I actually find most of Ethics fairly straightforward and intuitive. But there are certain points that are not and just have to be memorized. I’ve compiled a list of these odd or not obvious points. Hope this helps someone out there! ###ETHICS Manager must keep in mind the ultimate beneficiary. Allocating shares on the basis of account size effectively discriminates on the basis of larger (i.e., favored) clients of the firm. CFA Institute Research Objectivity Standards require firms to institute procedures that prevent investment banking divisions from having direct authority over the research department to review, modify, approve, or reject its research as this poses a threat to the independence and objectivity of a firm’s research. According to the procedures for compliance involving Standard I(A), CFA Institute members should determine legality and disassociate from any illegal or unethical activity. This is not a violation of Standard VI(B), Priority of Transactions, because the investment is not suitable for her clients. If the analyst believes that none of her clients should trade options, she is not obligated to advise them in this instance. Premiums paid for bonding insurance to guarantee management performance is an example of an agency cost. Agency costs are costs associated with the fact that all public companies are not managed by owners and the conflict of interest created by that fact. Costs of financial distress can be direct or indirect. Direct costs would include cash expenses associated with bankruptcy, such as legal and administrative fees, while indirect costs would include foregone business opportunities, inability to access capital markets, or loss of trust from customers, suppliers, or employees. The allocation of a disproportionate number of shares to performance-based fee accounts constitutes a violation of fiduciary duty, in addition to being a violation of the Standard concerning fair dealing. Standard III(B) states that clients for whom the investment is suitable should be notified at approximately the same time. Strict pro rata means that each suitable account should receive m/n shares, where there are m shares available and n suitable accounts. In cases when the Soft Dollar Standards conflict with local law, managers should follow local law and are still in compliance with the Standards. Newsome was not impartial with respect to the current income beneficiary relative to the remaindermen interests. (Remaindermen refers to the group that is to receive the remainder of the trust once its term is complete. Of course, some trusts never expire so not every trust has remaindermen.) This could also be perceived as a loyalty violation in that he did not act in the best interest of all beneficiaries. Caution deals with the investment decisions of the portfolio. According to ROS, recommends firms make full research reports available to members of the audience at a reasonable price. The firm should disclose if the report is available to audience who are not clients, the cost, and how a listener may aquire the report. Full copy of report should be available for purchase or review. Trade allocation procedures should be disclosed to all clients (even if unfair). It is permissible to allocate trades on a pro-rata basis over all suitable accounts. It is not permissible to base allocations upon compensation arrangements. Any method is not necessarily suitable, and disclosure does not absolve the member from ensuring that the allocation is necessarily fair. Understanding and complying with all applicable laws, rules, and regulations is required by Standard I(A) – Knowledge of the Law. The other choices are included in the Code of Ethics. In unsolicited trade that are unsuitable to client, members should refrain or get written consent that suitability is not an issue. An individual investment may not be risky in the context of overall portfolio. In terms of confidentiality, members should follow applicable law. Place interests of client above employer. While still employed, members should act independently but with full disclosure. When violations are discovered: respond promptly, conduct a thorough investigation to determine scope of wrongdoing, increase supervision or place appropriate limitations on the wrongdoer pending outcome of investigation. Putting a stock on a restricted list, refusing the trade, or sharing information with a supervisor are all potential violations of II(A) since they involve acting or causing others to act on material nonpublic information. The best thing to do is to try to make the info public. Members can ask to have their names removed from research reports unless they are satisfied that the conclusions are sound even if he does not agree with them. CFA recommends maintaining records for 7 years. Members should NOT treat his parent’s account any differently. CFA designation an adjective, NEVER a noun. If a law is stricter that Codes and Standards, follow stricter law. Include terminated portfolios in composites. Reporting to a regulatory agency may not be always necessary. Standard III(D) recommends presentation of performance of a composite as a weighted average of the performance of similar portfolios rather than using a single representative account. Fair dealing: disseminate new recommendations to all clients who express an interest or for whom the investment is suitable. NOT all clients need to be informed. Well known stat tables can be used without citation. Required: review assumptions used to evaluate the objectivity of externally generated research reports. Member must have written permission from both employers if doing work for another employer. Selective disclosure occurs when companies discriminate in making material nonpublic information public. Selective disclosure raises insider trading concerns. If you go to another job, recreate old research, update it and make the same recommendation, you are NOT in violation. Disclose ALL gifts from clients to the employer. Getting a gift from a client, with whom you already have a relationship, different from other entities. It may be OKAY. Does Standard I(B) allow you to accept accept transportation, lodging, expenses, and compensation for writing a research report (but requires to disclose such an arrangement in the report)??? “Modest gifts and entertainment are acceptable” unless it threatens independence and objectivity. Firewall must exist between research and investment banking. Restricted lists should not be widely disseminated. The least appropriate action is to speak to an employee directly about a violation; should be done through supervisors Members should disclose special compensation arrangments with the employer that might conflict with client interests. If the firm does not permit such disclosures, the member should document the request and may consider dissociating from the activity. Members should include info on compensation packages in promotional literature. For example, performance fees. If outstanding agent options, the amount and expiration date should be disclosed as a footnote to any research report. A member or client having the same investment positions or being co-invested with their clients do not always create a conflict. Strict limits should be placed on members getting private placements. Upon request, members and candidates should fully disclose to investors their firm’s personal investing policies. All referral fees must be disclosed : nature of benefit and dollar value. Standard VI© is meant to cover where advice seems independent but instead influenced by unseen referral fees. It is not meant to cover compensation for NEW business where it is obvious. It is not a violation to state that you passed the CFA exam on the first try. Clients may direct a manager to use that client’s brokerage commissions to purchase goods and services for that client (“directed brokerage”). Client brokerage commissions may NOT be directed to pay for investment manager’s operating expenses. Mosaic theory: analyst can use material public information or nonmaterial nonpublic information. Under Standard III(A) (Loyalty, Prudence and Care), members who manage a company’s pension fund owe a fiduciary duty to the participants and beneficiaries of the plan, NOT the management of the company or shareholders. Differences of opinion should be documented. In the ABSENCE of regulatory guidance, CFA recommends maintaining records for at least seven years. Brief communications must be supported by background reports or data that can be made available to interested parties. If the law requires confidentiality, even in the case of illegal activity, such information should NOT be dislosed. When leaving an employer, simple knowledge of the names and existence of former clients is generally not confidential unless demmed such by an agreement or by law. Separate codes of ethics from compliance procedures. All prohibition on all types of proprietary activity when a firm comes into possession of material nonpublic information is NOT appropriate. When allocating trades for new issues, obtaining advance indications of interest, allocating securities by client (rather than by portfolio manager) and providing for a method for calculating allocations. Different levels of service should not be offered to clients selectively. Market Manipulation (II(B)) does not refer to wash trades. An exchange may engage in liquidity-pumping as long as it is disclosed. Duty of loyalty owed to ultimate beneficiaries and not just to client. Directed brokerage not a violation. If client not getting best execution, should be disclosed. If a firm does not have compliance, you should decline in writing to accept supervisory responsibilities until the firm adopts reasonable compliance procedures. Members should pay for their own commerical transportation and hotel charges. If you leave a firm on good terms, do not sign a non-compete agreement, and take no firm materials with you, you may contact previous clients immediately. Do you accept lavish gifts or not? Obtain permission in writing? If you front-run you violate VI(B) Priority of Transactions Always give credit, even if report is public and original author tells you you’re welcome to it. You violate Standard V(B) Communications with Clients and Prospective Clients if you do not say “estimate” when doing a a report. Always disclose referral fees Best practice for issuer-paid research: flat fee prior to writing the report. Follow stricter rules, but in the ABSCENCE of rules, follow CFA. You can mimic trades, but you can’t front run. You must disassociate from illegal activity. Notify supervisor. Document violations. Reporting to a regulatory organization is not required. Experience and knowledge gained at one employer can be used at another without penalty. Do not use CFA designation of business card before you have the charter. Firms should prohibit covered employees from communicating a rating or recommendation that is different from the current published rating or recommendation. Gifts from clients are different from gifts from other parties because the potential for obtaining influence to the detriment of other clients is not as great. The gift can be accepted as long as dislosed to the employer. Bonuses and gifts from other jobs that do not compete with ones’s analyst job does not violate the standard. But do you still have to inform employer (?). It is not permitted to project when one will receive the CFA charter. One is prohibited from accepting any gift that could be expected to compromise independence and objectivity. If a client offers a gift to an analyst based on future performance for an account, the analyst must disclose to employer AND get permission in writing. A large buy program may increase the price of a stock. Shares of an oversubscribed IPO should be prorated to all subscribers.