Ethical Code & Standards Explained | CFA Level I Ethics
In this lesson, we’ll delve into professional code and standards, the distinction between ethical and legal standards, and a framework for ethical decision making.
Professional Code and Standards
As a professional, you possess specialized knowledge and skills to serve others, forming a relationship of trust with your clients. A profession’s code of ethics outlines the shared values, principles, and expected behaviors of its members. Some codes of ethics also include a set of standards for a minimum level of ethical behavior.
The CFA Institute Code and Standards are an example of principle-based code and standards, centered on honesty, integrity, transparency, diligence, and prioritizing client interests. Unlike rule-based standards that apply to specific groups under certain circumstances, principle-based standards like the CFA Institute Code and Standards apply universally to all candidates and members.
As a CFA Program candidate, you’re expected to act in accordance with the ethical and professional competency responsibilities expressed in the Code and Standards, which apply to all your professional activities. In the upcoming lessons, we’ll dive deeper into each of the code and standards.
Ethical vs. Legal Standards
The Code and Standards define ethical standards, while local laws and regulations define legal standards. The two often overlap when actions are both unethical and illegal. However, not all unethical actions are illegal, and not all illegal actions are unethical.
For instance, insider trading may be legal in some countries but is prohibited by the Code and Standards as unethical. Conversely, whistleblowing might violate local laws but be considered ethical conduct by the Code and Standards if the intent is to protect clients’ interests.
Framework for Ethical Decision Making
An effective ethical decision-making framework consists of four iterative phases: Identify, Consider, Decide and Act, and Reflect.
1. Identify
First, gather important facts relevant to your decision, identify stakeholders (clients, family, employer, or colleagues), clarify your duties to each, and understand potential conflicts of interest. Lastly, identify relevant ethical principles and/or legal requirements that may apply.
2. Consider
Next, evaluate situational influences and personal biases that could impact your decision making. Seek guidance from trusted sources, such as colleagues, mentors, compliance departments, or the CFA Institute Code and Standards. Envision how an ethical peer or role model might act in the situation.
3. Decide and Act
Based on the relevant facts and considerations, make the most ethical decision for the given situation and act on it.
4. Reflect
After taking action, reflect on your decision and its outcome, considering whether it achieved the intended results.
EXAMPLE
You’re an analyst and your employer asks you to provide a favorable valuation for an IPO their firm is underwriting.
Following the ethical decision-making framework, you gather relevant facts, identify stakeholders, recognize your duties to them, and note the applicable ethical principles. You consider situational influences and seek guidance from the compliance department and the Code and Standards. Based on this information, you decide that client interests should come first, and you need a reasonable basis for your recommendations. The most ethical action is to reject your employer’s request for a favorable valuation.
And there you have it, our two-part introduction to ethics. In our upcoming lessons, we’ll dive deeper into the Code and Standards, ensuring you have a thorough understanding of each component. Remember, maintaining ethical conduct is crucial in the finance industry and will help you build a strong foundation of trust with your clients.
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