First Study Day and Reading 1 - Code and Standards

While I'm waiting for the Schweser materials to arrive I thought I'd make a goal of doing the first one and a half CFAI readings on Ethics today (technically 'Ethics and Professional Standards').  This'll help get a taste of that Ethics is and is not, and how to approach it.  I can't help but be reminded of the scene in Billy Madison in the quiz show portion when Carl gets totally stumped by a Business Ethics question and freaks out.

Reading 1 is a quick intro, Reading 2 actually walks you through the Seven Standards into which the CFAI goes in depth.  This is about 150 pages of material, so I think covering four of the standards is probably a good goal for a lazy Saturday.

Before Readings 1 and 2 there's a quick intro that goes over some technical aspects of the material.

Intro

CFAI puts in italics the following:

"The reading assignments are the basis for all examination questions, and are selected or developed specifically to teach the knowledge, skills, and abilities reflected in the CBOK (Candidate Body of Knowledge). (Institute xii)"

Institute, CFA. Level I 2012 Volume 1 Ethical and Professional Standards and Quantitative Methods, 7th Edition. Pearson Learning Solutions. <vbk:9781256112754#page(xii)>.

I'll also note that when I copied and pasted that from the CFAI electronic material, the citation appeared immediately and automatically - super cool.  Wish every journal would do that.

CFA recommends here that one devotes 15-20 hours per week for 18 weeks.  I've got closer to 12 weeks, so 300 hours divided by 12 is about 25 hours, and my general plan is closer to 30.  As a former banking analyst I can't really balk at spending 30 hours a week.  Remember there are 168 hours in a week.  I spend 40% sleeping (~70 hours) and so about 100 hours remain and I'm happy to commit 30% of that discretionary time.  30 hours/wk by 12 wks is 360 hours, so work in a little wiggle room for breaks, traveling for a wedding, and general laziness and it should work out to about 300 hours.  30 hours per week means just over 4 hours per day for a 'good CFA day' for me.  Really not too bad if you're not working.  I can certainly see how passing Level I while working full time would be a real challenge - finding 4 free hours per day is no small feat.  So I'm becoming happier and happier that I have decided to do this now.

Another useful tidbit from CFAI:

"Every question on the CFA examination is based on specific pages in the required readings and on one or more LOS. Frequently, an examination question is also tied to a specific example highlighted within a reading or to a specific end-of-reading question and/or problem and its solution. (Institute xiv)"

Institute, CFA. Level I 2012 Volume 1 Ethical and Professional Standards and Quantitative Methods, 7th Edition. Pearson Learning Solutions. <vbk:9781256112754#page(xiv)>.

So it appears these pages have everything, and if you know them cold you should pass.  But it's probably too much.  It tells a lot I think that CFA puts this section in the front - this is clearly not an afterthought and you can tell by the language that they take ethics very, very seriously (as they should).

Reading 1 - Code of Ethics and Standards of Professional Conduct

"The candidate should be able to:

a. describe the structure of the CFA Institute Professional Conduct Program and the process for the enforcement of the Code and Standards;

b. state the six components of the Code of Ethics and the seven Standards of Professional Conduct;

c. explain the ethical responsibilities required by the Code and Standards, including the multiple sub-sections of each Standard. (Institute 5)"

Institute, CFA. Level I 2012 Volume 1 Ethical and Professional Standards and Quantitative Methods, 7th Edition. Pearson Learning Solutions. <vbk:9781256112754#page(5)>

Objective a)

• CFAI  members and candidates are REQUIRED to adhere to the Code
• Handbook is the fundamental source for interpreting and implementing Code
• Not intended to be all inclusive - cannot cover every contingency - not just something learned to pass the test
• Enforcement and Structure: CFA Board of Governers>Professional Conduct Program (PCP)>Disciplinary Review Committee (DRC) - enforce the Code and Standards based on a) fair process to member/candidate and b) confidentiality
• Inquiry can be prompted by several circumstances
• Self disclosed, written complaint, media source, exam proctors
• After inquiry data collection ensues (interviews and reports etc.) and designated officer either concludes with no discipline or continues to disciplinary sanction - member may then accept or reject
• Sanctions include censure, suspension of CFA, revocation
• Firms adopting CFA Code can say they do, but must say it is not verified by CFAI 
• CFAI divides into Code of Ethics ('Code') and Standards of Professional Conduct ('Standards')
• Code is a set of principles for CFAs
• Standards is conduct for all business practices
• Mkt sustainability
• Everything is connected, one fault leads to others
• Markets are based on trust which is hard earned and easily lost
• Regulation alone is not enough - more violations means more regulation, but also vice versa
• Choice b/w right and wrong is not always clear - anyone can make unethical choices b/c of the dynamic nature of ethical decision

Objectives b/c)

• Code of Ethics - six bullets that are a bit repetitive (IPRCRL - I Pack Royal Caravans Really Lightly - Integrity, Personal, Reasonable, Competence, Rules, Look good)
• Act w integrity, competence, diligence, respect and in an ethical manner when dealing with participants (clients, public, prospective clients, colleagues etc.)
• Place integrity of the investment profession above personal interests
• Reasonable care and exercise independent judgment in analysis
• Practice and encourages others to practice in a way that looks good for the profession
• Promote and uphold rules governing capital mkts
• Maintain/improve professional competence of yourself and strive to maintain/improve that of others
• Standards of Professional Conduct - there are seven (ICEPRIC - Integrity, Clients, Employers, Professionalism, Responsibility as CFA, Investments, Conflicts)
• 1) PROFESSIONALISM (LIMM - Law, Independence, Misrepresentation, Misconduct)
• Knowledge of Law - know the applicable laws/rules/regulations (including CFAI) and in event of conflict, comply with the more strict law/rule/regulation.
• Independence/Objectivity - reasonable care and judgment, cannot offer or solicit or accept any gift, benefit, compensation or consideration that reasonably could be expected to compromise independence/objectivity
• Misreprentation - must not knowingly make misrepresentations
• Misconduct - no dishonesty, fraud, deceit OR commit any act that reflects adversely on reputation, integrity or competence (this actually seems quite broad - taken literally CFA really means committing to great behavior all the time)
• 2) INTEGRITY OF CAPITAL MKTS (NM - Nonpublic, Manipulation)
• Material Nonpublic Info - must not act OR cause others to act on it
• Market Manipulation (i'm looking at YOU phil falcone) - must not engage in practices distorting prices or artificially inflate trading volume with intent to mislead the market
•  3) DUTIES TO CLIENTS (LFSPC - Loyalty, Fair, Suitable, Presentation, Confidentiality) (Lisa Frank's Succulent Peach Cobbler; Lisa Frank is a client)
• Loyalty, Prudence, Care - reasonable care and prudent judgment.  Place CLIENT interest before FIRM or own.  Important distinction that client comes before firm.
• Fair Dealing - deal fair and objectively with ALL clients.  
• Suitability - make reasonable inquiry into client situation/objectives prior to making a recommendation or action and regularly update information; determine investment is suitable based on this; determine suitability in context of total portfolio.  When managing to a specific mandate, take only actions consistent with stated objectives/constraints.
• Performance Presentation - when reporting performance make reasonable efforts to be fair, accurate and complete
• Confidentiality - must keep all client info private UNLESS information concerns illegal activities on part of client, disclosure is required by law, or client permits dissemination
• 4) DUTIES TO EMPLOYERS
• Loyalty - act for benefit of employer and don't slack off ('deprive employer of skills or abilities') or divulge information or otherwise cause harm (how does this apply in whistleblowing situations?)
• Compensation - not accepts gifts or other that might reasonably cause a conflict with employer's interest unless obtain written consent from all parties involved
• Supervisors - must make reasonable attempts to detect/prevent violations by any underlings
• 5) INVESTMENT ANALYSIS, RECOMMENDATIONS, & ACTIONS
• Diligence and Reasonable Basis - exercise diligence and thoroughness in investment recos, and have a reasonable basis for any reco or action
• Communication - must disclose general approach to investing and what might affect process, use reasonable judgment to decide what is important and tell that to clients, distinguish between fact and opinion
• Records - develop/maintain appropriate records to support analyses, recos, actions and communications with clients
• 6) CONFLICTS OF INTEREST
• Disclosure of Conflicts - make full and fair disclosure of all matters that could reasonably be expected to impair independence/objectivity.  Must be in plain language and communicate information correctly.
• Priority - transactions for client and firm come before transactions where Member is beneficial owner
• Referral Fees - must disclose to employer/clients any consideration received from or paid to others for recommendation of products/services - so even if you have to pay someone to recommend their product (hypothetical), you must tell client/employer
• 7) RESPONSIBILITIES AS A CFA MEMBER/CANDIDATE
• Conduct - don't engage in conduct that compromises rep/integrity of CFAI or its exams
• Reference to CFAI - must not misrepresent or exaggerate meaning of implications of membership/candidacy

End of Reading 1.
Approximate hours - 2.5.