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Summary Investment Management 354
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- Stellenbosch University (SUN)
In-depth notes from textbook and class slides from ethics and portfolio management.
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INVESTMENT MANAGEMENT 354Ethics and Portfolio Management
Luschke Labuschagne
CFA Institute Code of Ethics and Standards of Professional
Conduct
Introduction
• Slide 3
The Code of Ethics
• Members of CFA Institute and candidates for the CFA designation:
o Act with integrity, compete, 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.
o Place the integrity of the investment profession and the interest of clients
above their own personal interests.
o Use reasonable care and exercise independent professional judgement
when conducting investment analysis, making investment
recommendations, taking investment actions and
Standard 1: Professionalism
Standard 1A: Knowledge of the Law
Members and Candidates must understand and comply with all applicable laws, rules, and
regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct)
of any government, regulatory organization, licensing agency, or professional association
governing their professional activities. In the event of conflict, Members and Candidates must
not knowingly participate or assist in and must dissociate from any violation of such laws, rules
or regulations.
Introduction
• Understand the application laws and regulations of the countries and jurisdictions where
they engage in professional activities.
• Activities may include but are not limited to, trading of securities or other financial
instruments, providing investment advice, conducting research, or performing other
investment services.
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, • Must comply with the laws and regulations that directly govern their professional
activities and resulting outcomes and protect the interest of the clients.
• Should know their firms’ policies and procedures for assessing compliance guidance.
• During times of changing regulations, members must remain vigilant in maintaining their
knowledge of the requirements for their professional activities.
• As new local, regional, and global requirements are updated to address these and other
changes, members candidates and their firms must adjust their procedures and
practices to remain in compliance.
Guidance
• Understand and comply with all applicable laws, regulations and CFA Code and
Standards.
• Not expected to be a legal expert.
o Be aware of changes; consult experts as necessary.
• Comply with the stricter law or regulation.
o If no law or regulation, follow CFA Code and Standards.
• Do not knowingly participate or assist in violations.
o Dissociate from any violations;
o Inform employer, compliance, externally. Resign in extreme cases.
• Be mindful of laws of areas where products will be sold.
Relationship between the Code and Standards and Applicable Laws.
• When applicable the law and the Code and Standards require different conduct,
members must follow the stricter of the applicable law or the Code and Standards.
• Applicable Law: law that governs the members or candidates conduct.
• Which laws that applies will depend on particular facts or circumstances of each case.
• More strict law: law or regulation that imposes greater restrictions on the action or calls
for greater degree of action that protects the interests on investors.
• Adhere to the following principles:
o Comply with the applicable laws or regulations related to their professional
activities.
o Not engage in conduct that constitutes a violation of the Code and Standards,
even though it may be otherwise legal.
o Absence of any applicable laws or regulations or when Code and Standards
impose a higher degree of responsibility than applicable laws and regulations,
must adhere to Codes and Standards then. Applications of these principles are
outlined in Exhibit 1.
• Applicable laws governing the responsibilities of a member should be viewed as the
minimal threshold of acceptable actions.
• Take actions that exceed the minimal requirements, they further support the conduct
required.
• ***Exhibits
Participation in or Association with Violations by others
• Responsible for violations in which they knowingly participate or assist.
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, • CFA Institute acknowledges that members may not recognize violations if they are not
aware of all the facts giving rise to the violations.
• Should know that their conduct may contribute to a violation of applicable laws, rules, or
regulations or the Code and Standards.
• Reasonable grounds to believe that imminent or ongoing client or employer activities are
illegal or unethical, they must dissociate or separate from the activity. In extreme cases,
dissociation from ethical violations they must attempt to stop the behavior by bringing it
to the attention of the employer through a supervisor or firms compliance department. If
this is unsuccessful then they have the responsibility to step away and dissociate from
activity.
• Dissociation practices will differ depending role in investment industry.
• May include removing name from written reports or recommendations, asking for a
different assignment, or refusing to accept a new client or continue to advise a current
client.
• Inaction combined with continuing association with those involved in illegal or unethical
conduct may be construed as participation or assistance in that particular conduct.
• Report potential violations of the Code and Standards committed by a fellow member.
• Impact of inactivity on the integrity of capital markets can be significant.
• Doesn’t compel members to report violations unless such disclosures are mandatory
under applicable law (such as whistleblowing, which is voluntary) such disclosure may
be prudent under certain circumstances.
• Should consult their legal and compliance advisors for guidance.
Investment products and applicable laws
• Involved in creating or maintaining investment services or investment products or
packages of securities and/or derivatives should be mindful of where these products or
packages will be sold as well as their place of origination.
• Applicable laws and regulations of these countries or regions of origination and expected
sale should be understood by those responsible for the supervision of the services or
creation and maintenance of the products or packages.
• Make reasonable effort to review whether associated forms that are distributing products
or services developed by their employing forms.
• Undertake the necessary due diligence when transacting cross-border business to
understand the multiple applicable laws and regulations in order to protect the reputation
of their firm and themselves.
Recommended procedures for Compliance
• Stay informed.
o Changes in laws, regulations.
o Consult compliance and legal.
• Review compliance procedures.
o Ensure procedures reflect current law and adequate guidance for employees.
Members and Candidates
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, • Stay informed: establish or encourage their employers to establish procedure by which
employees are regularly informed about changes in applicable laws, rules, regulations
and case law. Employers compliance department or legal counsel can provide such
information in the form of memorandums distributed to employees in the organization.
Participation in an internal or external continuing education program is a practical
method of staying current.
• Review procedures: should review, or encourage their employers to review the firms
written compliance procedures on a regular basis to ensure that procedures reflect
current law and provide adequate guidance to employees about what is permissible
conduct under the law and/or Code and Standards.
• Maintain current files: maintain or encourage their employer to maintain accessible
current reference copies of applicable statutes, rules, regulation and important cases.
Distribution area laws
• Make reasonable efforts to understand the applicable laws – both country and regional –
for the countries and regions where their investment products are developed and are
most likely to be distributed to clients.
Legal counsel
• When in doubt seek the advice of compliance personnel or legal counsel concerning
legal requirements.
• Potential violation is being committed by a fellow employee, it may also be prudent to
seek the advice of the firm’s compliance department or legal counsel.
Dissociation
• Document the violation and urge their firms to attempt to persuade the perpetrator(s) to
cease such conduct.
• May have to resign.
Firms
• Formality and complexity of compliance procedures for firms depend on the nature and
size of the organization and the nature of the investment operations.
• Develop and/or adopt code of ethics: encourage their supervisor or mangers to adopt a
code of ethics. Facilitates solutions when people face ethical dilemmas and can prevent
the need for employees to “whistleblowing” solution publicly alleging concealed
misconduct.
• Provide information on applicable laws: pertinent information that highlights applicable
laws and regulations might be distributed to employees or made available in a central
location.
• Establish procedures for reporting violations: written protocols for reporting suspected
violations of laws, regulations or company policies.
Application of the standard
Standard 1 B: Independence and objectivity
Copy right: Luschke Labuschagne
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