Chapter 8

CFA Institute Code of Ethics

and Standards of Professional
Conduct

When you register for the Level I exam, you will become a Candidate for the CFA
designation. Candidates are required to abide by the CFA Institute Code of Ethics
and Standards of Professional Conduct (the “Code and Standards”). The Code and
Standards are described in CFA Institute’s Standards of Practice Handbook.

The Standards of Practice Handbook is available from the CFA Institute Web site
and is reprinted in the CFA Curriculum volumes you will receive when you register
for each level of the CFA Exams. The Handbook includes guidance for each of the
Standards, recommended procedures for compliance, and many examples of how
the Standards should be applied in practice.

In addition to the Code and Standards, with which all Members and Candidates
must comply, CFA Institute has developed several sets of voluntary standards that
relate to particular segments of the financial services industry. These include:
• Global Investment Performance Standards (GIPS®) for calculating and
presenting investment performance.
• Asset Manager Code of Professional Conduct.
• CFA Institute Research Objectivity Standards.
• CFA Institute Soft Dollar Standards. “Soft dollar” arrangements are benefits a
broker might provide to investment managers that direct clients’ trades to the
broker. Soft dollars must be used in ways that benefit the clients, not just the
investment manager.
The Code of Ethics1 is as follows:

“Members of CFA Institute (including Chartered Financial Analyst® [CFA®]

charterholders) and candidates for the CFA designation (“members and
candidates”) must:
• act with integrity, competence, dignity, 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.

1 Copyright 2010, CFA Institute. Reproduced and republished from Standards of Practice
Handbook, 10th Ed., 2010.

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CFA Institute Code of Ethics and Standards of Professional Conduct

• 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 Standards of Professional Conduct2 are as follows:
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 any violation of laws, rules, or
regulations and must disassociate themselves from any such violation.
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.
C. Misrepresentation. Members and Candidates must not knowingly
make any misrepresentations relating to investment analysis,
recommendations, actions, or other professional 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.
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.
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.

2 Ibid.

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CFA Institute Code of Ethics and Standards of Professional Conduct

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.
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.
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’s or prospective clients’
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 make
only investment recommendations or take investment actions that
are consistent with the stated objectives and constraints of the
portfolio.
D. Performance Presentation. When communicating investment
performance information, Members or Candidates must make
reasonable efforts to ensure that it is fair, accurate, and complete.
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.
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.

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CFA Institute Code of Ethics and Standards of Professional Conduct

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.
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.
V. INVESTMENT ANALYSIS, RECOMMENDATIONS, AND ACTIONS
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.
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.
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.
VI. CONFLICTS OF INTEREST
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.
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.

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CFA Institute Code of Ethics and Standards of Professional Conduct

C. Referral Fees. Members and Candidates must disclose to their

employer, clients, and prospective clients, as appropriate, any
compensation, consideration, or benefit received from, or paid to,
others for the recommendation of products or services.
VII. RESPONSIBILITIES AS A CFA INSTITUTE MEMBER OR CFA
CANDIDATE
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.
B. 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.

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 Index

A balance sheet 133

bank discount 257
absolute advantage 111 bankers’ acceptances 259
accelerated depreciation 157 basic accounting equation 131
accounts payable 132, 136 benchmark 423
accounts receivable 135 beta 413, 416, 421
accrual basis accounting 132 bid price 251, 257
accrued interest 322 black market 83
affirmative covenants 312 bond-equivalent yield 258
after-tax cost of debt 208 bond funds 261
agency costs 200 bond indenture 311
agency securities 315 bond yield plus risk premium approach
aggregate demand (AD) 91 210
aggregate supply 91 book value 154, 164
algebra 6 breakeven analysis 219
allowance method 149 breakeven point 220
alpha 420 broker market 247
American Depository Receipts (ADRs) Bulldogs 256
254 business risk 203, 290
American-style options 332
annual compounding 24 C
annuities 31
annuity due 31 callable bonds 312
ask discount 258 call option 331
ask price 251, 257 call risk 318
ask yield 257 capital 100
asset allocation 405 capital account 120
asset utilization 300 capital asset pricing model (CAPM)
at-the-money 335 209, 413, 419
auditor’s opinion 147 capital budgeting 213
average collection period 286 capital components 207
average cost 150, 152 capitalization of income method 285
average fixed costs 101 capital market line (CML) 403
average total cost 102 capital markets 248
average variable cost 102 capital structure 205
carrying value 154
B cash 135
cash flow from financing 139, 144
balanced funds 261 cash flow from investing 139
balance of payments (BOP) 119

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Index

cash flow from operations 139 cost of retained earnings 209

cash settlement 343 coupon payments 311
certificates of deposit (CDs) 258 coupon rate 160, 311, 325
characteristic line 415 covariance 410
Chicago Board of Trade (CBOT) 330 credit 131
Chicago Board Options Exchange credit risk 317
(CBOE) 330 current account 119
Chicago Mercantile Exchange (CME) current liabilities 159
330 current ratio 285
classical economics 94 current yield 327
classified balance sheet 134 cyclical unemployment 90
clearinghouse 341
coefficient of variation 291 D
collusion 110 dealer market 247
commercial paper 259, 317 debentures 255
commodity futures contracts 260 debit 131
common stock 136, 199 debt-equity ratio 291
common stock funds 261 debt ratio 292
common stockholders 251 debt to assets 292
comparative advantage 110 declining balance method 157
complements 80 defined benefit plan 165
component costs 207 defined contribution plan 165
compounding rate 20 delivery 343
compound values 21 demand 79
constant growth dividend discount demand curve shifts 97
model 310 depletion 154
Consumer Price Index (CPI) 314 depreciation expense 137
consumption demand 92 derivative 330
contributed capital 136, 165 derivatives markets 259
contribution margin 220 direct market 247
convergence 343 direct write-off method 149
conversion price 313 discount 35, 160
convertible bonds 256 discounted cash flow approach 211
corporate bonds 255 discount rate 319
corporate finance 195 discouraged workers 90
corporate governance 195 distortions to equilibrium 82
corporate securities 316 distribution of possible values 203
corporation 198 diversifiable risk 412
correlation 410, 411 dividend discount model 304
cost of capital 207 dividends 302
cost of debt 208 dollar discount 258
cost of goods sold (COGS) 152 double declining balance method 157
cost of plant assets 155 double entry system 130
cost of preferred stock 209

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Index

Dow Jones Industrial Average (DJIA) federally-related institutions 315

263 financial flexibility 207
Du Pont system 300 financial futures 261
financial leverage 205
E financial risk 205, 290
earnings multiplier model 308 financial statement analysis 284
earnings quality 284 financial statement footnotes 145
effective interest 162 first-in, first-out (FIFO) 150, 152
effective interest rates 26 fiscal policy 92
effects of taxes 83 fixed asset turnover ratio 288
efficient frontier 401 fixed costs 101
efficient portfolio 401 fixed-income securities 254
elasticity 79, 98 floor brokers 252
empirical rule 407 flotation costs 250
entry barriers 106 foreign exchange 113, 115
equation 6 forward contracts 339
equilibrium 81 forward market 115, 248, 338
equipment 136 Freddie Mac 315
equity market 251 frequency distribution 42
equity valuation 284 frictional unemployment 90
estimated warranty liability 159 full employment 90
Eurobond 256 fully amortized 38
European-style options 332 futures 338, 340
event risk 318 future value 20
excess return 404 future value of a lump sum 20
exchange for physicals (EFP) 344 future value of an annuity due 31
exchange rate risk 118 future value of an ordinary annuity 32
exchange rates 114 G
exercise price 331, 338
expansionary fiscal policy 92 GDP deflator 86
expansionary monetary policy 93 general obligation bonds 255
expansion project 214 geometric mean return 28
expected return 406, 407 goodwill 159
expenditure approach 85 Gordon growth model 304
expenditure multiplier 94 government sponsored entities 315
expiration date 332 gross domestic product (GDP) 84
explicit growth period 306 gross profit margin 289
exponent 16 growth potential 292
F H
face value 311 high entry barriers 107
fair value 283 histogram 43
Fannie Mae 315 human capital 100
federal funds 259

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Index

I legal factors 424

leverage 200, 300
impairment 154 liabilities 136, 159
implicit growth period 306 limited liability 199
income bonds 256 liquidity 318, 341
income growth 119 liquidity risk 318
income statement 136 long call 331
indifference curves 399 long forward position 340
indirect method 140 long put 331
inelastic 98 long run 101
inferior goods 99 long-run aggregate supply 91
inflation 87, 119, 417 long-term asset 154
inflation-adjusted principal 314 long-term debt 136, 159, 160
inflation indexed notes 314 long-term fixed assets 135
inflation risk 318 lump sum 20
initial public offering (IPO) 196, 249
intangible assets 154, 158 M
interest rate risk 317
internal rate of return (IRR) 217 macroeconomics 84
international bonds 256 macroeconomic variables 202
international economics 110 maintenance margin 342
international equity 253 making a market 251
international mutual funds 254 management discussion and analysis
in-the-money 335 146
intrinsic value 283 marginal cost 102
inventory 135 marginal propensity to consume 93
inventory costing methods 150 marginal revenue 105
inventory turnover ratio 286 margin balance 341
investment bankers 249 margin call 342
investment companies 261 marked to market 341
investment policy statement (IPS) 423 marketable securities 135, 148
investors 422 market makers 251
market order 252
K market portfolio 404
market rate of interest 160
Keynesian economics 94 market value 283
market value-weighted index 267
L
Markowitz, Harry 397, 400
land 135 maturity 257, 311, 323
last-in, first-out (LIFO) 150, 152 mean 43
law of demand 80 mean absolute deviation 45
law of diminishing returns 102 measures of dispersion 45
law of supply 79 median 44
lead banks 249 microeconomics 95
lease 164 microeconomic variables 202

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Index

mode 45 operating profit margin 289

monetary policy 93 opportunity cost 110
money market 248, 257 optimal asset allocation 404
money market funds 261 optimal capital structure 207
moneyness 333, 335 optimal portfolio 402
monopoly 107 option premium 332
multi-stage dividend discount model options 260, 331, 338
305 out-of-the-money 335
municipal bonds (munis) 255, 316 ownership 247
ownership transfer 199
N
P
National Association of Securities
Dealers Automated Quotation System paid-in-capital 136
(NASDAQ) 251 paid-in-capital in excess of par 166
national income 86 parentheses 14
National Market System (NMS) 251 parentheses and exponents 17
natural rate of unemployment 90 partnership 198
natural resources 154 par value 165, 311
negative covenants 312 payables payment period 287
net cash flow 214 payables turnover ratio 287
net income 290 payback period 218
net investment 214 payoffs 333
net present value 215 pension plan 165
net profit margin 290 periodic inventory system 150
New York Futures Exchange (NYFE) perpetual inventory system 150
330 perpetual preferred stock 310
Nikkei Dow Jones Stock Average 266 perpetuity 20
nominal GDP 86 physical capital 100
nominal yield 326 plant 135
noncash investing and financing population 39
activities 139 portfolio risk 412
non-recurring item 164 portfolio theory 398
normal distribution 48 preference stock 166
normal goods 100 preferred stock 166, 209, 256
notes payable 136 premium 160
prepaid expenses 135
O present value 20, 322
official reserve account 120 present value of a lump sum 30
offsetting trade 343 present value of an annuity due 35
oligopoly 109 present value of an ordinary annuity 36
open market operations 93 price 323
operating efficiency 300 price ceiling 82
operating leverage 204, 291 price controls 82
price elasticity 98

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Index

price floor 82 return 201

price index 86 return on assets (ROA) 290
price searcher market 106 return on equity (ROE) 290
price takers 105 revenue bonds 255, 316
price-to-earnings ratio 308 risk 201
price-weighted index 262 risk aversion 400, 418
principal 311 risk premium 413
private placement 250 risk tolerance 424
probability 408
probability distribution 406 S
production (units-of-production) sales volatility 291
method 156 Sallie Mae 315
profitability ratios 289 sample 40
profits 335 Samurai bonds 256
proprietorship 197 Securities and Exchange Commission
proxy 199 (SEC) 249
public offering 249 securitization 315
purely competitive market 104 security market line (SML) 417, 420
put option 260, 331 senior secured bonds 255
Q serial bonds 312
serial obligations 316
qualified opinion 147 settlement price 341
quick ratio 286 shareholders’ equity 136
quota 112 Sharpe ratio 404
shifts in the supply curve 103
R short call 331
range 45 short forward position 340
ratios 285 short put 331
real estate 262 short run 101
real GDP 86 short-run aggregate supply 91
real interest rates 92 single-stage dividend discount model
receivables turnover ratio 286 304
regression 415 sinking fund 312
reinvestment risk 317 skip day settlement process 257
replacement project 214 sole proprietor 197
repurchase agreement 259 specialist 251, 252
required return 417 specific identification 150, 152
resource cost-income approach 86 speculative bubble 284
resource prices 92 spot market 115, 248
restrictive fiscal policy 93 standard auditor’s opinion 147
restrictive monetary policy 93 standard deviation 46, 410, 411, 412
retained earnings 136, 200 standardized contract terms 341
retention rate 293 stated interest rate 160
statement of financial position 133

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Index

statement of owners’ equity 177 U

statutory incidence 83
stock issuance 166 uncollectible accounts 149
stock price 337 undervalued 420
stock volatility 338 underwriter spread 250
straight-line method 155, 162 underwriting syndicate 249
strike price 331 unearned revenues 136
structural unemployment 90 unemployment 89
subordinated debenture bonds 255 unlimited life 199
subscription 251 unqualified opinion 147
substitutes 80 unsystematic risk 412
supplementary schedules 146 utility 77
supplies 135
V
supply 77
sustainable growth rate 292 value-weighted index 267
systematic risk 412, 416 variability in revenue 204
systems of equations 18 variable 40
variable costs 101
T variance 46, 410
tangible assets 154
W
target capital structure 207
tariff 112 warrants 260
tax concerns 424 warranty 159
tax incidence 83 working capital 134
tax shield 207 working capital management 285
T-bills 257 writedown 151
tick size 341 writer 331
time horizon 424
time to expiration 332, 338 Y
tombstone 249
Yankee bonds 256
total asset turnover ratio 287
yield to maturity (YTM) 327
trade restrictions 112
trading post 252 Z
Treasury bills 314, 403
Treasury bond 254, 314 zero-coupon bond 164, 255
Treasury inflation protection securities
(TIPS) 314
Treasury notes 314
Treasury securities 313
treasury stock 166
Treasury strip 254
Treasury yield curve 314
trustee 311

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 Notes

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CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services
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owned by CFA Institute.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED
FINANCIAL PLANNER™, and federally registered CFP (with flame design) in the U.S., which it
awards to individuals who successfully complete initial and ongoing certification requirements.
Kaplan University does not certify individuals to use the CFP®, CERTIFIED FINANCIAL PLANNER™,
and CFP (with flame design) certification marks.
CFP® certification is granted only by Certified Financial Planner Board of Standards Inc. to those persons
who, in addition to completing an educational requirement such as this CFP® Board-Registered Program,
have met its ethics, experience, and examination requirements.
Kaplan Schweser and Kaplan University are review course providers for the CFP® Certification
Examination administered by Certified Financial Planner Board of Standards Inc. CFP Board does not
endorse any review course or receive financial remuneration from review course providers.

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nor is GARP® responsible for any fees or costs of any person or entity providing any services to Kaplan
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