Reading 1

1a CFAI Professional Conduct Program

Describe the structure of the CFA Institute Professional Conduct Program and the disciplinary review
process for the enforcement of the Code of Ethics and Standards of Professional Conduct

What is the first thing that I need to know about Ethics?

If you are preparing to write a CFA exam, you are expected to comply with CFAI's Code of Ethics
and Standards of Professional Conduct.

What are the Code and Standards?

Think of these as being the laws that you have to follow if you want to be in good standing with
CFAI. Don't violate anything in the Code and Standards and you'll be fine. If you commit a
violation, you could get in trouble with CFAI.

Whos going to make sure we all follow the law?

The general responsibility for enforcing the Code and Standards belongs to CFAI's Board of
Governors. Think of them as being the government. But, just like Presidents and Prime Ministers
don't actually arrest people, the Board had formed a Disciplinary Review Committee, or DRC,
which is a bit like the Justice Department or Ministry of Justice. In turn, the DRC is responsible
for running the Professional Conduct Program.

What is the Professional Conduct Program?

The Professional Conduct Program, or PCP, is a bit like the courts or legal system. Its the rules
and procedures that need to be followed in order to ensure that everyone is treated fairly
during the course of a professional conduct inquiry. The one key difference is that these
proceedings are usually confidential, whereas secret trials tend to be frowned upon in
democracies.

What is a Professional Conduct Inquiry?

The PCP is run by the CFAI Designated Officer, or DO, who you can think of as being a bit like the
District Attorney or Crown Prosecutor. Have I mentioned that this is not a perfect metaphor?
Anyway, the DO oversees the Professional Conduct staff, or PC staff. Think of these people as
Police Detectives or Inspectors, only they investigate professional conduct cases, not crimes.
However, as you will learn, committing a crime is almost always a violation of the Code and
Standards.

Okay, so that's what it all looks like. How does it work?

There are four ways that CFAI may become learn of an alleged violation:

1. A member/candidate may "turn themselves in" by reporting a violation as part of their annual
Professional Conduct Statement.
2. Anyone can file a complaint by writing to CFAI.
3. CFAI staff may learn about "questionable conduct" from the media (in which case, one imagines
that a huge violation has occurred).
4. Of most relevance to you, CFA exam proctors who suspect that a candidate has "compromised
his or her professional conduct" during an exam.
So, CFAI becomes aware of an alleged violation. Then what happens?

PC staff conduct an investigation. Just like the real police, they talk to the accuser, interview the
alleged perpetrator, interview witnesses, collect evidence such as documents and e-mails, and
put together a report for the DO.

And then the Designated Officer...?

...has three choices.

First, he/she can decide that the case is bogus and "drop the charges" by refusing to take any
further action.
The second option is to send the alleged perpetrator (who remains "alleged" until proven guilty)
a "cautionary letter" but not impose any disciplinary sanctions.
Finally, the DO can rule that a violation has occurred and propose a disciplinary sanction.

"Propose a disciplinary sanction"? What does that mean"?

The alleged perpetrator has the option to accept or reject this sanction.
If he/she (let's say he) accepts it, he is no longer an "alleged" perpetrator and the proposed
discipline is carried out. Case closed, so to speak.
If he rejects it, the case goes before a hearing panel that is composed of DRC member and CFAI
member volunteers. This is a bit like the Court of Appeal and it's the last step in the process.
The hearing panel reviews all the evidence put forward by the DO, decides if a violation has
occurred, and, if so, what sanctions should be imposed.

Sanctions? They can send you to the Slammer? The Big House? The Hoosegow? The Joint? The Clink?

CFAI does not have the authority to send you to jail, but they can carry out one or more of the
following disciplinary measures:
Public censure
Suspension of membership and revocation of the right to use the CFA designation
Revocation of the CFA charter
If you're a candidate (ie. you don't have a CFA charter to revoke), you can be kicked out
of the program completely

So, the best advice would be to NOT violate Code or Standards?

Correct.

Explain the ethical responsibilities required by the Code of Ethics and the Standards of Professional
Conduct, including the multiple sub-sections of each standard

I'm not guaranteeing anything, but...

Many prep provider practice questions ask you to identify which of the possible answers is the exact
wording that appears in the Code of Ethics. The wrong answers are usually taken from one of the
Standards of Professional Conduct. Such questions are stupid.
What can you tell me about the Code of Ethics that I can't learn by just reading it?

Try breaking up the Code's components into their own components.

Notice how certain themes get repeated.

Members and candidates must:

1) Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients,
prospective clients, employers, employees, colleagues in the investment profession, and other
participants in the global capital markets.

How should I act?

Which means?
Act with Integrity
Be honest
Act with Competence Be good at your job
Act with Diligence
Put in an effort
Act with Respect
Don't be a jerk
Act Ethically
Self-evident?

Now that I know HOW i should act, with

whom should I act this way?
The public

Which means?
So, pretty much everyone, but that's not
all

Clients and prospective clients

Employers and employees
Colleagues in the investment profession
Other participants in the global financial
markets

Never distinguish between these groups

Everyone at the office
Friends who work at other firms
It's getting redundant at this point

The Code's remaining components expand on the themes that appear in component #1

2) Place the integrity of the investment profession and the interests of clients above their own personal
interests.

Place what?
And...?
Place these where?

The integrity of the investment profession

The interests of clients
Above your own personal interests

We are only at component #2 and we're already repeating the themes of "act with integrity" and "you
exist to serve the interest of the client." This is not the last time we will encounter these themes.
3) Use reasonable care and exercise independent professional judgment.

Do what?
And...?
As a general rule, or...?
Any other time?
And...?

Use reasonable care

Exercise independent judgement
When conducting investment analysis
When making investment recommendations
When engaging in other professional
activities

If this seems familiar...

The wording of component 3 of the Code of Ethics is not accidental. The curriculum tends to group the
various functions of your job into the following categories:

1) conducting investment analysis

2) making investment recommendations
3) everything else

4) Practice and encourage others to practice in a professional and ethical manner.

Do what?
And...?
Just me?

Practice in a professional manner

Practice in an ethical manner
Encourage others to practice this way

5) Promote the integrity of, and uphold the rules governing, capital markets.
Do what?
And...?

Promote the integrity of capital markets

Uphold the rules governing capital markets

6) Maintain and improve their professional competence and strive to maintain and improve the
competence of other investment professionals.

Do what?
Just maintain it?
Just me?
Just maintain it?

Maintain your professional competence

Improve your professional competence
Strive to maintain the competence of other
investment professionals
Strive to improve the competence of other
investment professionals

Okay, so that's the Code of Ethics. What do I need to know about the Standards of Professional
Conduct?

Quite a lot.
Specifically, everything covered in Reading 2.