Claritas Curriculum Review: Ethics and Investment Professionalism

Following the numerous cases of fraud discovered in the wake of the financial crisis and the current investigation against Steve Cohen and SAC Capital Advisors, module 2 in the Claritas Investment Certificate curriculum seems especially relevant.
Ethical and Professional Standards are give a huge weighting in the CFA designation curriculum, between 10% and 15% of each exam, and much of the Institute’s marketing is behind promoting a standard of trust in the industry.
In fact, the Institute makes close pass/fail decisions for CFA candidates based on their score within the topic area. Resist the temptation to avoid studying the module because you are an ethical person and generally know the difference between right and wrong.
Investment Industry, Ethical Standards and Trust
This seems largely a definitional reading with some list material. Remember, list material is easily testable on multiple choice tests so probably has a good chance of showing up on your exam.
Financial market integrity refers to capital markets that are efficient, ethical, transparent and that protect investors’ interests. Understand the steps that can be taken to improve financial market integrity.
Obligations of the Investment Professional
The reading revolves around a professional’s obligation to three groups; clients, employers and co-workers. Duties to clients and employers is a big part of the CFA designation while duties to co-workers is new to Claritas.
Remember that professional’s must place the client’s interest above their own and above their employer’s, except when it may impair financial market integrity. Treat all clients consistently, fairly and respectfully, regardless of asset size. Professionals must only recommend products or offer advice that is suitable for the specific client. Suitability mainly deals with the riskiness of an investment relative to the client’s tolerance and within the whole portfolio perspective.
After the client’s interest, professionals must hold their employer’s interest above their own. Conduct is an important one for the institute. While something may not necessarily be illegal, i.e. having a few drinks at lunch, it could impair your ability to fulfill your duties.
Supervisory duties are another important one within the CFA curriculum and it looks like the Institute is highlighting it in Claritas as well. An extremely important note to remember, one which Steve Cohen is learning now, is that supervisors are responsible for employee conduct that they knew or should have known about. Policies should be in place for monitoring and ignorance is no excuse. In fact, the charterholders are not allowed to take supervisory positions where proper procedures are not in place.
Obligations to co-workers seems to revolve around these supervisory duties as well.
Ethical Standards
The material on limitations of laws is new to Claritas. Understand a few of the bullet points and be able to pick them out of a list.
I would think that the CFA Institute Code of Ethics, a big component of the designation curriculum, would be especially important in the Institute’s goal of standardizing ethics and standards across the industry. The acronym I always used was SPAMED:
Subordinate personal interests to the integrity of the profession and client’s interests
Promote the integrity of and uphold rules governing capital markets
Act with integrity, competence, respect and in an ethical manner
Maintain and improve professional competence
Exercise independent judgement and use reasonable care
Demonstrate ethical practice and professionalism and encourage others to do the same
Understanding each of these rules will go a long way to understanding the Institute’s stance on ethics and professionalism.
Benefits of Ethical Conduct and Consequences of Unethical Conduct
This section is also new to Claritas and struck me as a little odd in that it seems the Institute is trying to convince people to act ethically rather than just stating that it is the right thing to do. The benefits and consequences listed are accurate and you need to remember them for the test, but I would hope that the industry doesn’t need a pros versus cons list to act ethically (though many market participants seem to want to prove me wrong).
Benefits of compliance include: market stability and an improvement in the economy through higher liquidity, achievement of financial goals, market efficiency and public awareness. This helps to prevent financial crises, enhance economic development, promote fairness in the markets and avoid adverse legal consequences.
The consequences portion of the material is much longer and is separated into four participants: employers, industry, clients and individuals. Understand the basic loss for each of the participants and the list material for the consequence.
Framework for Ethical Decision Making
Another list reading and fairly easy to memorize enough to pick the right choice on a multiple choice test. As with the charterholder curriculum, pay especially close attention to any examples or practice problems provided in the material. These are going to be the closest to the actual wording and format you will see on the test. The ethics questions can be surprisingly tough for many because they skim the material and think they can pick out the answers to ethical dilemmas without studying. You need to learn how the Institute sees a particular situation and what ethical dilemmas might be involved.
‘til next time, happy studyin’
Joseph Hogue, CFA

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