – Misrepresentation.
E. Preservation of Confidentiality. Members and Candidates must keep information about
current, former, and prospective clients confidential unless:
1. the information concerns illegal activities on the part of the client or prospective
client,
2. disclosure is required by law, or
3. the client or prospective client permits disclosure of the information.
New Standard III(E) – Preservation of Confidentiality – is based on the current “Preservation of
Confidentiality” standard and requires members to keep client information confidential. The
new standard is somewhat broader than the current standard in two respects: 1) all client
information is to be kept confidential, not just that information “concerning matters within the
scope of the relationship,” and 2) the information to be kept confidential can come from other
sources and not just “information communicated by clients” as described in the current standard.
The language of the standard explicitly states that, in this instance, clients include prospective
clients and former clients. Standard III(E) also explicitly states the circumstances in which
confidential client information can be released. Finally, while the current standard addresses
confidentiality of employer information as well, in the new standards, confidential employer
information will be addressed as part of Standard IV – Duties to Employer.
Standard IV: Duties to Employers
A. Loyalty. In matters related to their employment, Members and Candidates must act for
the benefit of their employer and not deprive their employer of the advantage of their
skills and abilities, divulge confidential information, or otherwise cause harm to their
employer.
CFA Institute proposes to add Standard IV(A) – Loyalty – imposing on members and candidates
a general duty of loyalty to their employer in matters relating to their employment. Currently,
the CFA Institute Standard of Professional Conduct relating to the employer directly address
members and candidates’ responsibilities only in certain situations (e.g., undertaking
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independent practice). As a general matter, best ethical practice dictates that members and
candidates must act in the best interests of their employer, not deprive the employer of the
member and candidate’s skills and abilities, protect confidential information, and not otherwise
harm the employer.
Initially, the proposed language of the standard was general and was interpreted by some as
overly broad. During the public comment period, CFA Institute received several comments that
the new standard, as originally written, placed an undue burden on members and candidates to
comply with their employers wishes in situations not necessarily relating their responsibilities as
employees. This standard is not meant to be a blanket requirement to place employer interests
ahead of personal interests in all matters. This standard does not require members and
candidates to subordinate important personal and family obligations to their work. The
modifying phrase “in matters related to their employment” at the beginning of the standard, is
meant to limit applicability of this Standard to matters clearly within the employer/employee
relationship.
B. Additional Compensation Arrangements. Members and Candidates must not accept
gifts, benefits, compensation, or consideration that competes with, or might reasonably
be expected to create a conflict of interest with, their employer’s interest unless they
obtain written consent from all parties involved.
New Standard IV(B) – Additional Compensation Arrangements – is drawn from the current
“Additional Compensation Arrangements” standard except that the new language broadens what
is meant by “compensation” by prohibiting the member from accepting “gifts, benefits,
compensation, or consideration” that competes with or might reasonably be expected to create a
conflict of interest with, their employer’s interest.
C. Responsibilities of Supervisors. Members and Candidates must make reasonable efforts
to detect and prevent violations of applicable laws, rules, regulations, and the Code and
Standards by anyone subject to their supervision or authority.
New Standard IV(C) – Responsibilities of Supervisors – is drawn directly from the current
“Responsibilities of Supervisors” standard. CFA Institute has simplified the language to ease
comprehension and dropped the language in the current standard about supervisors relying on
reasonable procedures designed to detect and prevent unethical or illegal activities. This
language is really guidance as to what constitutes “reasonable efforts” and is more appropriate
for inclusion in the SOPH. Establishment and implementation of reasonable compliance
procedures will remain a valid method complying with this standard.
Standard V: Investment Analysis, Recommendations and Action
CFA Institute has revised the standard relating to members and candidates’ responsibilities when
performing investment analysis, making investment recommendations, or taking investment
action. This new Standard includes activities that the current standard may reach only
implicitly.
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A. Diligence and Reasonable Basis. Members and Candidates must:
1. Exercise diligence, independence, and thoroughness in analyzing investments,
making investment recommendations, and taking investment actions.
2. Have a reasonable and adequate basis, supported by appropriate research and
investigation, for any investment analysis, recommendation, or action.
New Standard V(A) – Diligence and Reasonable Basis – is taken directly from the current
“Reasonable Basis and Representations” standard. The revisions do not change the current
application of the standard other than to explicitly state that members and candidates must act
with diligence, independence, reasonableness, and thoroughness when undertaking investment
analysis as well as making a recommendation or taking investment action.
B. Communication with Clients and Prospective Clients. Members and Candidates must:
1. Disclose to clients and prospective clients the basic format and general principles of
the investment processes used to analyze investments, select securities, and construct
portfolios and must promptly disclose any changes that might materially affect those
processes.
2. Use reasonable judgment in identifying which factors are important to their
investment analyses, recommendations, or actions and include those factors in
communications with clients and prospective clients.
3. Distinguish between fact and opinion in the presentation of investment analysis and
recommendations.
Two of the current standards, relating to research reports and investment recommendations and
actions, address a member and candidate’s responsibilities when communicating with a client or
prospective client. Attempting to distinguish between types of communication (e.g.,
communication through a research report versus communication through a recommendation)
draws an artificial distinction that could generate confusion among those trying to fulfill their
responsibilities under the Code and Standards.
As a result, CFA Institute created new Standard V(B) – Communication with Clients and
Prospective Clients – that explicitly states the responsibilities of members and candidates when
they are communicating with clients in any form, whether it is through a research report, a
recommendation, or any other manner or method. The requirements of the new standard are
taken from provisions contained in several of the current standards that address, in one way or
another, communication with clients and prospective clients.
C. Record Retention. Members and Candidates must develop and maintain appropriate
records to support their investment analysis, recommendations, actions, and other
investment-related communications with clients and prospective clients.
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The current standard addressing “reasonable basis and representations” in investment
recommendations and actions requires members and candidates to maintain appropriate records
to support the reasonableness of such recommendations or actions. CFA Institute believes that
maintaining accurate records is a critical step in establishing investor confidence and preserving
the historical record when the actions of a member or candidate are later challenged. Therefore,
CFA Institute has created new Standard IV(C) – Record Retention – that explicitly requires
members and candidates to maintain appropriate records, not just to support the reasonableness
of their investment recommendation or actions, but also to support their investment analysis,
performance and any other investment related communications with clients and prospective
clients.
Standard VI: Conflicts of Interest
Because the current standards are organized by the “constituency” of the members and
candidates, certain concepts (e.g., preservation of confidentiality, disclosure of conflicts of
interest) that apply to a member or candidate’s relationship with both clients and employers are
repeated in the Code and Standards. While repetition can signal the importance placed on the
concept by CFA Institute, it can also cause confusion. Conflicts can occur in a member or
candidate’s relationship with clients, prospective clients, or employers. CFA Institute strongly
supports the current requirement of the standards that all matters that could reasonably be
expected to impair independence and objectivity should be disclosed to whomever that conflict
may affect. To simplify the language, improve understanding, and emphasize the importance of
the requirements, CFA Institute has created new Standard VI – Conflicts of Interest, specifically
addressing various conflicts of interests.
A. Disclosure of Conflicts. Members and Candidates must make full and fair disclosure of
all matters that could reasonably be expected to impair their independence and
objectivity or interfere with respective duties to their clients, prospective clients, and
employer. Members and Candidates must ensure that such disclosures are prominent,
are delivered in plain language, and communicate the relevant information effectively.
New Standard VI(A) – Disclosure of Conflicts - is drawn from the current “Conflicts of
Interests” standards that address disclosure to clients and employers and the requirements remain
the same. In addition, CFA Institute recognizes that “disclosure” can take many forms, including
vague boilerplate or generic language that may satisfy legal requirements but do not effectively
disclose useful information. CFA Institute believes that best practice dictates that disclosure
means meaningful disclosure. Therefore, Standard VI(A) requires disclosures that “are
prominent, are delivered in plain language, and communicate the relevant information
effectively.”
B. Priority of Transactions. Investment transactions for clients and employers must have
priority over investment transactions in which a Member or Candidate is the beneficial
owner.
An important concept addressed by the current Code and Standards is personal trading.
However, the language of the current “Priority of Transactions” standard is somewhat awkward,
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legalistic, and includes explanatory text that dilutes the true importance of the standard. CFA
Institute has greatly simplified the language of the standard to better communicate the core
concept – transactions for clients and employers have priority over personal transactions. New
Standard VI(B) – Priority of Transactions – eliminates the explanatory text addressing what
constitutes a “beneficial owner,” believing that it is better suited as part of the guidance for the
Standard. The essential requirements of new Standard V(B) remain unchanged from the
requirements of the current “Priority of Transactions” standard.
C. Referral Fees. Members and Candidates must disclose to their 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.
Another specific conflict of interest that is explicitly addressed in the current Code and Standards
relates to referral fees. CFA Institute continues to require disclosure of any referral fee received
by or paid to anyone for the recommendation of products or services. New Standard VI (C) –
Referral Fees – is drawn directly from the current “Referral Fee” standard.
Standard VII: Responsibilities as CFA Institute Member or CFA Candidate
CFA Institute recognizes that members and candidates have important responsibilities to the
organization and the CFA designation as part of their association with CFA Institute and the
CFA Program. However, previously CFA Institute appeared to emphasize these responsibilities
over the duties owed to clients, prospective clients, employers, and the global capital markets by
including detailed standards relating to membership at the beginning of the Code and Standards.
Therefore, CFA Institute has consolidated the conduct requirements related to members and
candidates’ interaction with CFA Institute and placed them at the end of the Code and Standards.
Firms or non-CFA affiliated institutions seeking to adopt the Code and Standards for their
organizations but that do not find these provisions relevant can simply drop Standard VII and
adopt the remainder of the document in its entirety without extensive revisions.
A. Conduct as Members and Candidates in the CFA Program. Members and Candidates
must not engage in any conduct that compromises the reputation or integrity of CFA
Institute or the CFA designation or the integrity, validity, or security of the CFA
examinations.
New Standard VII(A) – Conduct as Members and Candidates in the CFA Program – is drawn
from the current language in the “Professional Misconduct” standard related to the CFA
designation and examinations. This standard is meant to prohibit members from engaging in
conduct (such as cheating on the CFA examinations, or otherwise violating rules of CFA
Institute or the CFA Program) that would cause harm to the organization or the CFA Program.
This standard is not meant to stifle or in anyway prevent members and candidates from
expressing any opinions or beliefs they may have about CFA Institute or the CFA Program.
B. Obligation to Inform Employer of Code and Standards. Members and Candidates must
provide notice to their employer, through their immediate supervisor, that they must
comply with the Code and Standards or be subject to disciplinary sanctions for
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violations. Members and Candidates must make a copy of the Code and Standards
available to their employer.
New Standard VII(B) – Obligation to Inform Employer of Code and Standards - is drawn
directly from the current standard of the same name. The requirements remain unchanged except
that new Standard VII(B) only requires that members and candidates make a copy of the Code
and Standards “available” to their employer rather than requiring them to deliver a copy to their
employer. This will allow members and candidates to fulfill their responsibilities under Standard
VII(B) by emailing their supervisor a link to the Code and Standards on the CFA Institute
website.
One commenter opined that a significant number of members and candidates were likely not
complying with this standard. The standard is designed for awareness as well as protection by
informing employers the CFA Institute members and candidates may not be able to undertake
certain conduct. The intent of the standard is to make sure employers know of the Code and
Standards – not to require repetitive or redundant notification. The Standard does not require
annual notification or formal presentation of the Code and Standards. CFA Institute believes
this Standard is very simple to comply with and can be done with a simple email message.
C. Reference to CFA Institute, the CFA designation, and the CFA Program. When
referring to CFA Institute, CFA Institute membership, the CFA designation, or candidacy
in the CFA Program, Members and Candidates must not misrepresent or exaggerate the
meaning or implications of membership in CFA Institute, holding the CFA designation,
or candidacy in the CFA program.
CFA Institute has rewritten the current use of the professional designation standard and proposes
new Standard VII(C) – Reference to CFA Institute, the CFA designation, and the CFA Program.
New Standard VII(C) drops the requirement that members and candidates reference their
membership or designation only in a “dignified and judicious” or “proper, dignified, and
judicious” manner. The terms “dignified” and “judicious” are overly subjective and vague. A
use of the designation that one person considers dignified and judicious may be considered
undignified and unwise by others. Including vague terms in the Code and Standards leads to
confusion by members and candidates regarding what conduct is acceptable.
In place of the current vague language, the new standard recommends prohibiting candidates
from engaging in any conduct that may “misrepresent or exaggerate the meaning or implications
of membership in CFA Institute, holding the CFA designation, or candidacy in the CFA
Program.” The terms “misrepresentation” and “exaggeration” are more narrowly focused than
“judicious” and “dignified” and will provide members and candidates a clearer understanding of
the conduct that they should avoid. In addition, the new, more precise language will assist the
CFA Institute Professional Conduct Program identify, investigate, and sanction conduct that
violates the Code and Standards.
Under the new language, candidates will continue to be prohibited from implying that they have
achieved any partial designation, as any such reference would clearly constitute a
misrepresentation or exaggeration of their credentials.
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