September 23, 2018 CFA Level 1, EthicsAdmin

Ethics, CFA® Program Level I

If one has integrity, there is no need of rules, but does this apply in the practical world? If taken a poll, 90% investment professionals will say no! Each of us has witnessed integrity going down the aisle with personal benefits, either ours or someones. Reaching a conclusion, there is a definite need for ethics even if 10% of the public has some integrity left in them.

Ethics, which is a part of all three levels of CFA draws our attention to certain rules the CFA institute lays down for it’s candidates and members. Having said that, it leaves many areas open to judgement, depending upon specific circumstances.

The level 1 curriculum is broken into three parts – 6 Codes of Ethics, 7 standards of Ethics and GIPS- Global Investment Performance Standards. Visual presentations leave a better impact, so see this tree: The roots are the codes of Ethics, the branches that come out are the 7 standards which are further bifurcated into leaves( sub-standards ). If you remember it in a tree like a flowchart, you will never forget the visual and the concept.

To further elaborate on the codes and standards, I would want to pen down an overview of how these ethical words would look like and leave you to analyse, before I get to it.

Codes of Ethics:

  • 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
  • Place the integrity of the investment profession and the interests of clients above their own personal interests
  • Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities
  • Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession
  • Promote the integrity and viability of the global capital markets for the ultimate benefit of society
  • Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals

Standards of Ethics:

  • Professionalism
  • The integrity of Capital Market
  • Duties to Clients
  • Duties to Employers
  • Investment Analysis, recommendation and actions
  • Conflict of Interest
  • Responsibility as a CFA member or candidate

To  pro le to clear level 1, it is suggested for candidates to be a pro in ethics but is it. It is said, CFA institute just doesn’t give heavy weightage to ethics on paper but they repeatedly test the same content in all 3 levels to make the candidate understand and believe in the ethical rules by the time they get their charter. CFA institute wants the candidate to practice what they learn in this subject and make the investment profession an ethical place to practice in.

Nowhere would you notice any disregard of local, state or country laws in the curriculum printed by the CFA Institute, they give equal and in some cases more importance to the laws already in place related to certain financial practices.

Let’s now discuss how to master the art of understanding the scenario and laying down inferences. I believe in the first rule when it comes to solving these tricking questions. The question would basically ask you to analyse the action and consider the perspective of 5  party’s, which are as follows :

  • The Individual
  • Colleagues
  • The Firm
  • Clients and counterparties
  • Society at Large

It is very important that you try to put yourself in the shoes of others. You should also consider determining details to include in the scenario section and points worthy of discussion.

at a piece of cake, well the answers have been very subjective. Certain steps suggested, which help while solving the questions are as follows:

  • Setting out the facts (clearly and succinctly) –  Drawing out the ethical concerns raised
  • Focus  on any ambiguities in the case and encourage readers to consider differing points of view
  •  Set out the consequences of the activity on the individual, their employer, affected counterparties and the markets

Level 1 question are MCQ types, not all questions are direct and easy to understand but a handful of the total is. They should be attempted with speed and ease. Some examples are as follows :

Qs1. According to fundamental ethical and professional principles applicable to the investment industry, which group should have its interests ranked first?

(a) Clients

(b) Employers

(c) Co-workers

Ans – (a)

QS2. Regarding the definition of the firm, the GIPS Standards require all of the following except?

(a) firms must be defined as an investment firm

(b) A firm’s organization alters historical composite results

(c) total firm assets must be the aggregate of the market value of all discretionary and nondiscretionary assets under management.

Ans – (b)


Qs1. When should I study ethics?

Ethics is a subject that you become comfortable with over a period of time, you won’t get it in one go. If you do get it too, without repeatitive practice you won’t be able to crack it. My suggestion- Learn the codes and standards be a heart at the beginning of your study sessions and give an hour to ethics atleast on alternative days.

Qs2.How important it is to score good in Ethics?

CFA institute weighs Ethics 15% of the whole syllabus in level 1, as I said before they again ask the same content in the other two levels also. So the importance is crystal clear. Being above 70 in Ethics surely gives a candidate an edge, but nothing can be said with 100% accuracy as CFA institute has not published it’s marking policies.

Qs3. How important is GIPS?

Equally important is the Global Investment Performance Standards (GIPS®), which is the standard for how firms are supposed to record, compare and present investment performance. You can expect atleast 3-4 questions about this topic, with most direct answers.

Ethics, in a nutshell, is there to teach you:

  • How investment managers should conduct themselves.
  • How firms should represent their investment performance

Tip – Please don’t use your sense of morals, answer what you think will be right!

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