Ethical and Professional
Standards
Ethics Application
Ethics Application
Standard I(A): Knowledge of the Law
Case 1: Actions taken remedy the situation for some
clients, but not for others. The member must disassociate
from the activity.
Case 2: Failing to investigate transactions in an account
that appear to be at high risk of violating money-laundering
laws violates the Standard.
Case 3: A member violates the Standards (and the law)
by forging customer signatures.
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Ethics Application
Standard I(B): Independence and Objectivity
A member violates the Standard by contributing to a
politician’s campaign, believing that it may lead to
preferential treatment with regard to receiving government
contracts (“reasonably could be expected to compromise
another’s independence and objectivity”).
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Ethics Application
Standard I(C): Misrepresentation
Case 1: Assuring a client that returns on a fund will
outweigh penalties incurred essentially guarantees a
specific rate of return and violates the Standard.
Case 2: A member is required to inform a potential client
that a key person has left the firm (misrepresentation by
omission).
Case 3: Posting untrue financial information on social
media is clearly a violation of the Standard.
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Ethics Application
Standard I(D): Misconduct
Case 1: Civil disobedience is not necessarily a violation of
the Standard (neither “engaging in any professional
conduct involving dishonesty, fraud, or deceit” nor
“reflects adversely on their professional reputation,
integrity, or competence”).
Case 2: A member violates the Standard by effectively
giving his own money to a client account to make his
management of the account look better.
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Ethics Application
Standard I(E): Competence
Accepting a new role (e.g., as a supervisor) without
obtaining the necessary skills and knowledge violates this
Standard.
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Ethics Application
Standard II(A): Material Nonpublic Information
Case 1: A member violates the Standard by using material
nonpublic information he acquired by overhearing a phone
conversation.
Case 2: A member violates the Standard by sharing
information with clients that he learned of during a meeting
of analysts with company management, which cannot be
considered public disclosure.
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Ethics Application
Standard II(B): Market Manipulation
A member violates the Standard by misleading market
participants about a potential liquidity of shares.
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Ethics Application
Standard III(A): Loyalty, Prudence, and Care
Case 1: Members and candidates cannot “opt out” of the
Standards through client agreements.
Case 2: Because a client self-directs her own account and
has received the firm’s policies, a member’s requirements
to act in the client’s best interests are limited.
Case 3: Allocating expenses to a client is not a violation,
but charging for expenses that benefit other clients or that
are for personal activities of the member is a violation.
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Ethics Application
Standard III(B): Fair Dealing
Emails regarding changes in investment recommendation
are sent monthly on the third Friday. The head of research
provides individual clients with updates or clarifications.
The firm offers all clients the option to get weekly updates
(that have no changes in recommendations) for an
additional fee. There are no violations of the Standards.
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Ethics Application
Standard III(C): Suitability
Case 1: A member violates the Standard by
recommending investments that carry more risk than
is suitable.
Case 2: A member violates the Standard by not
investigating whether the requested investment is suitable.
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Ethics Application
Standard III(D): Performance Presentation
A member violates the Standard by presenting
performance data based on a composite the firm managed
before creating the fund that is being reported, giving the
impression that the fund has existed for more years than it
actually has been.
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Ethics Application
Standard III(E): Preservation of Confidentiality
A member and head of compliance both violate the
Standard by not taking adequate steps to protect client
information.
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Ethics Application
Standard IV(A): Loyalty
Case 1: A member violates the Standard by making
harmful statements about a current employer and
promoting the firm she intends to move to while still
employed.
Case 2: A member’s whistleblowing actions are not a
violation of the Standard.
Case 3: A member violates the Standard by taking client
information with her when she leaves her firm.
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Ethics Application
Standard IV(B): Additional
Compensation Arrangements
Companies seeking coverage by the firm offer a member a
bonus if their firm is selected. Because this creates a
possible conflict between her interests and her firm’s
interests, she must get approval in writing from her
employer.
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Ethics Application
Standard IV(C): Responsibilities of Supervisors
Case 1: A supervisor violates the Standard by not making
reasonable efforts to ensure those under his supervision
are not engaging in misconduct, and by not having clear
written compliance policies and procedures in place.
Case 2: A member violates the Standard by accepting a
compliance officer position despite being denied power to
carry it out. She should have declined supervisory
responsibilities.
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Ethics Application
Standard V(A): Diligence and
Reasonable Basis
A member violates the Standard by recommending
purchase of shares for which he has not performed a
diligent, thorough, and independent analysis.
Another member violates the Standard by basing her
recommendation on the first member’s analysis and
incorporating part of that member’s research report in
her own.
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Ethics Application
Standard V(B): Communication with Clients and
Prospective Clients
A member violates the Standard by publishing credit
ratings without disclosing a change in methodology.
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Ethics Application
Standard V(C): Record Retention
A member violates the Standard by not keeping written
client profiles up to date.
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Ethics Application
Standard VI(A): Avoid or Disclose Conflicts
A member must disclose payments from third-party
subadvisors because the payments may influence her
choice of subadvisors.
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Ethics Application
Standard VI(B): Priority of Transactions
Case 1: A member violates the Standard by front running.
Case 2: A member violates the Standard by allowing
friends and relatives to front run.
Case 3: A member violates the Standard (also Fair
Dealing) by allocating profitable trades to personal
accounts and allocating losing trades to accounts where
they will likely not be noticed.
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Ethics Application
Standard VI(C): Referral Fees
A member invites clients who have referred profitable
accounts to her to lavish parties and rewards them with
discounts on fees and gift cards. These are considered
referral fees, and the member violates the Standard by not
disclosing them to her employer, clients, and prospects, as
appropriate.
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Ethics Application
Standard VII(A): Conduct as Participants in CFA
Institute Programs
A member who teaches exam prep classes may solicit
candidates’ opinions about the difficulty of the exam, but is
not permitted to solicit or share information about specific
exam questions or which topics were or were not tested.
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Ethics Application
Standard VII(B): Reference to CFA Institute, the CFA
Designation, and the CFA Program
A previous member who has not paid dues to CFA Institute
violates the Standard by using the CFA designation.
Another member violates the Standard by claiming the
member who has not paid dues is a CFA charterholder.
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