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CFA LEVEL 1

3 120+120=240 1

10 A/B

70%

Notes (equity
fixed income )

Ethics 18 #1-18 36
Code of ethics // (6 ) 2
Standards (7 )

Global investment Performance Standards (GIPS) 5-6


GIPS ()

( code and GIPS)(


standards)

CFA Institute Disciplinary Review Committee (DRC/):


responsible for the Professional Conduct Program (PCP) and enforcement
of the Code and Standards
Proceeding hearing panel
DRC members and CFA Institute member volunteers ()

Code of Ethics
1. (integrity , competence , diligence
, respect , ethical manner)
(public, client, prospective clients, employers, employees,
colleagues, other)
2. >, ( 5 )


3.
(reasonable care and exercise independent professional
judgment)
4. Practice and encourage others to practice in a professional and
ethical manner that will reflect credit on themselves and the
profession
5. (promote the
integrity and viability )
6. (maintain and improve their
professional competence and strive to maintain and improve the
competence of other investment professionals)

Guidance for Standards I-VII

Content Guidance content Recommended


procedure Examples (case study)

Guidance and examples, examples handbook


guidance

I. PROFESSIONALISM
I(A) Knowledge of law ->->

: applicable/directly
governing

: more strict MS (more strict) LS(less strict)


CFA standards
Applicable Law Comply to
Member resides in LS country, does MS laws
business in MS country; LS law
applies, but it states that law of
locality where business is
conducted governs
Member resides in MS country, does CFA Standards
business in LS country; MS law
applies, but it states that law of
locality where business is
conducted governs
Member resides in MS country, does CFA Standards
business in LS country with a
client who is a citizen of LS
country; MS law applies, but it
states that the law of the
clients home country governs
Member resides in MS country, does MS laws
business in LS country with a
client who is a citizen of MS
country; MS law applies, but it
states that the law of the
clients home country governs
: /dissociate

(not required but advisable)(


) dissociate/ CFA
:
1.Know ()-> report through supervisor or compliance
department -> may consider confronting wrongdoers -> (if
unsuccessful) -> dissociate and document -> quit ()
2.Suspect () -> consult -> but cant be absolved from
requirements to compliance

( dissociate)

Should make reasonable efforts to review associated firms that are


distributing products or services also abide by the laws and regulations

Recommended procedures for members and candidates ()


Stay informed:

Review procedures:
Maintain current files:

Case study:

I(B) Independence and objectivity ()


,
gift:
1. analyst
()
modest and normal gift is OK,

gifts, invitation to lavish functions (), tickets (


), favors, job referrals (/?)
2. fund manager

disclose ( I(B)
)
written consent (
)
;

/
1. Buy-side clients
()
IBD research

2. Fund manager relationships and custodial () relationships


pension fund
trust fund manager pension fund

(outside manager)
outside manager
3. Investment banking relationships
research and IBD, research
IBD
IBD IBD

Firewall b/w research and investment banking ()


(separate reporting structure for personnel
, IBD
Compensation arrangement
Analysts can work with investment bankers only when the conflicts are
adequately and effectively managed and disclosed.
(road show ),

4. Performance measurement and attribution


performance analyst ()
fund manager
sales stray from their mandate (
40%bond
60%stock 80%)
performance analyst
5. Public companies
promise favorable report about
the firm.
6. Credit rating agency opinions
()
7. Influence during the manager selection/procurement process
(charity or political organization)
fund manager
( cfa member) fund manager fund
manager , fund manager (cfa member)
offer such donations/gift/contributions to such a charitable
organization or political candidate (pay to play).
8. Issuer-paid research
flat fee () that is not linked to
the conclusions or recommendations
9. Travel funding
modestly arranged

Recommended procedures for compliance


Create a restricted list (of some companies) for corporate client
if (the CFA analyst/firm) not willing to issue adverse opinion (on
these companies) and distribute factual information rather than
opinion about companies on the list

Restrict special cost arrangement, cannot be reimbursed by
corporate issuer

Case study:
Example 7
(
)
broker broker
,
Tip:
( though)
Example 15 composite : , ABCDEFG, ABC
ABC composite ,
portfolio composite portfolio
( portfolio) composite
( portfolio)

I(C) Misrepresentation ()//

1. Guarantee investment performance


(prohibit guaranteeing specific return which
is inherently volatile, not prohibit guarantees built into the structure
of the product or for which an institution has agreed to cover any
losses)
2. Qualification or credentials
50 500
3. Service
Prohibited from saying providing full service/all service, proper way is
to provide a list of services available

(new in 11ed)
1. outcome (given growing use of models and technical
analysis) fact ()
2.encourage firm to develop strict policies to prevent cherry-picking
for composite

()
1.
2. use excerpt from other report without acknowledgement
3.citing leading analysts or investment experts without naming
specific reference
4.using charts and graphs without stating sources
5.using others statistical estimates without including the qualifying
statements or caveats
6.using third-party information
( care and diligence
)
:
1. duration standard deviation well-known
:

2. GDP,CPI
3.:

4.

Performance Reporting
Misrepresent success of performance through incomparable benchmark
selection ( benchmark?
portfolio
)
most appropriate benchmark comparable to their
strategies (
)
I(C) does not require that a benchmark always be provided in order to
comply ( hedge fund benchmark benchmark
)
Illiquid or non-traded securities
Misrepresent may occur when valuations for illiquid or non-traded
securities are available from other sources

Social Media

Worker completed for employer


A , B A
A
(reissue solely under his/her name)

()

I(D) Misconduct /
misconduct(
) misconduct
misconduct

Dishonest ()
Abusing alcohol during business hour
Personal bankruptcy
misconduct() misconduct,

II. INTEGRITY OF CAPITAL MARKETS


II(A) Material nonpublic information

: material (reliable source-- board/c-suite/;


clear impact)non-public (public ,
selective disclosure public)

Clear impact
Company-related information
Earnings
Mergers, acquisitions, tender offers, or joint ventures
Changes in assets or asset quality
Innovations products, processes, or discoveries
New licenses, patents, registered trademarks, or regulatory
approval/rejection of a product
Developments regarding customers or suppliers (e.g. the
acquisition or loss of a contract)
Changes in management
Changes in auditor notification or the fact that the issuer may no
longer rely on an auditors report or qualified opinion
Events regarding the issuers securities (
, )
Bankruptcies
Significant legal disputes
New or changing equity or debt rating issued by third party
Macro-economy
Government reports of economic trends (interest rate, employment,
housing starts, currency information, etc.)
Large orders ()
Orders for large trades before they are executed
Well-known analyst
Reports from well known analyst
Qualified personnel (new in 11ed)
Information about trials of a new drug
Educated conjecture by subject experts not connected to the trials
is unlikely to be material
Competitors
Competitors estimation -- not MNI

Mosaic Theory use of material public and nonmaterial nonpublic


information I(D)
Material public: ,
Nonmaterial nonpublic information: ,

members can provide compensation to industry expert for


their insights but members are ultimately responsible for

II(A)
Analyst is not a company insider, and has no access to
inside information. Presumably, the analyst created the report from
public information and by using his expertise to interpret the
information. His hard work, paid for by clients, generated the
conclusions. Simply because the public in general find the conclusions
material does not require that the analyst make his/her work public.
Investors who are not clients of the analyst can either do the work
themselves or become clients of the analyst for access to the analysts
expertise.

II(B) Market manipulation maybe

Info-based
Transaction-based (
()

)
(): 1. Trading strategies, especially
hedge fund buy and sell ,
2.tax purposes, 12 loss 1
()3.to increase liquidity,
Futures Exchange made agreements w/ members to insure minimum trading
volume in exchange for reduction of commission -> if for the interest of
clients and disclosed, not violate.

III. DUTY TO CLIENTS


III(A) Loyalty, prudence and care
III(B)-III(E) III(A)

Identify the actual investment client (#2 #3


)
1. Individual
2.Beneficiary
- Trust trustor trustee (fund manager)
( beneficiary)
trustee trustor trustor, beneficiary

3.Mandate
Mutual fund (
)

4.Investing public research

Fiduciary ()
: investment manager, advisor
nature
: trade execution professional
use
their skills and diligence to prudently work in the clients interest.

()Developing the clients portfolio


portfolio portfolio

Soft commission policies


soft dollar: client
, broker
broker execution service commission
broker,
soft dollar1. commission is
clients asset( manager
) soft dollar ,
broker ,
2. broker best execution (comes before low
commission) and suitable for the client (investment type such as good at
bond vs. stock)3., broker
soft money (mutually benefit)
client soft$ client

Voting proxy
Client fund manager , client
by contract client has delegated his voting proxy to his fund manager
Fund manager clients interest
Fund manager cost-benefit analysis,
(voting proxies
may not be necessary in all instances)Member/candidate/fund manager
disclose to clients their proxy voting policies

III(B) Fair dealing --


Fair equal()

Premium level service (,


)(
)
available to everyone
Trade : securities
order size pro rata account/asset
size (e.g., asset is 2m under client A and 1m under client B, but
order size is 100 securities from A and 200 from B, now only 150
securities are available on market, so 50 should go to A and 100 to B,
)
Material changes in prior recommendations ,
particularly to clients who have acted on or affected by earlier advice.

III(C) Suitability
III(D) Performance presentation
III(E) Preservation of confidentiality
IV. DUTY TO EMPLOYER

GIPS
Who can claim compliance GIPS
Complying with the GIPS standards is voluntary
Only an investment management firm that actually manage assets can
claim compliance once the firm has satisfied all requirements of
the Standards. ( subsidiary
divisionmutual fund
)
Compliance is a firm-wide process that cant be achieved on a
single product or composite
The firm must use the following compliance statement to indicate
that the firm is in compliance with the GIPS standards
[Insert name of firm] has prepared and presented this report in
compliance with the Global Investment Performance Standards (GIPS)
In case in which applicable local or country-specific laws or
regulations conflict with the GIPS, the standard requires firms to
comply with the local law or regulation and make full disclosure
of the conflict

Composites
A composite is a grouping of individual discretionary portfolios
representing a similar investment strategy, objective, or mandate.
// portfolio ();
composite
Reporting on the performance of composites gives clients and
prospects information about the firms success in managing
various types of securities or results for various investment
styles.
A composite, such as Global Equities, must include all portfolios
(current and past) that the firm has managed in accordance with
this particular strategy.
The firm should identify which composite each managed portfolio is
to be included in before the portfolios performance is known.
This prevents firms from choosing portfolios to include in a
composite in order to create composites with superior returns.
cherry-picking

Discretionary:
Non-discretionary:
(<40%), composite
Fee-paying portfolio: composite (
)

Verification
GIPS, Verification is
voluntary!
Verification is the review of an investment management firms
performance measurement processes and procedures by an independent
third-party verifier.
Verification tests:
o Whether the firm has complied with all the composite
construction requirements of the GIPS standards on a firm-
wide basis.
o Whether the firms processes and procedures are designed to
calculate and present performance results in compliance with
the GIPS standards.
A single verification report is issued in respect of the whole
firm; verification cannot be carried out for a single composite.
Third-party verification brings credibility to the claim of
compliance and supports the overall guiding principles of full
disclosure and fair representation of investment performance.
Key characteristics
Define its firm. This definition should reflect the distinct
business entity that is held out to clients and prospects as the
investment firm
GIPS are ethical standards for performance presentation which
ensure fair representation of results and full disclosure

Nine major sections of GIPS ( GIPS


6 7)
0. Fundamentals of compliance
1. Input data
2. Calculation methodology
3. Composite construction
4. Disclosure
5. Presentation and reporting
6. Real estate
7. Private equity
8. Wrap fee/Separately Managed Account Portfolios / pension

0-5 general

0. Total firm assets must be the aggregate fair value of all


discretionary and non-discretionary assets managed by the firm. This
includes both fee-paying and non fee-paying portfolios. :
market value

1.Firms must value portfolios in accordance with the composite-specific


valuation policy. Portfolios must be valued at least monthly and on the
date of all large cash flows

2.Firm must calculate time-weighted rates of return that adjust for


eternal cash flows. Both periodic and sub-period returns must be
geometrically linked. Composite returns must be calculated by asset-
weighting the individual portfolio returns at least monthly for periods
beginning on or after 1 January 2010.

3.Firms must not link performance of simulated or model portfolios with


actual performance. () Terminated portfolios
must be included. Portfolios must not be switched from one composite to
another unless documented changes to a portfolios investment mandate,
objective, or strategy or the redefinition of the composite makes it
appropriate. composite. The historical
performance of the portfolio must remain with the original composite.

5. GIPS 5 ( 5 )
10 GIPS Composite returns must be
clearly identified as gross-of-fees or net-of-fees.