Standards of Practice Handbook Update is Open for Public Comment

Categories: Standards of Practice, Standards, Ethics & Regulations (SER)
Glenn-Doggett-CFA.jpeg

The Standards of Practice Handbook is a vital resource to our members to ensure their actions continue to meet the principles of the Code of Ethics and Standards of Professional Conduct. The Standards of Practice Council (SPC), a volunteer committee, is charged by the CFA Institute Board of Governors with providing continuous oversight of CFA Institute standards and fostering the integrity of the capital markets by developing and maintaining the Code and Standards. To meet this responsibility, the SPC periodically reviews the Code and Standards as well as the Handbook.

The review being carried out for the eleventh edition of the Handbook focuses on market practices that have gained in prominence since the tenth edition. Along with updates to the guidance and examples, the eleventh edition also includes an update to the Code of Ethics that embraces the role the members have with maintaining the social contract between the industry and investors. Additionally there are two changes to the Standards of Professional Conduct that recognize the importance of proper supervision and clear communications with clients.

Inclusion of Updated CFA Institute Mission: Serving the Greater Good

The CFA Institute Board of Governors approved an updated mission for the organization that is included in the preamble to the Code and Standards. The new mission conveys the organization’s conviction of the investment industry’s role in the betterment of the society at large.

The fifth bullet in the Code of Ethics was updated to reflect the role the capital markets have on the greater society. As members work to promote and maintain the integrity of the markets, through their actions they should also work to maintain the social contract with investors.

New language reads as follows:

Promote the integrity and viability of the global capital markets for the ultimate benefit of society.

Updated Standard IV(C): Responsibilities of Supervisors

The Standard for members and candidates with supervision or authority over others within their firm was updated to bring about improved actions in stopping illegal and unethical actions from occurring. The prior version of Standard IV(C) focused on the detection and prevention of violations. The updated version stresses broader compliance expectations, which include the detection and prevention aspects of the original.

New language reads as follows:

Members and Candidates must make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations, and the Code and Standards.

Additional Requirement within Standard V(B): Communication with Clients and Prospective Clients

Given the constant development of new and exotic financial instruments and strategies, the Standard regarding communicating with clients now includes an implicit requirement to discuss the risks and limitations of recommendations being made to clients. The new principle and related guidance understands that levels of disclosure will differ between products and services. Members and candidates, along with their firms, must determine the specific disclosures their clients should receive while ensuring appropriate transparency of the individual firm’s investment process.

Additional language reads as follows:

Disclose to clients and prospective clients significant limitations and risks associated with the investment process.

General Guidance and Example Revisions

The guidance and examples were updated to reflect practices and scenarios applicable to today’s investment industry. Two concepts that appear frequently in the updates of this edition relate to the increased use of social media for business communications and the use and reliance upon the output of quantitative models. Social media platforms have increased significantly in use since the publication of the tenth edition. And while financial modeling is not new to the industry, this update reflects upon actions that are viewed as possible contributing factors of the financial crises of the past decade.

The SPC welcomes your comments on this draft update during the public comment period that will run until 30 September. The draft files, both a clean version of the consolidated recommendations and redline versions of the major changes for each standard, are available online. Please send all feedback and comments to ethics@CFAInstitute.org.

The updated Code and Standards are anticipated to become effective for members on 1 July 2014.

4 comments on “Standards of Practice Handbook Update is Open for Public Comment

  1. Mario Eichenberger said:

    I applaud many changes of the 11th edition that clarify the C&S even more, increase its relevance and keep it up-to-date with our ever evolving industry practices. Still, I suggest to consider two points as related to those changes.

    While a Code of Ethics may and – to some extent – should be aspirational in the context of its objectives and purpose, we must not forget that our industry is neither altruistic nor even philantropic. And while it may appear desirable to many of us that human cultures might develop in this direction, we must not shoot over the top and appear too far from reality. The addition of ‚for the ultimate benefit of society‘ to the fifth principle of the Code may not only create astonishment among users but may lead – undesirably – to rejections for an image of disconnection from reality. ‘Upholding the rules’ (which is expected to also include the implicit meanings of such laws, regulations and rules) and ‘promoting the integrity’ are already two objectives that go beyond what is lived in many parts of everyday financial markets. There is risk of diluting our Code and Standards by being ‘overaspirational’.

    In respect of V.B (communication with clients and prospective clients) the term ‘significant’ sets a very high standard for any investigation and subsequently taking action against possible wrong-doing (enforcement of our C&S). While we understandably do not want to expose our members (or other users of our C&S) to a too cumbersome and business unfriendly level of requirement, practice shows that all of us interpret ‘significance’ always in the context of our own objectives and that enforcement more often than not will interpret the term in a rather accommodative way. In practice, especially in a legal context, there already are too many back-doors. Let’s not assist in opening them, too. Disclosure is a one of the most important concepts in handling any kind of relationship. Absent any specific law, regulation or rule on required disclosure, it is up to the user and subsequently those who are enforcing the C&S to assess what might be useful or even material information the client should (have) know(n). It is my opinion coming from experience that the industry is using extensive boiler-plate ‚disclosures‘ but in individual advice useful information is often deliberately withheld (often under the excuse ‘the client does not understand anyway’) – whether significant or not. Therefore, I suggest to delete ‚significant‘.

  2. Glenn Doggett, CFA said:

    Mario —Thank you for your comments. I will pass them along to the SPC for review during its final deliberations on the proposed changes.

  3. Mark Sinsheimer said:

    I totally agree with Mario’s comments.

    Adding a reference to “the ultimate benefit of society” is either redundant or implies mezza voce that financial analysts must take into account externalities which may affect society without having financial relevance. This is essentially the objective of ISR investments but not all investments.

    At first reading it appears at best as a faint-hearted effort to respond to populist criticism of our industry, at worst as a hypocritical attempt to whitewash it by additional boiler plate disclaimers regarding some higher good. It will almost certainly stir up controversy with ISR specialists.

    Disclosing limitations of the process will probably lead to broad boilerplate disclaimers as is already the case in most legal documents such as Mutual Fund prospectus. Perhaps, some further reference will be provided regarding first level backtesting but it is quite probable that anything pertaining to the future will remain a risk which can’t be controled.

    I strongly believe that the wrongdoings of our industry were not caused by lack of rules but rather by lack of enforceability and therefore that the C&S should not move into such soft areas which are virtually impossible to enforce.

    On the other hand, I don’t think it is realistic to consider that senior charterholders have the authority to ask every fellow worker under his authority to respect the C&S and I wonder how the guidelines will be drafted to define when a charterholder needs to dissociate himself and refuse supervisory authority.

    These two directions followed by the SPC seem to some extent contradictory. More responsibility for supervisors requires clearer definitions and better enforceability not wider ranging aspirational objectives.

    In terms of what I think is missing, I would have liked clear definitions of :
    1) the “investment profession” which most probably extends further than the common understanding relating the expression to the buy side of finance;
    2) “referral fees” which seems to only relate to services outside the investment profession which is not the case in Lawyers or Real Estate brokers. In particular, I strongly believe it should clearly include all types of trail commissions, fee sharing schemes, soft dollar arrangements, etc. Denouncing such kickback arrangements is I think crucial if we wish to restore the image of our profession.
    3) the standards of communication which are applied: emission or reception? In other words do the standards cover communication materials or their understanding by clients and prospects.
    4) Diligence is not a commonly used word. I think it is closest to thoroughness, zealous, hard working in English. But its latin roots subsides in French and perhaps other latin languages for quick and efficient ; it is not considered a heavenly virtue. I believe the French version provides a qualitative appreciation of the result and English refers more to a character disposition and to the quantity of work produced than its relevance. To make things more confusing, I think “due diligence” describes a minimum amount of research rather than something comprehensive, deep or thorough at least in the 1933 US security act.

    Respectfully yours,

  4. Glenn Doggett, CFA said:

    Mark —Thank you for your comments. I will pass them along to the SPC for review during its final deliberations on the proposed changes.

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