CODE OF ETHICS AND STANDARDS OF PRACTICE. by Naomal Goonewardena, CFA

Transcription

1 CODE OF ETHICS AND STANDARDS OF PRACTICE by Naomal Goonewardena, CFA

2 Code of Ethics Act with integrity, competence, diligence, respect and in an ethical manner with the public, clients, employers, employees and colleagues Interest of profession and clients above personal interest Use reasonable care and independent professional judgment Practice and encourage others to practice in an ethical manner Promote integrity of capital markets Improve professional competence

3 Standard I: Professionalism A. Knowledge of the Law Understand and comply with applicable laws Not knowingly assisting any violation of the law Should comply with the higher of the applicable law and the Code and Standards Disassociate with unethical activities Compliance procedures include staying informed, review procedures, maintenance of current files

4 B. Independence and Objectivity Must take reasonable care to achieve independence and objectivity in professional activities Not accept gifts or compensation that could compromise independence and objectivity Clients should have the benefit of work and opinions unaffected by potential conflict of interest Receipt of gifts from clients as supplementary compensation may be acceptable, but acceptance of gifts from other persons to the detriment of clients not acceptable Compliance procedures include policies to protect independence, restricted lists, restrict special cost arrangements, limit gifts, restrict investments

5 C. Misrepresentation Must not make any untrue statements or omission of fact of any statement that would make the statement misleading Not be involved in plagiarism Compliance procedures include maintaining copies, attribute quotations and attribute summaries

6 D. Misconduct Must not engage in any professional conduct involving dishonesty, fraud, deceit or any act that adversely reflects on professional reputation, integrity or competence This includes even acts which are not directly related to the workplace, but which reflects adversely on professional activity Compliance procedures include the adoption of the code of ethics, identify prohibited activities and checking references of potential employees

7 Standard II: Integrity of Capital Markets A. Material / Nonpublic Information Must not act or cause others to act on the basis of material nonpublic information Information is material if disclosure would have an impact on the price of a security or if reasonable investors would consider it important to an investment decision Information is nonpublic until it has been made available to the market place in general The analysis of public and nonmaterial nonpublic information is not prohibited

8 Standard II: Integrity of Capital Markets Compliance procedures include making efforts to achieve public dissemination, control of inter-department communication, maintenance of watch, restricted, rumor lists, review of proprietary trading

9 B. Market Manipulation Must not engage in practices that distort prices or artificially inflate trading volume Transactions that give impressions of activity or price movements which are artificial is prohibited Securing a controlling or dominant position to exploit or manipulate prices is prohibited

10 Standard III : Duties to clients (A) Loyalty, Prudence and Care Must exercise same level of prudence that they would exercise in their own interest Understand and adhere to fiduciary responsibility Manage any assets in accordance with agreement with client Ensure that client expectations are realistic and suitable Vote proxies in an informed and responsible manner Compliance procedures include quarterly reporting and establishing policies and procedures for all important aspects of the investment process

11 Standard III (B) Fair Dealing Must take care not to discriminate against any clients when disseminating investment recommendations or taking investment action Dissemination obligations more critical when a change of recommendation is being made In taking investment action client should be treated fairly such as being allotted shares pro-rata in case of over subscription Compliance procedures include requiring employees to disseminate information fairly and on the basis of suitability for client, limiting time period between decision and dissemination, guidelines for pre dissemination, simultaneous dissemination, maintaining list of client holdings, trade allocation procedures

12 Standard III (C) : Suitability When having an advisory relationship determine client objectives in relation to risks and return and client constraints such as time horizon, liquidity means, tax concerns, legal and regulatory factors and unique circumstances When leverage is used its suitability for client should be assessed Compliance procedures include identification of types of clients, return and risk objectives, investor constraints and performance measurement bench marks

13 Standard III (D): Performance Presentation The general rule would be to comply with the overall principles contained in GIPS Knowledge and sophistication of audience should be kept in mind Appropriate disclosures that explains the results should be made maintaining data and records to calculate the performance which is been presented

14 Standard III (E): Preservation of Confidentiality The duty continues even after a person has ceased to be a client Cooperating with an investigation carried out by the CFA institute may not be a violation of this standard with respect to one s own conduct Compliance procedures include avoiding disclosure to any person except to fellow employees who are working for the same client

15 Standard IV: Duties to Employers (A) Loyalty Must not engage in conduct that harms the interest of employer Independent practice should be carried out only with written consent of employer When leaving must continue to act in best interest of employer until resignation becomes effective, does not preclude making preparations to leave Skills and experience can generally be taken unless there are non compete provisions Whistle blowing permitted in interest of market and clients

16 Standard IV (B): Additional Compensation Arrangements Written consent should be obtained from employer before accepting compensation or other benefits from other third parties for services rendered to the employer Compliance procedures include making an immediate written report to employers specifying any such arrangements and the terms thereof

17 Standard IV (C): Responsibilities of Supervisors Obligation to not only enact such compliance procedures to prevent violations but also ensure that such procedures are being followed Compliance procedures include taking reasonable efforts to establish appropriate procedures, document and communicate such procedures and see that they are followed. The procedures should be designed to anticipate likely activities of misconduct and if violations have occurred investigations should be carried out

18 Standard V : Investment Analysis, Recommendations and Actions (A) Diligence and Reasonable basis Must make reasonable efforts to cover all relevant issues before making a recommendation If third party research is used must determine whether it is sound If part of a team, but dissenting, need not necessarily have to decline being identified with the report if the conclusion is the independent and objective view of the team Compliance procedures include policies which require that reports are reasonable and adequate, having written guidance for determining the same and measurable criteria for assessing the quality of research

19 Standard V (B): Communication with Clients and Prospective Clients Clients must understand the investment process being followed Factors that are instrumental to the investment recommendation should be communicated Facts should be distinguished from opinions Compliance procedures include determining that relevant factors have been included in research reports and excluding irrelevant factors. There should be after the fact review of a report

20 Standard V (C): Record Retention As a general rule, record created on behalf of the employer are the property of the employer In the absence of regulatory guidance CFA institute recommends maintenance of records for seven years

21 Standard VI : Conflicts of Interest (A) Disclosure of Conflicts Conflicts arise between the interest of clients, employers and members personal interest This standard requires full disclosure of the conflict to enable the other party to make an informed decision When serving as directors of companies conflicts arise regarding duty to the company, receiving benefits from the company and being in possession of insider information Personal ownership of shares in company which are being recommended creates conflict of interest, similarly other relationships with company such as consulting, significant lending also create conflicts

22 (.Cont d) The mere appearance of conflict may normally be considered problematic by employer Compliance procedures include disclosing special compensation arrangements received from employer such as bonuses based on short term performances and fees based on capital gains

23 Standard VI (B): Priority of Transactions Client transactions must take precedence over personal and member firm transactions Family accounts that are client accounts should be treated like any other firm account Compliance procedures include limited participation in equity IPO s, restriction on investment of private placements establishment of restricted periods, reporting requirements, pre clearance procedures

24 Standard VI (C): Referral Fees Should advice clients of any arrangements for such fees Disclosure should be made of benefits to be received by the client if any

25 Standard VII: Conduct in CFA Program Must not engage in conduct that reflects adversely on the public confidence of the CFA Charter Compliance procedures should include desisting from cheating on examinations, disregarding rules and policies, leaking confidential information, misrepresenting information on PCS statement

26 Standard VII(B): References to CFA Institute, CFA Designation and the CFA Program References must not over promise the competency of an individual, or over promise future investment results In order to call one self a candidate must be registered for a specified exam or awaiting results Compliance procedures include the firms, public relations and marketing departments should follow guidelines issued by compliance departments in this regard