Lien Nguyen

READING 1: ETHICS AND TRUST IN THE INVESTMENT PROFESSION

1-a. explain ethics;

Ethics:
• describes a system of principles, beliefs, and values that guide (or society believes should
guide) our behavior → to guide our understanding of required, acceptable or examplary
behavior
• practice ethical behavior → benefit clients, employers, the industry, and the investing
public (collectively known as stakeholders of the investment industry)
Code of ethics: is a written set of principles that codify their beliefs about obligatory and
forbidden conduct → codified guideline that communicates an organization/profession’s
expectation regarding member behavior
Standard of conduct: benchmarks for the minimally acceptable behavior of community
members and can help clarify the code of ethics. Standards can be grouped into 2 categories:
rule-based and principles-based
Violations:
• harm the community in a variety of ways
• damage the community’s reputation among external stakeholders and the general public
• also damage the community’s reputation internally and lead to reduced trust among
community members
1-b. describe the role of a code of ethics in defining a profession;
Profession:
• specific education, expert knowledge
• based on service to others
• applying a framework of practice and behavior that underpins community trust, respect,
and recognition → members behave according to a code of ethics and standards of
conduct
• By joining the community, members are agreeing to adhere to the community’s code of
ethics and standards of conduct
1-c. describe professions and how they establish trust;
1-d. describe the need for high ethical standards in investment management;
1-e. explain professionalism in investment management;
• Investment officials are entrusted with investors’s wealth → requirement for high ethical
behavior
• Investment offcicial provide advisory service → intangile → require a high level of trust
• Failure to establish and maintain trust → damage firm success/client weath/society →
adding a layer of risk → increase the cost of funding and borrowing

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 • Lack of trust → misinformation → misallocation of capital → inefficient capital
allocation → reduce the welling being of the whole society
1-f. identify challenges to ethical behavior;
• Overweighting our own ethical disposition (Overconfidence Bias): what we believe
about overselves vs what others believe about us
• Underweighting the situational influence:
o external factors, such as environmental or cultural elements, that shape our
thinking, decision making, and behavior
o Eg: the bystander effect
o Situational influences often blind people to other important considerations →
motivate others to act in their own short-term self-interests, ignoring possible
short-term risks and others as well as long-term risks
o Situational influence impact the ethical decision more than internal traits
• Limitations to organizational compliance: a focus on adherence to rules → not
encourage decision makers to consider the larger picture and can oversimplify decision
making → a strong compliance culture can become another situational influence that
blinds employees to other important considerations
1-g. distinguish between ethical and legal standards;

• Not all ethical behavior is legal and not all legal behavior is ethical → whistle-blowing
• Ethical principles set higher standards than law and regulation → it requires judgement
and considerations to consider impacts of actuon on stakeholder in the short-term and
long-term
• Law and regulations are often “lagging”: Glass Steagall act 1933 after Depression crash,
Sarbanes Oxley law after Enron, Dodd Frank after 2008 crisis
1-h. Describe a framework for ethical decision making
A framework for ethical decision making:
• consider alternate actions
• consider the effect of a decision on stakeholders, in the short term and in the longer term

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 • help the decision maker reach an ethical decision
• justify a decision to the broader group not directly affected, but perhaps indirectly
affected
CFA ethical decision making process:
• Identify: Relevant facts, stakeholders and duties owed, ethical principles, conflicts of
interest
• Consider: Situational influences, additional guidance, alternative actions
• Decide and act
• Reflect: Was the outcome as anticipated? Why or why not?

READING 2: CODE OF ETHICS AND STANDARDS OF PROFESSIONAL CONDUCT

2-a. describe the structure of the CFA Institute Professional Conduct Program and the
process for the enforcement of the Code and Standards;
• The structure of CFA Professional Conduct Program (PCP)
o All CFA Institute members and candidates enrolled in the CFA Program are
required to comply with the Code and Standards
o The CFA Institute Board of Governors and the Disciplinary Review Committee
(DRC) oversee the program (enforcing the Code and Standard)
o DRC is a volunteer committee of CFA charterholders who serve on panels to
review conduct and partner with Professional Conduct staff to establish and
review professional conduct policies
• Enforcement of the Code and Standards
Professional Conduct inquiries come from a number of sources:
o Self disclosure on annual Professional Conduct Statement (about any matter that
question their professional conduct)
o A written complaint
o CFA Institute staff may become aware of questionable conduct by a member or
candidate through the media, regulatory notices, or another public source
o Candidate conduct is monitored by proctors, violating testing rules
o Monitoring online and social media to detect disclosure of confidential exam
information
• When an inquiry is initiated, the Professional Conduct staff conducts an investigation that
may include:
o Requesting a written explanation from the member or candidate.
o Interviewing the member or candidate, complaining parties, and third parties.
o Collecting documents and records relevant to the investigation.

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 • Upon reviewing the material obtained during the investigation, the Professional Conduct
staff may:
o Take no disciplinary action.
o Issue a cautionary letter.
o Continue proceedings to discipline the member or candidate.
➔ Can’t impose fine/imprisonment/ legal punishment
• The member or candidate has the opportunity to reject or accept any charges and the
proposed sanctions → the matter is referred to a panel composed of DRC members →
DRC review materials → final decision
• Sanctions imposed by CFA Institute:
o public censure
o suspension of membership and use of the CFA designation
o revocation of the CFA charter
o Candidates enrolled in the CFA Program who have violated the Codeand
Standards or testing policies may be suspended or prohibited from further
participation in the CFA Program
2-b. State the six components of the Code of Ethics and the seven Standards of Professional
Conduct;
• Six Component of Code of Ethics:
1. Act with integrity (competence, diligence, and respect) in an ethical manner with the
stakeholder (public, clients, prospective clients, employers, employees, colleagues)
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 in
professional practice (conducting investment analysis making investment
recommendations, taking investment actions)
4. Practice and encourage others to practice in a professional and ethical manner
5. Promote the integrity and viability of the global capital markets for the ultimate
benefit of society.
6. Maintain and improve their professional competence
2-c. Explain the ethical responsibilities required by the Code and Standards, including the
sub-sections of each Standard
Seven Code of Standands and its corresponding sub-sections (covered in next reading)

Standards of Professional Conduct

I. Professionalism

A. Knowledge of the Law

B. Independence and Objectivity

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 C. Misrepresentation
D. Misconduct

II. Integrity of Capital Markets

A. Material Nonpublic Information

B. Market Manipulation

III. Duties to Clients

A. Loyalty, Prudence, and Care

B. Fair Dealing
C. Suitability
D. Performance Presentation
E. Preservation of Confidentiality

IV. Duties to Employers

A. Loyalty
B. Additional Compensation Arrangements
C. Responsibilities of Supervisors

V. Investment Analysis, Recommendations and Actions

A. Diligence and Reasonable Basis

B. Communication with Clients and Prospective Clients
C. Record Retention

VI. Conflicts of Interest

A. Disclosure of Conflicts
B. Priority of Transactions
C. Referral Fees

VII. Responsibilities as a CFA Institute Member or CFA Candidate

A. Conduct as members and candidates in the CFA program

B. Reference to CFA Institute, the CFA Designation, and the CFA Program

Note:

- The 7 standards list out requirement for the behavior and then provide recommendation
actions (best practice)
- Be mindful of requirement vs advice: What must be done and what should be done? →
Please read the questions carefully

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 READING 3: GUIDANCE FOR STANDARD I – VII

I. Professionalism

A. Knowledge of the Law

B. Independence and Objectivity
C. Misrepresentation
D. Misconduct

I.A KNOWLEDGE OF LAW

THE STANDARD:

• must understand and comply with all applicable laws, rules, and regulations governing
the professional activities
• In the event of conflict → must comply with the strictest law, rule, or regulation
• must not knowingly participate or assist in and must dissociate from and violation of
such laws, rules, or regulations

BREAKING KEY POINTS DOWN:

1- With the applicable law:

• Applicable law is the law that government the member/candidate’s conduct →
checking whether the law is still in effect or withdrawn/cancelled
• Extending: not only in the scope of law but also consider other regulations →
follow the stricter one which provide a higher degree of protect to the interest of
investors
2- In the global context:
• For members/candidate who practice in multiple jurisdictions
• They are subject to multiple laws and regulations
• Must follow the strictest one
• Remember: not only considering the law, but also consider other ethical duties
(eg. CFAI Code and Standards)
3- Participation/Association with Violations by others
• Candidate/members havving a grounds to believe that there is a illegal/ethical
activities → not working/trading/assisting the activities
• Must dissociate from that activities → in extreme cases, need to resign
4- With investment products
• Members and candidates involved in creating or maintaining investment services
→ mindful of how these products will be sold and where they originates
• Understand the applicable laws and regulations of the countries of origination and
distribution

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 • Practice due diligence on checking cross border transaction to ensure the multiple
applicable laws and regulations

RECOMMENDATIONS/BEST PRACTICE

1- Stay informed: regularly informed about changes in applicable laws, rules, regulations,
and case law
2- Review products: should review, or encourage their employers to review, the firm’s
written compliance procedures on a regular basis to ensure that the procedures reflect
current law
3- Maintain current files: maintain readily accessible current reference copies of
applicable statutes, rules, regulations, and important cases.
4- Should make reasonable efforts to understand the applicable laws for the countries
and regions where their investment products are developed and are most likely to be
distributed to clients.
5- Legal Counsel: whenever in doubts → seek legal counsel
6- Dissociation: should document the violation and urge their firms to attempt to cease such
conduct
7- The firms should have a code of ethics, provide information on applicable law, establish
a reporting procedure for reporting violations

I.B. INDEPENDENCE AND OBJECTIVITY

THE STANDARD:

• must use reasonable care and judgment to achieve and maintain independence and
objectivity in their professional activities (analyze, recommend, investment)
• must not offer, solicit, or accept any gift that reasonably could be expected to
compromise their own or another’s independence and objectivity.

BREAKING KEY POINTS DOWN:

1- independence and objectivity = true opinions, free of bias from internal or external
pressures, and be stated in clear and unambiguous language.
➔ Allowing analysis/recommendation/investment action to be influenced (by
pressure/incentive) → violate → need to avoid such situations
2- Modest gifts and entertainment are acceptable, but special care must be taken to
consider whether it is expected to influence our independence and objectivity. Lavish
gifts (allocation of IPO shares) → compromise objectivity → need to avoid
3- Gifts from clients are less likely to cause compromises than a 3rd party (who will be
benefited at the expense of our clients)

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4- Before accepting clients' gift → should disclose to employers. If notification is not
possible prior acceptance → must disclose to their employer the benefits previously
accepted from clients.
5- In the case of investment baking relationships:
➔ Sell-side firms pressure analysts to issue favorable research on certain clients → must
not be influenced
➔ Analyst vs investment banker: only allowed to work if conflicts are adequately and
effectively managed and disclosed
➔ Firms require public disclosure of actual conflicts of interest to investors
➔ “Firewalls” between the investment banking and research functions must be managed
to minimize conflicts of interest: Separate reporting structures for personnel +
Compensation arrangements (to minimize pressures on research analysts
and reward objectivity and accuracy)

6- In the case of public companies:

➔ Analyst follows any public firms → can be pressured to issue favorable reports about
these forms → avoid/not allow to be influenced → when issuing reports → analyst
need to give opinions in a factual manner
➔ Conduct due diligence in financial research and analysis → this requires the gathering
of information from a wide range of sources → including public disclosure and firm’s
management/document/conference call,.. → if the firm exclude “negative analyst”
from their information sources → difficult for analysts to conduct the comprehensive
research from objective recommendation
7- In the case of buy-side clients:
➔ Situation: Rating downgrading → adversely affect the PM’s performance +
compensation + reputation → PM implicitly/explicitly support sell-side rating inflation
➔ PM must respect and foster the intellectual honesty of the sell-side research
➔ Must not threaten and retaliate (such as reporting sell-side analysts to the covered
company in order to instigate negative corporate reactions)
8- In the case of fund managers and custodial relationships:
➔ Extending to members and candidate who are responsible for hiring and retaining
outside managers and third-party custodians (who holds customers' securities for
safekeeping to prevent them from being stolen or lost)
➔ Must not accept gifts, entertainment, or travel funding that may be perceived as
impairing their decisions
9- For the credit agency opinions:
➔ Must prevent undue influences from a sponsoring company during the analysis.
➔ Must abide by their agencies’ and the industry’s standards of conduct regarding the
analytical process and the distribution of their reports.

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 ➔ Be mindful of the potential conflicts of interest (between rating and advisory advice)
→ therefore need to practice independence
10- For the issuer-paid research:
➔ Some companies hire analysts to produce research reports in case of lack of coverage
from sell-side research
➔ Analysts must fully disclose potential conflicts, including the nature of their
compensation
➔ This compensation can be direct → accept only a flat fee for their work prior to writing
the report.
11- For fund traveling:
➔ Use commercial transportation at their expense or at the expense of their firm rather
than accept paid travel arrangements from an outside company.
➔ In case of unavailability of commercial trave → accept modestly arranged travel
12- For performance measurement and attribution:
➔ Performance measurement department → their analyses may reveal instances where
managers may appear to have strayed from their mandate → subject to pressure →
must remain independent
13- For influences during the Manager Selection/Procurement Process:
➔ members and candidates must not solicit gifts, contributions, or other compensation
that may affect their independence and object
➔ Solicitations → not directly benefit members and candidates but still considered to
violate this standard → Eg: Requesting contributions to a favorite charity or political
organization
➔ working to earn a new investment allocation, members and candidates
should not offer gifts, contributions, or other compensation to influence the
the decision of the hiring representative.

RECOMMENDATIONS/BEST PRACTICE

1. Protect the integrity of opinions: through policies to respect the unbiased opinion of the
analyst
2. Create a restricted list: if firms don’t want to permit dissemination of adverse
opinions about a corporate client → put them in the restricted list → remove from
research universe → analyst only public factual information not opinion/recommendation
3. Restrict special cost arrangements: limit the use of corporate aircraft in special
situations
4. Limit gifts: limited to the token items only.
5. Restrict investments: firms should have policies related to employees taking part in
IPOs → require prior approval before participation in IPOs + prompt disclosure of
investment actions taken following the offering.

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6. Review procedure: to ensure that analysts and PM comply with policies related to their
personal investment activities
7. Independence Policy: a formal written policy on the independence and objectivity
8. Appointed officers: appointing compliance officers

I.C. MISREPRESENTATION

THE STANDARD:

• must not knowingly make any misrepresentations relating to investment analysis,

recommendations, actions, or other professional activities

BREAKING KEY POINTS DOWN:

1. A misrepresentation is any untrue statement or omission of a fact → false

information or misleading
2. Must not knowingly omit or misrepresent information → give a false impression oral
representation + written materials → “knowingly” = either knows or should have known
that the misrepresentation was being made
3. Use webpages → not misrepresent any information and does provide full disclosure.
4. Must not guarantee clients any specific return on volatile investments.
5. If the guarantees are built into the structure of the products or an institution has agreed to
cover any loss → not prohibit to provide such information
6. Impact on Investment Practice:
➔ Must not misrepresent any respect of their qualifications or credentials, their firm’s
qualification and credentials, their performance record and the record of their firm, and
the characteristics of an investment.
➔ Must exercise care and diligence when incorporating third-party information →
Misrepresentations resulting from the use of the credit ratings, research, testimonials,
or marketing materials of outside parties → violating this standard
➔ Must disclose their intended use of external managers and must not represent those
managers’ investment practices as their own.
7. Performance Reporting
➔ Must not misrepresent the success of their performance record by choosing an
unsuitable benchmark
➔ take reasonable steps to provide accurate and reliable security pricing information to
clients on a consistent basis → can’t change the valuation method to provide higher
value/lower risk/improve liquidity
8. For the case of social media
➔ Regardless of channels → must provide them some information they are allowed
➔ Must not misrepresent their qualifications or abilities or those of their employer due to
the perceived anonymity of the internet platform
9. Omissions

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 ➔ not knowingly omit inputs used in any models and processes → misleading + Must not
present outcomes from their models as facts because they only represent expected
results
➔ Must not cherry-picking → only select the high performing account to be presented as
representative of the firm’s abilities → misleading the success of the firm/managers
10. Plagiarism
➔ Using/copying → without creating the source → misleading about the expertise
➔ Must not represent as the author of any third party documents → must disclose to the
client the source coming from an outside source → bring the responsibility to the
original author
➔ Extending to oral communication
➔ Not required for data from a recognised source, financial, statistic reporting services
11. Work completed for Employers
➔ Any research by an analyst of the firms → it is the firm’s property → even the analyst
is no longer at the firm → the firm can still issue the report without crediting the
analyst
➔ Member/candidate still can use the ex-colleagues' work → but must not represent it as
their own.

RECOMMENDATIONS/BEST PRACTICE

1. Factual presentations: the firm should provide a written list of the firm’s available
services qualification description as a guideline for employees + designate who can speak
on behalf of the firm
2. Qualification summary: prepare a summary of qualifications and experience + a list of
the services she is capable of performing.
3. Verify outside information: having a procedure to ensure the accuracy of the marketing
and distribution materials that pertain to the third party’s capabilities, services, and
products
4. Maintain webpages: update website to maintain the current information
5. Plagiarism policy:
➔ Maintain copies: keeps all sources on which they replied to prepare the report
➔ Attribute quote + summaries: direct quotation on their paper any material they
take from others

I.D. MISCONDUCT

THE STANDARD:

• 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.

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 BREAKING KEY POINTS DOWN:

1. Must comply with applicable law that governs their professional activities
2. Any act that involves lying, cheating, stealing, or other dishonest conduct → violating
3. Exhibit conduct that damages trustworthiness or competence → may not be illegal → but
still violating:
➔ Abusing alcohol during business hours
➔ Personal bankruptcy → not related but if the personal bankruptcy is related to
fraud/dishonest → might violate
4. Not due diligence + not understand the nature of the investment product before making a
recommendation → abuse the client’s trusts → poorly impact the profession’s reputation
→ violating
5. Abusing the PCP for personal settlement or political, or other disputes unrelated to
professional ethics

RECOMMENDATIONS/BEST PRACTICE

1. Developing a code of ethics → guideline form employees

2. List of violations: disseminate to all employees a list of potential violations and
associated disciplinary sanctions
3. Employee references: conducting a background check for candidates to ensure they are of
good character.

II. INTEGRITY OF CAPITAL MARKET

A. Material Nonpublic Information

B. Market Manipulation

II.A MATERIAL NONPUBLIC INFORMATION (MNI)

THE STANDARD

• 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.

BREAKING KEY POINTS DOWN

1. Related to information that is material and is nonpublic → must not be used for direct buying
and selling of individual securities nor to influence investment actions
2. Information is “material” → if it is disclosed → it will impact the price of the security
• Material Information includes: earnings, M&A, R&D information, changes in
management, changes in assets, changes in auditor notifications, bankruptcy
• if the information is material → must consider the source and the information’s likely
effect on the relevant stock price

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 ➔ less reliable → less likely to be considered material
➔ more ambiguous the effect on price → less material
3. Non-public information
• nonpublic” until it has been disseminated or is available to the marketplace via the
internet, press release, filing
• Selective group disclosure → selectively disclosed by corporations to a small group of
investors, analysts, or other market participants → not until the investors in general
know → still be considered MNI
• Can use insider information (information from the company) for a specific purpose →
credit rating, underwriting, offering engagement → but then use for other purposes →
violating

4. Mosaic Theory

• Using public information and nonmaterial nonpublic information → investment

recommendations and decisions → not violating
• Nonmaterial: = not importantm not directly relavent
• But need to save and document their research

5. Social Media

• online discussion forums/groups with membership limitations + must check other

platforms to see whether the information is also available to the public → otherwise using
this limited information → violate
• can social media platforms to communicate with clients or investors without conflicting
with this standard

6. Using Industry Experts

• Can seek consultation from industry expert → must not be requesting or acting on
confidential information received from external experts

7. Investment Research Reports

• reports prepared by well-known analysts may have an effect on the market → Considered
MNI
• these reports → made from public + nonmaterial nonpublic information → similar to
mosiac theory → member/candidate buy such research → use for investment
recommendation → not violate

RECOMMENDATION/BEST PRACTICE

1. Achieve public dissemination: reasonable efforts to encourage the firm/issuer public to

disseminate the information. If not possible → only communicate to only designated parties
+ must not act on this information

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2. Adopt compliance procedures: encourage their firms to adopt compliance procedures to
prevent the misuse of material nonpublic information
3. Adopt disclosure procedures
4. Firewalls: prevent the communication of material nonpublic information within firms:
Substantial control of relevant interdepartmental communications, Review of employee
trading, Documentation of the procedures of information flow
5. Appropriate interdepartmental communication + physical separation of the
department
6. Prevent personal overlapping → between the investment banking and corporate finance
areas of a brokerage firm and the sales and research departments
7. A reporting system: authorize people to review and approve communications between
departments → compliance officer
8. Personal trading limitations:
• consider restrictions or prohibitions on personal trading by employees and should
carefully monitor both proprietary trading and personal trading by employees
•should require employees to make a periodic report on their transaction and family
members’ transaction
9. Record maintenance:
• maintain written records of communications among various departments
• place a high priority on training and should consider instituting comprehensive training
programs
10. Proprietary trading procedures:
• as a market maker, a prohibition on proprietary trading may be counterproductive to the
goals of maintaining the confidentiality of the information and market liquidity → taking
the passive contra-side to unsolicited customers
•in the case of risk-arbitrage trading, a firm should suspend arbitrage activity when
security is placed on the watch list
11. Communication to all employees:
• Written compliance policies and guidelines → provide sufficient training

II.B MARKET MANIPULATION

THE STANDARD

• must not engage in practices that distort prices or artificially inflate trading volume with the
intent to mislead market participants → not able able to exploit the market inefficiency

BREAKING KEY POINTS DOWN

1. must uphold market integrity by prohibiting market manipulation.

➔ includes practices that distort security prices or trading volume → intent to deceive
people or entities that rely on information in the market.
2. Information-based manipulation

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 • spreading false rumors to induce trading by others.
➔ Must not “pump up” the price of investment by issuing misleading positive
information or overly optimistic projections of a security’s worth only to later “dump
3. Transaction-Based Manipulation
➔ Transactions that artificially affect prices or volume to give the impression of activity
or price movement
➔ Securing a controlling, dominant position in a financial instrument to exploit and
manipulate the price of a related derivative

III. DUTIES TO CLIENTS

A. Loyalty, Prudence, and Care

B. Fair Dealing
C. Suitability
D. Performance Presentation
E. Preservation of Confidentiality

III. A. LOYALTY, PRUDENCE, AND CARE

THE STANDARD

• Have a duty of loyalty to their clients and must act with reasonable care and exercise prudent
judgment.
• Must act for the benefit of their clients and place their clients’ interests before their
employers or their own interests.

BREAKING KEY POINTS DOWN

1. Clients’ interests
• Client interests are paramount → responsibility to a client includes a duty of loyalty and a
duty to exercise reasonable care.
• Investment actions → for the sole benefit of the client → must exercise the same level of
prudence, judgment, and care as their own interests in similar circumstances
• Prudence = Caution + Discretion → they act with the care, skill, and diligence that a
reasonable person acting in a like capacity in similar situations
• Must be aware of whether they have “custody” = effective control of client assets (have
any direct or indirect access to client funds ) → heighten the level of responsibility →
managing in accordance with the terms of the governing documents
• Not all members/candidates having the legal fiduciary duty* → depending on the nature of
their job and their relationship with clients
➔ A fiduciary is a person or organization that acts on behalf of another person or
persons to manage assets. Essentially, a fiduciary owes to that other entity the
duties of good faith and trust (required by law)

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 ➔ trade executioner: prudence execute in the most favorable term, carefully operate within
client parameters
➔ Advisor: diligence align client needs with recommended assets, in their best interest,
disregard any firm/personal interest
2. Identifying the actual investment clients
• the manager is responsible for the portfolios of pension plans → the client = the
beneficiaries of the plan or trust
• managing a fund to an index or an expected mandate owe the duty of loyalty, prudence, and
care to invest → invest in a manner consistent with the stated mandate → do not have to
be based on an individual investor’s requirements and risk profile
3. Developing the client’s portfolio
• objectives and expectations for the performance → realistic + risks involved are
appropriate
• relate to the long-term objectives and circumstances of the client.
• must provide clear and factual disclosures of potential conflicts
• must follow any guidelines (following IPS) set by their clients for the management of their
assets
• must be judged in the context of the total portfolio rather than by individual investment
within the portfolio.
4. Soft commission policies
• An investment manager often has discretion over the selection of brokers executing
transactions
• uses client brokerage to purchase research services → soft dollar/soft commission →
check whether this benefits the client who pays the brokerage commission + pays higher
brokerage fee → violate
• a client will direct a manager to use the client’s brokerage to purchase goods or services for
the client → “directed brokerage.” → not violate any duty of loyalty. → but obligated to
seek the best execution for client
5. Proxy voting
• Proxy voting has the economic benefit for clients → vote on behalf of clients → must ensure
that they properly safeguard and maximize this value

RECOMMENDATION

1. Regular Account Information

• Submit to each client, at least quarterly, an itemized statement → showing how the asset is
maintained + separate from any other party’s assets (sao kê tài sản)
2. Client Approval
• uncertain about the appropriate course of action related to a client → disclose the
questionable matter in writing to the client and obtain client approval
3. Firm Policies

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• should address and encourage their firms to address the following items
➔ following all applicable law and rules
➔ forming IPS + diversifying (taking the total portfolio perspective)
➔ considering all information before taking actions
➔ regular reviews: ensure following IPS
➔ disclose conflicts of interest + compensation arrangement
➔ follow the guideline on proxy voting: client interest first and seeking best execution
➔ fair dealing with all clients
➔ maintain confidentiality

III. B. FAIR DEALING

THE STANDARD

• must deal fairly and objectively with all clients when conducting professional service
(analyze, recommendation, investment)

BREAKING KEY POINTS DOWN

1. treat all clients fairly when disseminating information related to investment

recommendations /material changes/ taking investment action
2. Fairly = not discriminate # “equal” because not possibly reach all clients at exactly the same
time and not every investment opportunities are suitable for all clients
3. Clients pay a premium → more personal specialized and in-depth service → can differentiate
the service to these clients → but not negatively affect other clients → must disclose to
clients and prospective clients and must be available for everybody (not offered selectively)
4. Investment Recommendations
• Opinion to purchase, sell, hold a given security
• Disseminate the recommendation in the way that gives all clients fair opportunities to act
on the information
• change their recommendations due to subsequent research → mus communicate to all
current clients + special care → must reach clients acted on/being affected by previous
recommendation, for other clients not acting yet → remind clients before accepting
orders
5. Investment Action
• Hot issue/oversubscribing issue → allocating based on pro-rata basis +
member/candidate forgo personal lot to free up for clients
• Family member accounts → if paying → managing as normal client accounts
• Treat all individual and institutional clients in a fair and impartial manner.

RECOMMENDATION

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1. Develop Firm Policies
• Dissemination Policies
➔ Limit the number of people involved → prevent leaking information and taking
action on the pending recommendation
➔ Disseminate all information fast and simultaneously
➔ Provide guideline on how to behave for employees prior dissemination
➔ Holding a list of clients contact → to distribute information more effectively
2. Disclose Trade Allocation Procedures
• disclose to clients and prospective clients how they select accounts to participate in order
and how they determine the number of securities each account will buy or sell
• all allocation must be fair and equitable for the account’s objective
3. Establish Systematic Account Review
• review each account on a regular basis → to check no client or customer is being given
preferential treatment + investment taken according to the IPS
4. Disclose Levels of Service: disclose the service structure + not offered to clients selectively

III. C. SUITABILITY

THE STANDARD

When Members and candidates are in an advisory relationship with a client, they must:

• Make a reasonable inquiry into a client’s or prospective client’s investment experience,

risk and return objectives, constraints → must reassess and update this information
regularly.
• Following IPS +mandates, taking the total portfolio perspective
• Following the mandate: make only investment recommendations or take only investment
actions that are consistent with the stated objectives and constraints of the portfolio.

BREAKING KEY POINTS DOWN

1. Developing an Investment Policy

• Must gather client information before starting the relationship → including their financial
circumstances, personal data, attitude towards risk, an objective in investing
• Developing an IPS: stating risk tolerance, return requirements, investment constraints
• IPS also need to identify the roles and responsibility of the parties + schedule to review
IPS + choosing a benchmark
• developing an appropriate strategic asset allocation and investment program for the client
→ can be separate documents or appendices to IPS
2. Understanding the Client’s Risk Profile
• analyze and quantify investment strategy risk, market impact on securities, portfolio, in
advance
3. Updating an Investment Policy

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 • at least annually and also prior to material changes to any specific investment
recommendations
4. The Need for Diversification: evaluating investment suitability base on client total portfolio
5. Addressing Unsolicited Trading Requests
• Unsolicited trading request (unsuitable trades)→ have only a minimal impact on the
entire portfolio → explaining to the clients why it is not suitable to the IPS → client
acknowledge and accept the risk, grant approval → conduct the trades
• the unsolicited request is expected to have a material impact on the portfolio → required
to the client to update the IPS → if Okie then conduct the trade
•If the client refuses to change IPS → ask them to join the separated account → if not
agree then terminate the relationship
6. Managing to an Index or Mandate
• Must invest in a manner consistent with the stated mandate

RECOMMENDATION

1. Investment Policy Statement

• Considering the client identification: type/nature of clients – who are they?
• Identifying their objective: return vs risk
• Investor constraints: Tax, Time, Liquidity, Legal, Unique conditions
2. Regular Updates
• Reviewed periodically to reflect any changes in the client’s circumstances.
3. Suitability Test Policies
• Analysis of potential return, impact on the portfolio’s diversification, fitness with the
required investment strategies, comparing investment risk with the client’s assessed risk
tolerance

III. D. PERFORMANCE PRESENTATION

THE STANDARD

• communicating investment performance information → must make reasonable efforts to

ensure that it is fair, accurate, and complete.

BREAKING KEY POINTS DOWN

1. must provide credible performance information → to client + prospective client → to avoid

misstating + misleading about the performance
2. covering both performance presentation or performance measurement → causing misleading
3. must not state or imply that clients will obtain or benefit from a rate of return that was
generated in the past.
4. If the presentation is brief → must make the detailed available
5. Analysts → promoting the accuracy of their recommendation → their claims must be fair,
accurate, and complete

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RECOMMENDATION

1. Apply the GIPS Standards

2. Compliance without Applying GIPS Standards
➔ Performance measure = weighted average, not cherry-picking
➔ Including terminated accounts as part of performance history
➔ Including disclosures that fully explain the performance results being reported: eg gross
of the net, net of fee, after-tax/ or result is simulated based on models
➔ Maintain records

III. E. PRESERVATION OF CONFIDENTIALITY

THE STANDARD

1. 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;

2. Disclosure is required by law; or

3. The client or prospective client permits disclosure of the information.

BREAKING KEY POINTS DOWN

1. Status of clients:
• protects the confidentiality of client information even if the person or entity is no longer a
client
• must continue to maintain the confidentiality of client records even the relationship has
ended
• if the client/former client allow → can disclose
2. Compliance with Law
• must comply with applicable law → if the law requires to disclose in some situations →
must comply
• if applicable law requires to maintain confidentiality even it is related to illegal activities
→ must follow the applicable law → not disclose
3. Electronic Information and Security
• Must understand the firm and client policies to ensure the confidentiality
4. Professional Conduct Investigations by CFA Institute
• Can disclose to PCP when conducting an investigation

RECOMMENDATION

1. Avoid disclosing any information received from a client except to authorized fellow
employees who are also working for the client

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2. Communicating with Clients: firms having communication methods and compliance
procedures → prevent the accidental distribution of confidential information + working with
the client for suitable methods to provide confidential information

IV. DUTIES TO EMPLOYERS

A. Loyalty
B. Additional Compensation Arrangements
C. Responsibilities of Supervisors

IV. A. LOYALTY

THE STANDARD

• must act for the benefit of their employer

• not deprive their employer of the advantage of their skills and abilities,
• divulge confidential information, or otherwise cause harm to their employer.

BREAKING KEY POINTS DOWN

➔ Members/Candidates: comply with employers’ policies which are not conflicting with
applicable law and codes
➔ Not required to subordinate their family obligation → if they have personal issues →
encouraged to talk to employers
1. Employer Responsibilities
• Employers → expecting good employees → show their duties and responsibilities to
employees
• Establish a positive and ethical workplace
2. Independent Practice
• Not take part in an independent competitive activity that could conflict with the interests of
their employer.
• plan to engage in an independent practice for compensation → must notify their employers +
must receive an employer consent
3. Leaving an Employer
• Plan to leave the employers → must continue to act on the employer’s interest. Can prepare
for the next job/competitive business if not breaching the duty to current employers
• If not resign yet → not engage in any activities conflicting with their duties to employers
• Must not solicit the clients of the employers while not yet leaving + most notify the client of
separation
• must not take records or files to a new employer without the written permission of the
previous employer. → firms records/output creating while at the firm → must be deleted
from personal companies and devices unless the firm allows keeping records

21
 • the skills and experience that an employee obtained → still can be used in the next job →
not considered confidential or privileged → can still using for the next employers
•
after leaving the firm → can contact the client of their previous firm → if the contact does
not come from the records of the previous firm + not having a non-compete agreement
4. Use of Social Media
•
firm-approved business-related accounts would be considered part of the firm’s assets →
leaving employees must transfer or delete the social account following firm procedure
5. Whistleblowing
•
Can violate the duty to employers to protect the clients and the integrity of the market →
but not for personal gains
6. Nature of Employment
• Members and candidates must determine whether they are employees or independent
contractors
• an independent contractor relationship → based on the agreement to determine the scope
and the extent of their responsibilities → abide the contract

RECOMMENDATION/BEST PRACTICE

1. Competition Policy
• Must understand the restriction by the firm about offering similar service outside
• Must understand the non compete agreement before signing
2. Termination Policy
• Having guideline about the resignation process, outlining the transfer process, how to remove
specific client-related information from the departing employee
3. Incident-Reporting Procedures
• should be aware of their firm’s policies related to whistleblowing and encourage their firm to
adopt industry best practices in this area
4. Employee Classification: understand their status within the firm

IV. B. ADDITIONAL COMPENSATION ARRANGEMENTS

THE STANDARD

• must not accept gifts, benefits, compensation, or consideration that competes/expected to

create a conflict of interest with their employer’s interest unless they obtain written consent
from all parties involved

BREAKING KEY POINTS DOWN

1. Compensation and benefits include direct compensation by the client and any indirect
compensation or other benefits received from third parties

RECOMMENDATION/BEST PRACTICE

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1. When receiving an offer → should immediately send a written report to the employer
explaining the situation and nature the compensation → should be verified by the offering
party

IV. C. RESPONSIBILITIES OF SUPERVISORS

THE STANDARD

• must make reasonable efforts to ensure that anyone subject to their supervision or authority
complies with applicable laws, rules, regulations, and the Code and Standards. (not they are
abiding but all people under their supervision are abiding)

BREAKING KEY POINTS DOWN

1. Under supervision = direct subordinate + subordinates to whom supervision is delegated →

when delegating the responsibility → must instruct how to do + how to detect + prevent
violation
2. make reasonable efforts to prevent and detect violations by having an effective compliance
system → if the compliance system is not effective → should bring it to the attention of the
employers → if the firm does not take the corrective actions → refuse the supervisory roles
3. System for Supervision
• make reasonable efforts to see those appropriate compliance procedures are established,
documented, communicated to covered personnel, and followed.
• If an employee has violated → must investigate → need to make sure the violation will not
be repeated (review the procedure/policies)
4. Supervision Includes Detection
• reasonable efforts to detect violations → adopt reasonable procedures and taken steps to
institute an effective compliance program → if not able to detect even making reasonable
efforts → not violating
• if know/should know that the compliance produce is not following → not doing anything →
violating

RECOMMENDATION/BEST PRACTICE

1. Code of ethics and compliance procedure: should in plain language, easy to understand
2. Providing frequent training on compliance → establish a strong culture of integrity
3. Establish an appropriate incentive structure → focus on how the outcome is generated not
how much (higher returns)

V: INVESTMENT ANALYSIS, RECOMMENDATIONS, AND ACTIONS

A. Diligence and Reasonable Basis

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B. Communication with Clients and Prospective Clients
C. Record Retention

V. A. DILIGENCE AND REASONABLE BASIS

THE STANDARD

• Exercise diligence, independence, and thoroughness in conducting analysis,

recommendation, investment action
• Have a reasonable and adequate basis and is supported by appropriate research

BREAKING KEY POINTS DOWN

1. Reasonable effort to cover pertinent issues when analyze/recommend/investing + enhancing

the transparency by providing the detailed supporting information to clients
2. The level of diligence and reasonableness → depending on the roles, product characteristics
and the number of resources available. Consideration includes macro-economic conditions,
the company’s financial reports and history, sector analysis, business cycle condition, mutual
fund’s fee structure and management history, output and potential limitations of quantitative
models, appropriateness of selected peer group comparisons, so on
3. Using Secondary or Third-Party Research
• Secondary research is defined as research conducted by someone else / Third-party
research is research conducted by entities outside the member
• Must make reasonable and diligent efforts to determine whether such research is sound.
• make reasonable inquiries into the source and accuracy of all data used in their analysis
• Criteria can be used to check the soundness: assumptions, the rigor of the analysis
performed, date/timeliness, objectivity and independence of the recommendation
• Can rely on others to determine
• Should verify the firm’s review policies of approved research providers to ensure quality
→ if don’t have review policies → suggest to have one
4. Using Quantitatively Oriented Research
• must understand the parameters used in models and quantitative research
• are not required to become experts in every technical aspect of the models
• must understand the assumptions and limitations
• must test the output of investment models before using → test in broad scope including
the extreme cases → any omission of potentially negative outcomes → misrepresentation
of the economic value → violating this standard
5. Developing Quantitatively Oriented Techniques
• must understand the technical aspects of the products they provide to clients.
• thorough testing of the model and resulting analysis before distributing

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 • must pay attention to the assumptions, incorporate a wide range of possible inputs even
outside the observed data including negative market events
6. Selecting External Advisers and Subadvisers
• must review managers as diligently as they review individual funds and securities
• need to have standardized criteria for reviewing external adviser: code of ethics,
compliance, return information, investment policies
7. Group Research and Decision Making
• in case of disagreeing with the group decision → if believing that the consensus opinion
is reasonable and based on independence and objectivity → not need to disassociate

RECOMMENDATION/BEST PRACTICE

1. Establish a policy requiring all professional conduct → based on the reasonable and adequate
scope
2. Having written guidance for research and due diligence
3. Develop measurable criteria for assessing the quality of research/ accuracy of
recommendation over time
4. Develop measurable criteria for assessing outside providers → quality, assumption,
objectivity

V. B. COMMUNICATION WITH CLIENTS AND PROSPECTIVE CLIENTS

THE STANDARD

• Must disclose to clients and prospective clients the basic format and general principles of the
investment processes + must promptly disclose any material changes
• Must disclose significant limitations and risks associated with the investment process.
• Must use reasonable judgment in identifying which factors are important to their
investment analyses, recommendations, or actions→ communicating those factors to clients
• Must distinguish between fact and opinion

BREAKING KEY POINTS DOWN

1. Identifying the instrumental factors in making the investment recommendation →

communicate to clients clearly in plain language → distinguishing facts vs opinions →
follow up any changes in the security/investment strategy → update the clients regularly
2. Informing Clients of the Investment Process
• must adequately describe to clients and prospective clients the investment process
• address factors that have positive and negative influences including significant risks and
limitations of the investment process used.
• must keep clients and other interested parties informed of material changes and newly
identified significant risks and limitations
• should inform the clients about the expertise provided by the external adviser

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3. Different Forms of Communication
• All types of communication are fine but need to ensure that all clients have fair access to
the shared information and publicly disseminated
• recommendations are contained in capsule form (in the summarised form) → notify
clients that additional information can be found in the report
4. Identifying Risks and Limitations
• must outline to clients and prospective clients significant risks and limitations of the
analysis used
• Disclosure of risks → based on what was known at the time of conducting the service →
at the time of disclosure, disclose all significant risks → at time of disclosure, if don’t
know the risk with the current information → it is okie
5. Report Presentation
• quantitative research → must be supported by readily available reference material + be
applied consistently with previously applied methodology. If changes in methodology are
made → must be highlighted
6. Distinction between Facts and Opinions in Reports
• fail to separate the past from the future → violating. E.g: past performance → fact
(because it has happened), expected outcome/recommendation → future → opinions
• quantitative analyses → outcomes → based on assumptions → opinions → must identify
limitations → communicate them to clients → avoid the clients have a false perception of
the accuracy of the model to be a certain future

RECOMMENDATION/BEST PRACTICE

• should encourage their firms to have a rigorous methodology for reviewing research
• must maintain records indicating the nature of the research and should, if asked, be able
to supply additional information to the client

V. C. RECORD RETENTION

THE STANDARD

• develop and maintain appropriate records to support their

analysis/recommendation/investment + other investment-related communications with clients
and prospective clients.

BREAKING KEY POINTS DOWN

1. must retain records → support the scope of their research and reasons for their actions or
conclusions.
2. Can be in hard or soft copies
3. New (Digital) Media Records

26
 • all relevant information is retained → regardless of the law on maintaining the digital
data including e-mails, text messages, blog posts, and Twitter posts
4. Records Are Property of the Firm
• records created on behalf of his or her employer are the property of the firm → leaving
the firm → cannot take the recorded information → both original forms or derived forms
without consent
• in new companies → can not issue the historical recommendation → due to lack of
supporting documentation → if can re-create the supporting records (information
gathered in public source and not from memory or sources obtained at the previous
employer)
5. Local Requirements
• Time of recording → following the applicable law → if don’t have → follow CFA → at
least 7 years

RECOMMENDATION/BEST PRACTICE

1. Record retention → the firm’s responsibility but the individual still needs to record as well.

STANDARD VI: CONFLICTS OF INTEREST

A. Disclosure of Conflicts
B. Priority of Transactions
C. Referral Fees

VI. A. DISCLOSURE OF CONFLICTS

THE STANDARD

• make full and fair disclosure of all matters → expected to impair their independence and
objectivity or interfere with their duties to clients, prospective clients, firms (often related to
a compensation package, bonus structure)
• disclosures are prominent, are delivered in plain language, and communicate the relevant
information effectively.

BREAKING KEY POINTS DOWN

1. Best → avoid conflicts and appearance of conflict → but when conflicts cannot be avoided
→ must disclose clearly and completely → update the information of conflict when
situations changes
2. Disclosure of Conflicts to Employers
• Must give their employers enough information to assess the impact of the conflict.

27
 • must take reasonable steps to avoid conflicts → if can not → promptly report so that it
can be resolved quickly and effectively
• Report even any potential conflict situation → that could interfere with duties to
employers → for them to judge the potential bias and resolve
3. Disclosure to Clients
• Most obvious conflicts of interests: relationships between an issuer and
member/candidate/his firm: directorship or consultancy by a member /candidate,
investment banking, underwriting, and financial relationships; broker/dealer market-
making activities; and material beneficial ownership of stock → must be disclosed for the
client to fully understand the cost and benefit
• Must disclose the fee arrangement, sub-advisory agreements, or other situations
involving nonstandard fee structures, mutual fund rebates or how the firm can be
benefited from the recommendation
4. Cross-Departmental Conflicts
• Analysts can be influenced by other firm members. Eg: marketing division asking an
analyst to recommend security to obtain business → must resolve the situation + disclose
them
5. Conflicts with Stock Ownership
• a member’s or candidate’s ownership of stock that he is covering
• the easiest method for preventing a conflict → prohibit using the stock → but it is
discriminating
• sell-side members → disclose any materially beneficial ownership interest of any security
that they are recommending
• Buy-side members → disclose their personal transaction following the firm procedure
6. Conflicts as a Director
• Service as a director poses three basic conflicts of interest:
➔ duties to clients vs the duties to shareholders of the company
➔ Investment personnel → serving as director → director’s compensation is often linked
to stock (receive the securities, option to buy the security) → raise questions about
trading actions to raise the value of those stock
➔ Board member → having MNI → acting on MNI
• members or candidates providing investment services also serve as director → must be
isolated from those making investment decisions

RECOMMENDATION/BEST PRACTICE

1. Should disclose to employers all special arrangement → which might conflict with client
interest: bonuses based on short-term performance criteria, commissions, incentive fees,
performance fees,
and referral fees.

28
2. Firms are encouraged to include information on compensation packages in firms’
promotional literature.

VI. B. PRIORITY OF TRANSACTIONS

THE STANDARD

• Transaction: clients, then employers, then member/candidate

BREAKING KEY POINTS DOWN

1. Avoiding Potential Conflict

• Despite the conflicts, nothing is unethical about making money from personal investment,
if:
(1) clients not disadvantaged by the trade,
(2) member not benefit personally from clients' trades
(3) complies with applicable law
• personal transactions can be contrary to current recommendation for clients due to the
personal reasons but still need to fulfill the above requirements

2. Personal Trading Secondary to Trading for Clients

• Personal investment positions or transactions of member → must never adversely affect the
client investment
• Can hold the same position with clients account → to align the interest
3. Standards for Nonpublic Information
• Employer/client is having a pending transaction (MNI) → must not act on this for personal
gain
4. Impact on All Accounts with Beneficial Ownership
• Personal account = member/candidate’s own account, family account, account having
pecuniary interest (retirement account)
• Family account → paying fee → treated like normal client, can not be given special
treatment or disadvantaged
• Candidate/member has a beneficial ownership on the account → subject to preclearance,
reporting requirement by firm and applicable law.

RECOMMENDATION/BEST PRACTICE

1. should urge their firms to establish compliance policies and procedures.

2. Firms → having guideline on how to address the conflict related to personal trading:
➔ Limited participation in equity IPOs
➔ Restrictions on private placements,
➔ Establish blackout/restricted periods

29
 ➔ Reporting requirements, including:
■ Disclosure of holdings in which the employee has a beneficial interest.
■ Providing duplicate confirmations of transactions.
■ Preclearance procedures,
➔ Disclosure of policies to investors.

VI. C. REFERRAL FEES

THE STANDARD

• must disclose to their employer, clients, and prospective clients any ]benefit received from or
paid to others for the recommendation of products or services. → for the client to fully
evaluate the cost and potential partiality

BREAKING KEY POINTS DOWN

1. Including: receiving from others to recommend + paying other to recommend

2. Must disclose before entering into any formal agreement for the service
3. must disclose the nature of the consideration or benefit: estimated dollar value, cash/soft
dollar

RECOMMENDATION/BEST PRACTICE

1. should encourage their employers to develop procedures related to referral fees: firm can
restrict referral fee, if not restricting → should have a procedure for approval
2. Should notify the clients of approved referral fee program + Update the amount and nature of
compensation received

VII. RESPONSIBILITIES AS A CFA INSTITUTE MEMBER OR CFA CANDIDATE

A. Conduct As Participants in the CFA Institute Program

B. Reference to CFA Institute, the CFA Designation, and the CFA Program

VII. A. CONDUCT AS PARTICIPANTS IN THE CFA INSTITUTE PROGRAM

THE STANDARD

• must not engage in any conduct that compromises the reputation or integrity of CFA Institute

BREAKING KEY POINTS DOWN

30
1. Confidential Program Information:
Must not disclose:
➔ Specific details of questions appearing on the exam
➔ Broad topical areas and formulas tested or not tested on the exam.
2. Additional CFA Program Restrictions:
• Violating any of the testing policies: calculator policy, personal belongings policy, or the
Candidate Pledge
• Revealing information about grading process
3. Expressing an Opinion: free to express any opinion about CFAI, CFA Program, other CFAI
program → but not content-specific information, including any actual exam question and the
information as to subject matter covered or not covered in the exam.

VII.B. REFERENCE TO CFA INSTITUTE, THE CFA DESIGNATION, AND THE CFA
PROGRAM

THE STANDARD

• must not misrepresent or exaggerate the meaning or implications of membership in CFA

Institute, holding the CFA designation, or candidacy in the CFA Program.

BREAKING KEY POINTS DOWN

1. prevent promotional efforts that make promises or guarantees that are tied to the CFA
designation
2. not prohibit factual statement related to merit of earing CFA designation(considering it as
personal opinions) → but not overstating the competency + superior performance directly +
indirectly
3. applies to any form of communication
4. CFA Institute Membership
• Complete the Professional Conduct Statement every year
• Paying applicable fee on annual basis
• No long be member → can state that used to member until active year
5. Using the CFA Designation
• Member who fully the requirement → have the right to use the CFA designation with a
trademark → but not in the way to exaggerate the meaning and application → if fail to
meet the membership requirement → can not use the designation anymore
• Any name created to hide a member’s identity to express the opinion on the internet →
must not be tagged with the CFA designation
6. Referring to Candidacy in the CFA Program
• Candidate = register for the CFA exam, paying the fee, not yet sitting for exam or sitting
for exam but to receive the results
• Candidate → no partial designation, no expected completion date
7. Proper and Improper References to the CFA Designation

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32
 READING 4: INTRODUCTION TO GIPS

GLOBAL INVESTMENT PERFORMANCE STANDARDS

1. Overview of GIPS Standards

- Individual + institution investors → using past performance to show their investment
ability → how to ensure the accuracy and credibility of the performance presentation →
to enhance comparison
- Misleading practice include:
➔ Representative accounts: using the best performing accounts → show the firm
overall performance
➔ Survivorship bias: historical date exclude poorly performed accounts which were
terminated → overestimate the performance
➔ Varying time periods: choosing the well performing periods only
➔ GIPS is created to provide clients and prospective clients with comparable and
representative investment performance data → by creating an industry-wide, standard
approach for calculation and presentation of investment performance.
- Compliance with GIPS is voluntary → not required by law and regulatory authorities
- Only investment management firm → actually manage the asset → can claim compliance
→ to claim: must comply all requirement of GIPS → no partial compliance

2. Construction and purpose of composites in performance reporting.

- The GIPS standards require the use of composites
- Composite = combining discretionary portfolios → one group → representing a specific
investment objective/strategy → a composite for a particular strategy must include all
discretionary portfolios following that strategy
- the criteria for classifying portfolios into composites are decided before performance is
known → to avoid cherry-picking
3. Requirement for verification
- A company claim their compliance to GIPS → hire an independent third party to verify
- Verification check:
➔ Compliant with GIPS on firm-wide basis (verification is performed on the entire
firm rather than specific composites).
➔ Complied with all composite construction + all calculation process + data
requirement + performance information presentation

READING 5: THE GIPS STANDARDS

Objective of GIPS:

- worldwide acceptance of a single standard for the calculation and presentation of

investment performance for fair representation and full disclosure
- ensure consistency and accuracy of investment performance data

33
 - promote self regulation and global fair competition

The Structure of the GIPS Standards:

0. Fundamentals of Compliance
1. Input Data
2. Calculation Methodology
3. Composite Construction
4. Disclosure
5. Presentation and Reporting
6. Real Estate
7. Private Equity
8. Wrap Fee/Separately Managed Account (SMA) Portfolios

0. Fundamentals of Compliance
- Definition of Firms:
➔ investment firm, subsidiary, or division held out to client/ prospective clients as a
distinct business entity
➔ total firm asset = aggregate FV of all discretionary + nondiscretionary asset
managed by the firm, both paying and non-pay fee portfolios
➔ total firm asset including both assets assigned to sub-advisors if it has the power
to choose the sub-advisor
➔ change in firm organizational structure → cant change composite performance in
the past
➔ M&A with other firms, markets with other firms → must clearly defined and
separate: which om comply with GIPS and which does not
- present a minimum of five years of GIPS-compliant historical investment performance. If
any composite < 5 years → showing from the inception
➔ counting from the starting of claiming compliance with GIPS → must add one year
of compliant performance each year till counting to 10 years → for year 11th → adding
data for year 11th and dropping data for 1st year → forming a 10-year-series.
- Must comply with all the requirements of the GIPS standards: updates, guidance
statement, interpretation, Q&A, clarification published by CFAI and GIPS executive
committee in GIPS website and Handbook → no partial compliance
- Complying with all applicable law about calculation and presentation of performance →
follow local law, if there is any conflict with local law in calculating and presenting
performance → disclose
- Must be applied on firm-wide → can’t say a calculation methodology / a performance
presentation of a single client portfolio as complying with GIPS → violating → but when
reporting this portfolio to that client → can state “calculated in accordance with the GIPS
standards”

34
- Must provide a compliant presentation for any composite for the prospective client when
requested
- Having written procedures and policies about GIPS Compliance
1. Input Data: following the standards for data input: full, accurate, consistent
2. Calculation Methodology: includes definitions of specific methods for return
calculations of portfolios and composites.
3. Composite Construction: constructed to achieve consistency and fair presentation
4. Disclosure: Requirements for disclosure of a firm’s policies and performance
presentation
5. Presentation and Reporting: following requirement in GIPS
6. Real Estate: applied to present performance relating to real estate investments.
7. Private Equity: GIPS Private Equity Valuation Principles must be used to value
private equity investments, except for open-end and evergreen funds
8. Wrap Fee/Separately Managed Account (SMA) Portfolios: must include
the performance record of all wrap fee/SMA portfolios inappropriate composites in
accordance with the firm’s established portfolio inclusion policies

35