Violations of the CFA codes and standards are reviewed through the CFA Institute’s Professional Standards and Policy Committee (PSPC). This committee is authorized to conduct investigations and impose penalties. Within the PSPC, there are two subcommittees. First, the Disciplinary Review Committee (DRC) is charged with reviewing potential violations and enforcing the Code of Ethics. Second, the Standards of Practice Council (SPC) is charged with editing, deleting, or adding standards and distributing updated information to CFA members.
CFA Institute members may be investigated based on:
1. Violation of the CFA Institute Articles of Incorporation, Bylaws, Code of Ethics, Standards of Professional Conduct, or Rules of Procedure or other applicable rules
2. Sanction or injunction imposed by a government or judicial agency, or public or private self-regulatory organization with jurisdiction over investment-related activities
3. Conviction of a felony, or (if the jurisdiction does not define a felony) any crime punishable by more than one year in prison
4. Ban or restriction (permanently or indefinitely) from registration under a jurisdiction’s securities laws or any restriction related to any investment-related professional activity
5. Failure to complete, sign and return the Professional Conduct Statement
6. Falsifying information on a candidate or society membership application
7. Failure to cooperate with the CFA Institute’s inquiry and investigation into one’s own conduct or the conduct of another member
8. Any other good cause
If found to be in violation of codes and standards, members are subject to censure, suspension, or revocation of membership. Candidates can also be penalized by revoking the right to sit for CFA examinations, thereby becoming ineligible for membership.
The CFA Institute has outlined six components to its Code of Ethics. Members of the CFA Institute 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.
2. Place the integrity of the investment profession and clients’ interests above their own personal interests.
3. Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.
4. Practice and encourage others to practice professionally and ethically to reflect credit on themselves and the profession.
5. Promote the integrity of, and 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.
With regard to Standards of Conduct, there are seven areas by which one must be held accountable. They are as follows:
2. Integrity of Capital Markets
3. Duties to Clients and Prospective Clients
4. Duties to Employers
5. Investment Analysis, Recommendations, and Action
6. Conflicts of Interest
7. Responsibilities as a CFA Institute Member or CFA Candidate
Standard I is broad in scope and directed toward competence within a small business environment. This standard makes it clear high ethical standards must apply even when an issue hasn’t been identified in writing. In addition, it specifies that investment professionals must have a working knowledge of laws and a framework for resolving ethical dilemmas.
Standard II discusses sharing of material information qualified as non-public and the intent to manipulate markets. It prohibits CFA members from acting in a way to distort market value through manipulation.
Standard III addresses client loyalty, discretion, and care; fair dealing; suitability; performance presentation; and maintaining confidentiality. Investment professionals are obligated to put the interests of their clients before that of their organization or their personal interests.
Standard IV outlines basic responsibilities by investment professionals for their employers. Language includes the premise of “do no harm” toward an employer, bearing that there can occasionally be a conflict of loyalty between personal and agency interests. There are also specific instances outlined in which an investment professional may be considered in violation of duties to employers, including unfair competition and sharing of confidential information. Whistleblowing, or reporting unethical employers, is also addressed in this section.
Standard V outlines the responsibility of investment professionals regarding due diligence before making recommendations to clients. The intent is to prevent conjecture in the form of a “hot tip” but rather provides that recommendations be made based on a firm’s independent research or the quantitative research of other reputable sources.
There are bound to be conflicts of interest and loyalty within any business organization, leading to an ethical dilemma. Standard VI specifies that CFA members and candidates must disclose any potential conflicts between clients and employers, individual interests, and the like. The purpose of this is to protect employers from an unknown clash of concerns that may promote unethical decisions.
Finally, Standard VII indicates that members and candidates must not risk the integrity of the CFA Institute or the CFA designation through unethical action. This standard also addresses cheating on CFA exams.