Level III Review, Ethics in Practice

Study Session Two in the Level III curriculum consists of a review of the Code and Standards, two cases and a reading on the Asset Manager Code. We covered the AMC (linked here) briefly last week so will use this post to go over the cases. There really isn’t any new material here, just more detailed practice into the Code and Standards. If you spent enough time on the material in the first two exams, you shouldn’t have a problem. Use the cases as practice to understand how the Institute interprets and tests the CFA Code and Standards but you will not see questions relating to specific details of the case.
Ethics in Practice
Just review material here and you shouldn’t have a problem with it at this point. Review the first three posts of our 21-week plan which covered the Code and Standards. Suitability and the fiduciary duty to clients is a focus in the Level III CFA Program curriculum so make sure you practice questions around these standards.
The Consultant
Conflicts of interest can be tough on the exam because even the perception of a conflict may be a violation. Look for investment holdings or relationships with management or others in the industry. Disclosure is always required and avoidance is recommended.
As supervisors, members are required to make sure those under them acting in compliance with the Code and Standards. Supervisors or firms should have a written set of procedures and guidelines for ethical behavior and procedures must be in place to spot potential violations. Should have known or should have had a procedure to spot violations is an important part of the supervisor’s duties.
Pearl Investment Management
Members must know the law and follow the most strict in cases of overlap. While supervisors must have procedures for monitoring employees, they are not liable for actions that took place if they had proper monitoring in place. You should take reasonable steps for employee monitoring but you do not need to be clairvoyant.
Always pay attention if a case on the exam talks about an employee making trades in their own account or in a family member’s account. Remember: Client, Employer then Self and all personal trades should be cleared through the compliance department.
Diligence and reasonable basis is often a question when an analyst takes over coverage from another. You cannot simply rely on the work of another and must do your own research. Looking through a few brokerage reports or analysis by others is not sufficient.
Study Session Three in the Level III curriculum includes three readings on behavioral finance. The material can be pretty interesting but the terminology can be confusing at times. Be sure to check out last week’s posts on the Code and Standards if you missed them.
‘til next time, happy studyin’
Joseph Hogue, CFA

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