Ethics

Professionalism
Knowledge of law
1. Know: first report, must quit
Suspect: first consult, cannot
2.
Independence
1.
If analyst: must disclose.
If fund mgr: . Must disclose!
2. Firewall
Best separate. No link of compensation. Have them work together ONLY WHEN
conflicts managed and dis. long
short
3. Performance measure: performance analysts may reveal manager straying from
mandate()
4. CANNOT reimburse to client and corporate issuer()
Misrepresentation()
1. typo is ok ASAP
2. Performance report: benchmark not required, but if given must be appropriate
Valuation method should not change a lot due to higher V
Cherry pick:
3. Plagiarism
rewording
citation
Cite
4.
5.
OK
NO
Misconduct ()

Integrity of capital markets

Material nonpublic information

1. Material
2. Mosaic theory: material public & nonmaterial nonpublic OK
3. analyst (public )
4. Proprietary trading
If market maker: remain passive, cannot quit immediately()
If for arbitrage trading: best to stop. If NOT,

5. Using an expert network: OK

Market manipulation(distort price,

1.
for tax purpose sell and buy back
due to trading strategy
to increase liquidity, discout, OK!

Duty of clients
Loyalty
1. Fiduciary:

Trade execution
Execute and advice same time
2. loyalty to Ultimate beneficiary: pension,
Mandate: invest big fund: should follow mandate, not individual require.
3. Soft dollar: ultimate client
How to pick dealer: best executive
4. Proxy vote:must have cost-benefit analysis, and DISCLOSE
Fair dealing
1. Inform ALL, diclose
2. Material changes: informed to ALL current clients.
3. If client reject the recommendation, explain again first! If still insist, follow client
but should have
Suitability ( IPS including asset allocationmust invest following IPS)
1. Unsolicited trade:
Performance presentation (once violated, also violate Misrepresentation)
1. Terminated portfolio: must also disclose
2. Simulated: must fully disclosed
Performance from prior employer: OK must disclose
Preservation of confidentiality
1.
Illegal
share

Duty of employers
Loyalty
1.

solicit

2.

 experience and knowledge gained

Additional compensation arrangements

1. disclose!
Responsibility of supervisors
1. train, policy
2.
3.

Investment
Diligence and reasonable basis
1. Use 3rd party research
Must determine whether it is sound
2. Group research

3. Using quant research

Not required to be experts
Make effort to test, including extremely positive and negative
Communicate with clients
1. Disclose significant limitations and risks
Record retention
1. Cannot use historical reports from prior company, cuz no supporting documents.
2. At least 7 years, unless there is legal require

Conflicts of interests

Disclosure of conflicts
1.
2. Restricted list: NO opinion, only facts
Priority
1. Client>company>yourself
Referral feedisclose:

Research objectivity standards

1. Policymust have an officer to test update the policy

2. FULLY disclose conflicts of interests
3. Investment bank:
Must have 3rd party checked before shared to investment bank(no opinion only
fact in the information)
4. Cannot have contrary opinion()with company. Unless!have financial hardship
5. Quite period: IPO 30days! Secondary offerings 10days
6. Compensation: cannot directly linked to invesmtnet bank. Can link to company
performance but must investment bank
7. Personal trading:
Must disclose
Hold 60
CANNOT personal trade: 30 days before, 5 days after report issuance
1. 2.
8. Update report: at least Annually
9. Rating system:
Must include: 1. Rating category (buy sell index )
Absolute(buy hold sell) or relative (outperform, netural, under
Performed. identify benchmark, index or objective)
2. Time horizon
3. Risk category
1.
2.
3.
4.
5.

CFAer
Selectively! different service selective
Must outline all manager compensation arrangement
Supervisor: enforce investment related and non-investment related policy