ETH 3 Guidance for Standard I: Professionalism

Standard I(A) requires members and candidates to understand and obey every law, rule, and regulation that governs their professional work, including the Code of Ethics and Standards of Professional Conduct issued by CFA Institute. When two sets of requirements conflict, they must follow the stricter one. They must never knowingly take part in a violation, and they must separate themselves from any violation they discover.

Before the details, it helps to see how the pieces of Standard I fit together. Standard I: Professionalism sets out several linked duties that together protect the integrity of the profession.

How much do you have to know?

Members and candidates are expected to hold a reasonable, good-faith understanding of the laws and regulations of the places where they work, and to comply with the ones that bear directly on their professional activities. They must stay alert as rules change, and when something is unclear they should turn to their firm’s compliance or legal resources, or to outside counsel. The standard does not turn anyone into a compliance expert, and it does not demand detailed mastery of every law that might touch their work. What it does demand is real knowledge of the rules that relate directly to their own responsibilities. A junior employee with no supervisory role may not need a deep grasp of employment law, while a manager overseeing many staff probably does.

The Code and Standards against local law

Some members and candidates operate where local law is silent on a given action, or where it differs from the Code and Standards. The rule is to follow whichever is stricter. “Applicable law” is simply the law that governs the person’s conduct, and which one applies turns on the facts of each case. The “more strict” rule is the one that either restricts the person’s action more tightly or requires more effort to protect clients. For example, if local regulation does not require disclosing referral fees but the Code and Standards do, the person must disclose them.

Three principles follow. First, comply with the applicable law that governs your activities. Second, do not act in a way that breaches the Code and Standards, even where such conduct would otherwise be legal. Third, where no law applies, or where the Code and Standards ask more of you than local law does, follow the Code and Standards. Meeting the law is the floor, not the ceiling: taking extra steps that go beyond the law to protect clients reinforces the duty under Standard I(A).

Taking part in, or stepping away from, a violation

Members and candidates are answerable for violations they knowingly join or assist. They are presumed to know the applicable rules, though CFA Institute recognizes that someone may fail to spot a violation if they are unaware of the underlying facts. The standard bites when a member or candidate knows, or should know, that their conduct could contribute to a breach.

When there are reasonable grounds to believe that a colleague, employer, or client is engaged in illegal or unethical activity, whether ongoing or about to happen, the member or candidate must dissociate from it. Direct discussion comes first; if that fails, the next step is to raise the matter with a supervisor or the compliance department. If the problem is still not fixed, the person must step away. Depending on the role, dissociation can mean taking your name off a report, requesting a different assignment, or declining to accept or keep a client. In extreme cases it can mean leaving the job. Doing nothing while staying connected to the conduct can itself be read as participation. CFA Institute encourages reporting violations by fellow members and candidates; voluntary reporting to regulators, often called whistle-blowing, is not required unless local law makes it mandatory, so members and candidates should take legal and compliance advice.

Working across borders

Members and candidates who practice in several jurisdictions may face many different laws. Where the governing law demands more than the Code and Standards, they follow the law; otherwise the Code and Standards apply. The illustrations below use three country types: NS, a country with no securities law on the point; LS, a country whose securities rules are looser than the Code and Standards; and MS, a country whose securities rules are tighter than the Code and Standards.

NS: no securities law on the point. LS: securities rules looser than the Code and Standards. MS: securities rules tighter than the Code and Standards.

The pattern is consistent: wherever the controlling law falls short of the Code and Standards, or is missing, the Code and Standards prevail; wherever it goes further, the local rule prevails. Members and candidates who help create or maintain investment products or services must also think about where those products originate and where they will be sold, and do the due diligence to comply with the law in every relevant jurisdiction.

Compliance procedures

To meet Standard I(A), members and candidates should build habits that keep them current: staying informed about changes in the rules, often through the firm’s compliance team, legal counsel, or continuing education; keeping accessible, up-to-date copies of the relevant statutes, rules, regulations, and leading cases; seeking advice from compliance or legal staff when the right action is unclear or when a colleague may be committing a violation; and documenting the violation whenever they dissociate from conduct that breaches the Code and Standards.

Standard I(B) requires members and candidates to use reasonable care and judgment to reach and keep independence and objectivity in their work. They must not give, request, or take any gift, benefit, payment, or other consideration that a reasonable person would expect to undermine the objectivity or independence of themselves or anyone else. The goal is that clients receive opinions untainted by conflicts, and that members avoid even the appearance of a lost objectivity.

Recommendations, research, and investment actions must reflect the member’s honest opinion, free of internal or external pressure, and be expressed in clear, unambiguous language. Outside parties often try to sway the process with benefits: a corporation may want wider coverage, an issuer or underwriter may want a new offering promoted, a broker may want more commission business, and a rated company may lean on a rating agency. The inducements range from gifts, tickets, and favors to invitations to lavish events and even job referrals. Modest gifts and ordinary entertainment are acceptable, but members must resist pressure, subtle or open, to act against a client’s interest, and must reject anything a reasonable observer would expect to jeopardize their objectivity.

Gifts from clients are different

A gift from a client is not the same as a gift from an outside party trying to win favor at other clients’ expense. A client already has a compensation arrangement with the member or firm, so a gift from that client looks more like extra pay than an attempt to bias judgment. Even so, before accepting a bonus or gift from a client, the member should disclose it to the employer; if disclosure beforehand is not possible, it must follow after acceptance. That lets the employer judge independently whether the gift could affect the member’s objectivity, for instance by tempting the member to favor the gift-giving client over others.

Where the pressure comes from

Several settings recur. In investment banking relationships, analysts may be pushed to issue favorable reports on firms that have business ties to their employer; analysts and bankers may collaborate only where the conflicts are managed effectively, and any conflict not avoided must be disclosed. In performance measurement and attribution, analysts may be asked to reshape a composite or benchmark to hide a weak account or fund, and must refuse. When covering public companies, analysts may be pressured toward favorable ratings, and some cope by hedging with vague language, which fails the investors who expect clear, unbiased views; the better path is to work with issuers to make the analyst’s duty of independence understood, and to document the basis for conclusions.

Credit rating agencies face similar risks: analysts there may be pushed to grade an issuer generously because of other services the agency sells, such as advising on structured products, so firewalls between business lines matter, and users of ratings should be mindful of the conflicts and may need to validate a rating independently. In manager selection, a member may sit on either side, hiring a manager for a pension or endowment, or seeking a mandate. A person in the hiring seat must not request gifts, contributions, or other compensation capable of swaying the decision, and this includes asking for donations to a favorite charity or political cause; a person seeking a mandate must not offer such inducements. The US “pay-to-play” scandal, in which managers donated to the campaigns of officials who controlled pension allocations, is the cautionary example, and it prompted new reporting rules and hiring restrictions.

Issuer-paid research and travel

Companies sometimes hire analysts to write research on themselves, which can fill a gap left by limited sell-side coverage but is riddled with conflict: readers may think the work is independent when the subject company paid for it. An independent analyst doing issuer-paid research must analyze thoroughly and without bias, separate fact from opinion, support conclusions with adequate research, and fully disclose the compensation arrangement. Crucially, the analyst should take only a flat fee with no link to the report’s conclusions or to the stock’s performance; payment linked to a positive result, or equity-like instruments that gain value on favorable coverage, gives an incentive to bury bad news.

Paid travel raises the same worry. Talking with a company on its corporate jet or at a sponsored conference where airfare and lodging are covered can quietly shape an analyst’s views. Best practice is to use commercial transport at the member’s or firm’s own expense. If commercial transport is genuinely unavailable, a member may accept modest arranged travel to attend a legitimate information-gathering event, such as a site or property tour.

Compliance procedures

Members and candidates should follow firm policies that protect the integrity of research, such as a restricted list of companies the firm has banking or other ties to. They should limit special cost arrangements by paying their own commercial transport and hotel charges when visiting an issuer, and no issuer should reimburse their airfare. And they should limit gifts to token items, even where the employer has no formal policy, while ordinary business entertainment remains acceptable as long as its aim is not to influence or reward them.

Under Standard I(C), members and candidates are barred from knowingly making any misrepresentation tied to their analysis, recommendations, actions, or other work in the profession. Trust is the foundation of the profession: investors rely on what professionals tell them, and false or misleading statements harm those investors, erode confidence, and threaten the integrity of capital markets.

Members and candidates must not misstate any aspect of their work, including their own qualifications, their firm’s qualifications and services, their own and their firm’s performance record, or the features of an investment. When they communicate about their professional activities, the information and disclosures must be accurate, timely, complete, and in plain language. Plain language stays clear and brief, leans on everyday words, and avoids being swamped by jargon. Accurate language is truthful, precise, and free of error, not vague or misleading. Timely means delivered with enough notice for the recipient to act on it. Complete means it carries all the facts customary to convey the point.

A misrepresentation is any untrue statement, any omission of a fact, or anything otherwise false or misleading, whether written, electronic, or spoken. “Knowingly” means the person knew, or should have known, that a statement was misleading or that omitted information could change an investment decision. The reach is broad: research reports, underwriting documents, advertising, market letters, articles, books, emails, texts, and anything posted online. Members should regularly monitor their websites and social media to keep the content compliant, since the sense of anonymity online can tempt people to overstate their abilities or their employer’s.

Third-party information and plagiarism

When members incorporate outside material into their own work, any misrepresentation that results becomes their responsibility, and they share responsibility for the accuracy of third-party marketing materials they pass to clients. They must disclose their intended use of external parties and must never present others’ work as their own. That last point is the heart of the plagiarism rule: copying or using material prepared by others in substantially the same form, without crediting the source, breaches Standard I(C). It takes many shapes, from renaming another firm’s report and releasing it as original analysis, to lifting excerpts without attribution, citing unnamed “leading analysts,” repeating others’ forecasts without their caveats, using charts without their sources, or copying proprietary spreadsheets or algorithms without permission.

Distributing outsourced, third-party research is allowed, as long as the member does not claim to be its author and tells clients the work comes from another source; sifting and repackaging good research can add real value, but only if it is described honestly. Research and models built while employed belong to the firm, so a firm may keep using and reissuing that work after an analyst leaves, but a member must not reissue a previously released report solely under a different name.

Performance, benchmarks, and omissions

Because most investments carry unpredictable returns, members must not state or imply that a client will earn a return generated in the past, and must not guarantee a specific return or the preservation of capital. Saying “I can guarantee 8 percent on equities this year” or “you cannot lose money on this” is misleading. The rule does not stop members from describing products that carry a genuine built-in guarantee, such as one where an institution has agreed to cover losses. Benchmarks are another trap: presenting a benchmark that does not fit the strategy, or reporting on a basis that is not comparable, can overstate success, so members should choose the most appropriate available benchmark and explain any unusual reference index. When valuations for illiquid securities come from several sources, members must not shop for the highest value; consistent, reliable pricing serves clients better.

Omissions can mislead just as much as false statements. Leaving negative scenarios or risk levels out of a model can misrepresent an investment’s true value, and model outputs must be presented as expected results, not as fact. In performance reporting, cherry-picking the best accounts and presenting them as typical of a strategy distorts the record and breaches the standard.

Compliance procedures

Members should understand the real limits of their own and their firm’s capabilities and describe them accurately, ideally keeping a summary of their qualifications and the services they can actually provide. They should monitor their online and social media content to keep it current and protected. To avoid plagiarism, they should keep copies of the research and materials they relied on, attribute direct quotations, tables, statistics, and new methodologies to their sources, and attribute any paraphrase or summary of others’ work.

Standard I(D) bars any professional conduct that involves dishonesty, fraud, or deceit, along with any act that casts a shadow over a member’s or candidate’s standing, honesty, or ability in the profession. Where Standard I(A) targets breaches of law and Standard I(C) targets false statements, Standard I(D) sweeps in lying, cheating, stealing, and similar dishonesty whenever it touches a person’s professional activities.

The key filter is the tie to professional activity. The Code and Standards treat “professional activities” and “professional conduct” as the same thing: any conduct relating to investment management, security analysis, financial analysis, stewardship, or similar pursuits that either takes place in the workplace, academia, the profession, or the securities markets, or that draws on the person’s CFA charter, CIPM designation, CFA Institute membership, or candidacy. Whether a given act qualifies depends on the facts. Examples of conduct treated as professional activity include:

• Interactions with clients, colleagues, or employees at work, in academia, or across the profession.
• Representing oneself to others as a CFA charterholder, a candidate, or a CFA Institute member.
• Serving as an unpaid officer, representative, or volunteer for CFA Institute or a local society.
• Attending a CFA Institute, society, or industry event, meeting, course, or conference.
• Publishing analysis of investments or markets in articles, books, reports, message boards, or blogs outside work.
• Communicating with a regulator or professional body about matters within one’s investment responsibilities.

Conduct that damages trust or competence can breach the standard even when it is legal. Abusing alcohol during business hours may qualify, because it can impair the ability to do the job. Personal bankruptcy, by itself, does not reflect on integrity, but a bankruptcy tied to fraudulent or deceitful business conduct can. The standard is not meant to punish lawful acts of civil disobedience carried out for personal beliefs, since those do not reflect on professional reputation, integrity, or competence. CFA Institute is also aware that some people try to misuse the Professional Conduct Program to settle personal or political disputes, and it has policies in place to address such abuse.

To help prevent misconduct, members and candidates should urge their firms to put in place a code of ethics that each employee agrees to, making clear that behavior reflecting poorly on the individual, the firm, or the industry will not be tolerated.

Standard I(E) tells members and candidates to work with, and to keep, the competence their professional duties call for. It gives direct effect to the Code of Ethics, which asks members to work with integrity, competence, and care, and to keep building their own skills and those of fellow professionals. To be competent means holding the knowledge, skills, and abilities that let a professional succeed in a specific role, so that clients and employers receive a high standard of service.

The three parts are distinct. Knowledge is the body of information applied to performing a function, and how well it is applied. Skills are the capabilities to carry out role-specific tasks and reach professional goals. Abilities are the capabilities and attitudes that drive behaviors leading to observable results. What counts as competence differs by role and by the facts of each situation, so there is no single checklist.

What competence is not

A poor outcome does not, on its own, prove a lack of competence. Many able professionals have suffered losses: a competent manager will not always pick winners, and a competent analyst may misjudge an investment’s prospects despite thorough work. Competence is also more than formal education. A highly educated consultant may lack the experience for an unfamiliar area; an auditor expert in financial statements may not be competent to assess compliance with performance standards such as the GIPS standards; and a consultant skilled at general manager searches may lack the skills to evaluate managers who specialize in sustainable investing.

Because responsibilities change and grow, the knowledge, skills, and abilities a role demands can shift, so the duty is not only to reach competence but to keep it. When a member takes on new duties, moves into a new asset class, or gains supervisory responsibility, competence must extend to cover the new role. The standard does not require any particular continuing education program; members can attain and maintain competence in many ways, including professional development or continuing education, earning certifications or designations, attending conferences and seminars, taking part in employer training, disciplined self-study through reading in the field, joining expert groups, and gaining any new skill needed when responsibilities change.