Standards of Professional Conduct
The Standards of Professional Conduct convert the Code’s values into seven enforceable rules. They cover (I) Professionalism, (II) Integrity of Capital Markets, (III) Duties to Clients, (IV) Duties to Employers, (V) Investment Analysis, Recommendations, and Actions, (VI) Conflicts of Interest, and (VII) Responsibilities as a CFA Institute Member or Candidate. Each Standard splits into specific sub-provisions, for example the prohibition on trading material non-public information sits under Standard II and the duty of loyalty, prudence, and care under Standard III. Compliance is policed by the Professional Conduct Program, which investigates possible violations and can impose sanctions up to revocation of the charter.
Why it matters
If the Code is the spirit, the Standards are the letter. They take soft ideas like integrity and pin them to concrete situations a practitioner actually faces. The skill the course wants is not memorising the seven headings but reading a messy real situation and naming which Standard is in play. A tip from a friend on the board, a hot IPO allocated to the manager’s own account, a performance record that quietly drops the bad years. Each maps to a specific Standard, and the Professional Conduct Program is the machinery that gives the mapping teeth.
Worked examples
An analyst learns from a friend, a senior executive at a listed firm, that the company will miss earnings badly next week. The news is not yet public. The analyst sells the stock from client accounts before the announcement. Which Standard is violated.
This breaches Standard II, Integrity of Capital Markets, specifically the prohibition on acting or causing others to act on material non-public information (MNPI). The information is material because it would move the price, and non-public because it has not been released. Trading on it harms the integrity of the market that the Standard protects. The fact that the tip came from a personal friend is irrelevant to the breach. The correct conduct is to refrain from trading and, where appropriate, encourage the issuer to disclose.
A manager receives a heavily oversubscribed IPO that is expected to jump on listing. He fills his own personal account first, then allocates the remainder to client accounts. Which Standard is violated.
This is front-running and breaches Standard VI, Conflicts of Interest, together with Standard III, Duties to Clients, because client transactions must take priority over the member’s own. By stepping ahead of clients in a scarce, profitable allocation, the manager places personal interest above the duty of loyalty and fair dealing. The remedy is a written allocation policy that fills client orders first and treats clients fairly, with personal trading clearly subordinated and disclosed.
Common mistakes
- ✗Simply possessing material non-public information violates Standard II. The breach is in acting on it or causing others to act. A member can lawfully hold MNPI provided they do not trade on it or pass it on.
- ✗Duties to the employer always outrank duties to the client. When the two conflict, the client’s interest comes first. Standard III’s duty of loyalty, prudence, and care is not overridden by Standard IV.
- ✗The Standards are only enforceable where local law happens to match them. They bind every member and candidate globally through the Professional Conduct Program, independent of whether local law is weaker.
- ✗A conflict of interest is acceptable as long as it is never mentioned. Standard VI requires full and fair disclosure of conflicts. Concealment, not the conflict itself, is what most often triggers sanction.
Revision bullets
- •Seven Standards turn the Code’s values into enforceable rules
- •I Professionalism, II Market Integrity, III Clients, IV Employers, V Analysis and Actions, VI Conflicts, VII Member and Candidate duties
- •Material non-public information sits under Standard II; trading on it is the breach
- •Client interests outrank the member’s own and, in conflict, the employer’s
- •Conflicts must be disclosed fully and fairly under Standard VI
- •The Professional Conduct Program investigates and can sanction up to charter revocation
Quick check
A research analyst is told, in confidence by a director friend, that a takeover bid will be announced on Monday. Over the weekend he buys the target’s shares for client portfolios. The clearest violation is
A portfolio manager allocates a scarce, soon-to-rise IPO to his own account before filling client orders. Which pair of Standards does this most directly engage
Connected topics
Sources
- CFA Institute, Standards of Practice Handbook (2014)CFA Institute. Standards of Practice Handbook. 11th ed. CFA Institute, 2014.Sets out the seven Standards, their sub-provisions, and worked guidance on MNPI, conflicts, and priority of transactions.
- CFA Institute, Code & Standards (2014)CFA Institute. Code of Ethics and Standards of Professional Conduct. 11th ed. CFA Institute, 2014.Describes the Professional Conduct Program and the enforcement process behind the Standards.