Learning Module 5
Ethics Application

Knowledge of the Law — inadequate fixes don't excuse continued participation. When a supervisor's "corrective" measures only partially address known misconduct (e.g., fixing pricing for new clients but not existing or past ones), continuing to interact with clients under the flawed practice is still participating in the violation — you must dissociate, even if that means refusing client interactions or escalating further.

Knowledge of the Law — a longstanding relationship is not a substitute for required scrutiny. Approving anti-money-laundering reports without inquiry, because a client is well known or trusted, violates Standard I(A) — legally mandated reviews must actually be performed, and confidentiality/loyalty duties never excuse ignoring legal compliance obligations.

Knowledge of the Law — "the client said it was OK" never satisfies a legal signature requirement. Signing documents on a client's behalf to meet a deadline — even with the client's verbal blessing — violates the law's actual requirement for a genuine signature, and that legal violation is itself a Standard I(A) violation.

Independence and Objectivity — mixed motives still taint a "gift." A political donation made partly from genuine personal conviction but partly to curry favor with a government official who controls manager-selection decisions violates Standard I(B) — intent and the reasonable perception of influence matter more than the source or proportionate size of the benefit.

Misrepresentation — omission can be as harmful as an affirmative lie. Failing to update a prospective client (e.g., a pension plan) about the departure of "key personnel" named in a winning proposal is a misrepresentation by omission — material facts the client specifically asked about must be disclosed promptly, not after a replacement is found.

Misrepresentation — social media posts are held to the same standard as any other communication. A CEO's social media claim of "secure" buyout funding, when no actual agreement or financing existed, is a material misrepresentation — the informal, "joking" tone of the platform does not lower the bar for honesty.

Misconduct — personal/political activity is not automatically professional misconduct. An employee's arrest during a lawful civil-disobedience protest, unconnected to dishonesty or professional competence, generally does not violate Standard I(D) — even though it may separately breach an employment contract permitting termination for any criminal conviction.

Misconduct — disguising real trades as "gifts" via a trade-error account is fraud, not generosity. Falsely claiming a missed trade to retroactively "give" a client a profitable position (charging the cost personally) is dishonest and deceptive — even though it benefits the client and costs the firm nothing.

Competence — competence must extend to every new responsibility, including supervision. Diligently building subject-matter knowledge for a new sector coverage area is not enough if the new role also adds first-time supervisory duties — Standard I(E) requires developing competence across the entire scope of the new role, not just the most familiar parts.

MNPI — overhearing information in public still makes it nonpublic. Piecing together a likely acquisition by overhearing a friend's phone calls and observing private huddles, then trading on that inference, violates Standard II(A) — the public setting of the conversation doesn't make the information itself public, and this is meaningfully different from the mosaic theory (which combines genuinely public information with nonmaterial nonpublic information).

MNPI — selective "color" given to sell-side analysts is still selective disclosure. Describing a regulatory meeting as "very positive" to a hand-picked group of covering analysts, without sharing the same characterization publicly, violates Standard II(A) even if specific data isn't disclosed — qualitative characterizations that move price are still material, and selective recipients are still "nonpublic."

Market Manipulation — fabricating an investor base to meet a listing rule is information-based manipulation. Inventing fictitious shareholders to satisfy an exchange's minimum-spread requirement violates Standard II(B), regardless of whether the company later performs well — the manipulation created a false impression of investor interest and circumvented a safeguard meant to ensure genuine liquidity.

Loyalty, Prudence, and Care — "client protection" disclosures cannot waive a fiduciary-style duty. A contract clause that disclaims liability for failing to act in the client's best interest, or that eliminates suitability analysis, violates Standard III(A) regardless of disclosure — you cannot contract around the duty of loyalty itself.

Loyalty, Prudence, and Care — the nature of the relationship defines the duty owed. A self-directed brokerage client who explicitly agrees to discretionary, no-notice margin liquidation is bound by that agreement; the broker's duty here is to follow the contracted terms in good faith, not to proactively manage the client's market risk as an adviser would.

Loyalty, Prudence, and Care — expense reimbursement must track genuine client benefit, not personal convenience. Choosing cheaper weekend travel (even with extra personal days included) can be in the client's interest if it lowers net cost, but charging clients for personal entertainment or unrelated trip changes is not — the best practice is agreeing on reimbursable categories in writing upfront.

Fair Dealing — tiered service levels are fine if available to all and properly disclosed. Charging a subscription fee for a premium weekly research product (in addition to a free monthly report sent simultaneously to everyone) does not violate Standard III(B), as long as the premium tier doesn't change recommendations in a way that disadvantages standard-tier clients.

Suitability — high concentration in a leveraged, tax-advantaged vehicle can still be unsuitable. Even when a product offers genuine tax benefits, recommending 85%+ concentration in a leveraged closed-end fund to conservative, modest-net-worth clients violates Standard III(C) — suitability is evaluated holistically, not by isolating one attractive feature.

Suitability — accepting a client's stated preference is not the same as performing a suitability analysis. Relabeling clients' objectives as "growth" to match what they say they want (e.g., illiquid direct property within a retirement vehicle), without analyzing time horizon, liquidity needs, or expertise, fails Standard III(C) — and steering business to an affiliated firm without disclosure compounds the problem under III(A).

Performance Presentation — accurate numbers can still mislead without context. Presenting a fund's performance history that technically belonged to a predecessor vehicle (before the fund's own registration) without disclosing that lineage violates Standard III(D), even though every number is calculated correctly — "fair, accurate, and complete" requires the full context, not just correct math.

Confidentiality — both the employee and the compliance officer can be liable. An employee who moves client data to an insecure personal server violates Standard III(E) directly; the compliance officer who designed/maintained inadequate safeguards (and never tested their effectiveness) can also violate III(E) — protecting confidentiality is a shared, not single-point, responsibility.

Loyalty — badmouthing your current employer before you've resigned is a violation, even to your own clients. Sharing internal frustrations and concerns about firm leadership with clients — before formally resigning — and then using the resulting interest to solicit those clients for a new firm violates Standard IV(A), regardless of how the clients feel about it.

Loyalty — whistleblowing in the client's interest can justify otherwise-prohibited conduct. Secretly recording conversations and copying client records to report an employer's unethical practice (pressuring suboptimal proprietary product sales) to a regulator does not violate Standard IV(A) — protecting clients from active harm can override the ordinary duty of loyalty, though local recording laws are a separate legal issue.

Loyalty — good intentions don't authorize taking firm property. Downloading a client/prospect contact list to send a "thank you" note after resigning still violates Standard IV(A) — the list is the firm's property regardless of motive; the correct path is asking the employer's permission first.

Additional Compensation — issuer-paid research isn't inherently unethical, but undisclosed bonuses tied to coverage decisions are.An analyst who helps select which companies receive (paid) research coverage, and separately receives a bonus from those same companies, has a clear conflict under Standard IV(B) — both employer consent and disclosure of the payment source to report users are required.

Responsibilities of Supervisors — remote work and infrequent check-ins are not a compliance system. Letting an employee work from home with minimal oversight, with no system to detect a secret outside job and commission-sharing scheme, falls short of Standard IV(C) — a regular audit by headquarters does not substitute for active, on-site supervision by the actual manager.

Responsibilities of Supervisors — a title without real authority does not excuse the duty — but it should prevent you from accepting the role. Becoming compliance officer over someone (here, a parent and the firm's true power-holder) without any actual authority to enforce policies still violates Standard IV(C) if you accept and keep the role — the correct response is to decline in writing until real authority and an adequate compliance system exist.

Diligence and Reasonable Basis — relying on someone else's unverified research doesn't transfer the diligence requirement away from you. Both an independent analyst who never verified an issuer's claims (a forged regulatory certificate, fabricated land-use agreements) and a second analyst who built a "buy" recommendation on top of that first report without independent verification can both violate Standard V(A) — issuer-paid, third-party research demands extra scrutiny, not less.

Communication with Clients — a "more accurate" undisclosed methodology change is still a disclosure violation. Quietly switching the calculation methodology behind a key rating metric, even if the new approach is genuinely better, violates Standard V(B) if the change isn't disclosed — comparability and transparency matter independent of whether the change was an improvement.

Record Retention — personal familiarity with clients is not a substitute for updated written records. Knowing your clients well through decades of personal friendship doesn't satisfy Standard V(C) if formal records and risk profiles are only updated "when there's time" — life-changing events must be promptly and regularly reflected in the actual client file.

Avoid or Disclose Conflicts — disclosing the existence of an arrangement isn't the same as disclosing the conflict within it. Telling clients you use third-party sub-advisers is not sufficient if those sub-advisers also pay you based on assets placed with them — Standard VI(A) requires disclosing the financial arrangement itself, since it could bias which sub-adviser gets chosen.

Priority of Transactions — front-running is a violation even without measurable client harm. Buying personally ahead of a large client trade (or facilitating the same for friends/relatives ahead of a fund's trades) violates Standard VI(B) even if the client's price is never affected and even if the trader doesn't pocket direct profit — providing the advance information is itself the violation.

Priority of Transactions — delaying trade allocation to cherry-pick winners is a serious, aggravated violation. Using an omnibus account to defer which client account receives a trade until after seeing how it performs intraday — then routing winners to accounts you control and losers to large clients who can "absorb" them — violates both Standard VI(B) and Standard III(B), and cannot be cured retroactively by "evening things out" later.

Referral Fees — rewards conditioned on referrals are referral fees, no matter how they're dressed up. An "appreciation party" with gift cards and fee discounts, given specifically to clients who generated profitable referrals, must be disclosed under Standard VI(C) — the same benefits given unconditionally to all clients as a loyalty reward would not raise the same issue.

Conduct in CFA Institute Programs — general impressions are fine to discuss; specifics are not. Sharing that past candidates found the exam "harder than expected" to motivate future students is acceptable, but soliciting or passing along which specific questions or topics appeared on the exam violates Standard VII(A), regardless of good intentions.

Reference to the CFA Designation — a lapsed membership means you cannot call yourself a charterholder, no matter how long ago you passed. Continuing to use "CFA" after failing to pay dues or file the required Professional Conduct Statement violates Standard VII(B) — the designation is not earned once and kept forever, unlike a university degree.

Reference to the CFA Designation — silence in the room can itself be a violation. Knowing a colleague has falsely told a prospective client that "everyone" on the investment team is a charterholder (when one person's membership has lapsed) and saying nothing makes the silent colleague complicit under Standard I(A) — best practice is to address it directly, escalate to compliance if needed, and dissociate from further sales meetings involving the misstatement.