CFA Standards of Practice

Handbook 11e Summary

Study Plan
Content:
-

Handbook which provides:

o Standards
o Guidance
o Recommended procedures
o All examples

Exam tests:
-

Understanding of material, application of Standards

CFA topics 7-12
Part 1: 40 MCQ (40m)
Part 2: Open answer case (no theory) question (30m)
o Cases with multiple components
o E.g. Did Gerhard violate the CFA Institute Standards of Professional
Conduct by doing XYZ?
Yes or No?
What is the most applicable CFA standard (one standard
including substandard, e.g. VII(A) Conduct as Members and
Candidates in the CFA Program) in this case? MEMORISE
STANDARD AND SUBSTANDARD
Explain and justify your answer (for either choice you made,
i.e. yes or no) reasoning has to be a few sentences. Apply
answer to the actors in the case.

Practice exam
-

MCQ Handbook (pp 223-46) + solutions

CFA Institute

Schedule of Study
We
ek
7

8
9
10

11

12

Overview/Standard

Points

Standard I (A) (D)

Handbook pp 13-58
(cover all examples)
Standard II (A) (B)
Handbook pp 59-80
Standard III (A) (E)
Handbook pp 81-123
Standard IV (A) (C)
Start Standard V
Handbook pp 125-154
Standard V
Start Standard VI
Handbook pp 155-206
Standard VI
Final Exam Review Prep
slides

Boris Bieler covered risk and

compliance (see slides)

Summary
page

Last page of Prep slides

reveal where to find case in
the Handbook
Raj discussed 25 sample
cases from HB (see UTSO),
solutions on last slide
Take end of HB MCQ test and
CFAI online MCQ (see
Progress sheet)

13
*Note: Study all selected examples (see Comments section of Handbook)

STANDARD I PROFESSIONALISM (KIMM)

A. Knowledge of the law
Understand and comply with all applicable laws, rules and regs (CFAI CoE and
Stds of Professional Conduct) of any gov, reg org, licensing agency, or
professional assn. governing their professional activities
Conflict comply with more strict law, rule, or reg.
Do not knowingly participate or assist in, and must dissociate from, any
violations of laws, rules, regs

B. Independence and objectivity

Use reasonable care and judgment to achieve and maintain independence and
objectivity throughout professional activities.
Do not offer, solicit or accept any gift, benefit, compensation, or consideration
that reasonably could be expected to compromises I and O.

C. Misrepresentation
Do not knowingly make any misrepresentations relation to investment analysis,
recommendations, actions, or other professional activities

D. Misconduct
Not engage in any professional conduct involving dishonesty, fraud, or deceit, or
commit any act that reflects adversely on professional reputation, integrity, or
competence.

STANDARD II INTEGRITY OF CAPITAL MARKETS (MM)

A. Material Nonpublic Information
If in possession of MNI that could affect value of an investment, must not act or
cause others to act on that info

B. Market Manipulation
Do not engage in practices that distort prices or artificially inflate trading volume
with intent to mislead market participants

STANDARD III DUTIES TO CLIENTS (LFSPP)

A. Loyal, Prudence, Care
-

Displacement of own (self and employer) interests in favour of clients and

act for their benefit
To the same level as if would apply in management and disposition of own
interests in similar circumstances
III(A) are minimum expectations in fulfilling responsibilities
o Provides certainty of provision of services regardless of any
idiosyncrasies of the clients jurisdiction
o It is NOT however a substitute for legal and reg requirements of the
jurisdiction in which advice/investment services are being
administered which may include
Legally imposable fiduciary duties determined by nature of
professional relationship and responsibilities with client and
other facts
Custodian duties (i.e. effective control of clients assets) if
there is any direct/indirect control to assets; which must be
managed in accordance with terms of governing
documents/contracts (e.g. trust doc or investment
management agreement)
Variance in legal and reg requirements based on factors:
o Job function of the financial professional
o Existence of an adviser/client relationship (fiduciary)
o Nature of recommendations being offered

Loyalty
-

Duty of loyalty to clients

Avoid potential or actual conflicts of interests

Prudence
-

Exercise prudent judgement with care, skill and diligence that a

reasonable person with similar capacities and familiarity with such issues
would undertake
Follow investment parameters set by client that has been contractually
agreed to (within their risk tolerance range and objectives)
Balance risk and return

Care
-

Act with reasonable care

Guidance
Understanding application

Not all members and candidates are rendered fiduciaries because of III(A);
it depends on:
o Nature of professional responsibilities and relationships had with
client
o Type of client
o Whether member is giving investment advice
o Particular circumstances/ facts surrounding the
transaction/relationship
Irrespective of whether a position of fiduciary exists or not, III(A) requires
all members to work in clients interests at all times.
Blended environment (offer advice as well as trade execution) extent
and limitations of each function must be outlined in agreement at outset
of relationship
o E.g. allowable products based on risk tolerance and objectives of
client
Transactions must be motivated by acting in clients best interests with
loyalty, care and prudence to the exclusion of all else

Identifying actual investment client

-

What is the members role and responsibilities?

Who is the client to which duty of loyalty is owed
o Difficulty arises when management of portfolios with multiple
investors (e.g. pension plans or trusts) the beneficiaries of the
trust/plan are the clients
o If no clients exist (i.e. persons or entities) such as index fund or
expected mandate must act in manner consistent with mandate
There is no requirement in such a situation to work to
individual parameters/objectives
Potential conflicts of interests between clients within a fund may involve
complex considerations due to competing interests.
o Duty of loyalty, care and prudence apply to all clients, to different
degrees, but exact duties required depend on
Type of account in which assets are managed
Relationship type with client
o Need to avoid all potential or actual conflicts of interest

Develop clients portfolio

-

High level and specialised knowledge in investments causes client to be in

a state of vulnerability which causes a reliance on trust by client to their
detriment
Clients objectives/expectations of performance of account are realistic
and suitable to their circumstances and risks are appropriate
o Strategies should be structured to a long-term horizon (incl
objectives and circumstances of client)
Detect whether services provided by firm/member (selling, executing
transactions, etc) are not in conflict with best interests/objectives of client
In event of insuperable conflicts of interest, factual and clear disclosure is
required
Adhere to clients guidelines in management of assets

o
o
o

Type: sector and asset allocation

Total risk and return
Judged in respect of totality of portfolio rather than any individual
investments within the portfolio. This is considered in terms of
Position of investment with respect to existing portfolio
composition
Risk of loss (VaR)
Opportunities for gain
Tax implications
Degree of diversification
Liquidity/cash flow
Overall return

Soft commission policies

-

Soft dollars = abuse of discretionary powers by purchasing research

services from a client brokerage
Proxy voting policies

B. Fair Dealing
Deal fairly and objectively with all clients when providing IA, making IR, taking
investment action, or engaging in other professional activities

C. Suitability
1. If advisory relationship with client, must:
a) Make reasonable inquiry into clients investment experience, risk and
return objectives and financial constraints prior to making any IR or
taking investment action. Must reassess and update this info regularly.
b) Determine investment is suitable for clients financial situation and
consistent with Cs written objectives, mandates, and constraints
before making an IR or taking investment action.
c) Judge suitability of investments in context of Cs total portfolio.

D. Performance Presentation
When communicating PP information, must make reasonable efforts to ensure it
is fair, accurate and complete.

E. Preservation of Confi dentiality

Must keep info about current, former and prospective Cs confidential, unless:
1. Info concerns illegal activities on part of C
2. Disclosure required by law, or
3. C permits disclosure of information

STANDARD IV DUTIES TO EMPLOYERS (LAR)

A. Loyalty
Re employment matters, must act for benefit of employer and note deprive
employer of the advantage of their skills and abilities, divulge confidential info,
or otherwise cause harm to employer

B. Additional Compensation Arrangements

Must not accept gifts, benefits, compo, or consideration that competes with or
might reasonably be expected to create a CoI with employers interests unless
they obtain written consent from all parties involved.

C. Responsibilities of Supervisors
Must make reasonable efforts to ensure that anyone subject to their supervision
or authority complies with applicable laws, rules, regs, and the Codes and
Standards.

STANDARD V INVESTMENT ANALYSIS,

RECOMMENDATIONS, AND ACTIONS (DCR)
A. Diligence and Reasonable Basis
Must:
1. Exercise diligence, independent, and thoroughness in analysing
investments, making IR, and taking investment actions.
2. Have reasonable and adequate basis, supported by appropriate research
and investigation, for any IA, recommendation or action.

B. Communication with Clients and Prospective Clients

Must:
1. Disc to Cs the basic format and general principles of investment processes
used to analyse investments, select securities, and construct portfolios
and must promptly disc any changes that might materially affect those
processes.
2. Disc to Cs significant limitations and risks associated with the investment
process.
3. Use reasonable judgment in identifying which factors are important to IA,
recommendations, or actions and include those factors in communications
with Cs.
4. Distinguish between fact and opinion in the presentation of IA and IR.

C. Record Retention
Must develop and maintain appropriate records to support their IA, IRs, inv
actions, and other investment-related communications with all Cs.

STANDARD VI CONFLICTS OF INTEREST (DPR)

A. Disclosure of Confl icts
Must make full and fair disclosure of all matters that could reasonably be
expected to impair independence and objectivity or interfere with respective
duties to all Cs and employer.
Must ensure disc are prominent, made in plain language, and communicate
relevant info effectively

B. Priority of Transactions
Investment transactions for Cs and employers must have priority over
investment transactions in which I am the beneficial owner.

C. Referral Fees
Must disc to employer and Cs, as appropriate, any compo, consideration or
benefit received from or paid to others for the recommendation of products or
services.

[NOT IN EXAM] STANDARD VII RESPONSIBILITIES AS A

CFA INSTITUTE MEMBER OR CANDIDATE
A. Conduct as Participant in CFAI Programs
Must not engage in any conduct that compromises reputation or integrity of
CFAI/CFAD or the integrity, validity, or security of CFAI Programs

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

When referring to CFAI, CFAI membership, the CFAD, or candidacy in the CFA
Program, must not misrepresent or exaggerate the meaning or implications of
membership in CFAI, holding the CFAD, or candidacy in the CFA Program.

Sample CFAI Standard Practice Exam (page 223 in Handbook)

1. B Smith should advise customer of a change in recommendation before
accepting order; could be SIII Suitability and SV communication with clients
2. C SVI referral fees
3.