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Reading 5CFA L1 EthicsFull chapter

Standard IV-VII — Employer, Analysis, Conflicts, Member

In this chapter: IV Duties to Employer · V Investment Analysis · VI Conflicts of Interest · VII Responsibilities as Member

~4 min readLayer 4 · Professional CertificationsFree

Standards IV-VII complete the framework. IV covers loyalty to employer + supervisory responsibilities. V covers investment analysis quality + communication. VI covers conflict disclosure + priority of transactions. VII covers candidate/member integrity.

Foundation

IV — Duties to Employer: • IV(A) Loyalty: don't damage employer interests • IV(B) Additional Compensation: disclose arrangements • IV(C) Responsibilities of Supervisors: detect/prevent violations V — Investment Analysis: • V(A) Diligence and Reasonable Basis: backed by reasonable analysis • V(B) Communication with Clients: distinguish fact from opinion • V(C) Record Retention: appropriate records VI — Conflicts: • VI(A) Disclosure of Conflicts: disclose materially • VI(B) Priority of Transactions: client + employer before personal • VI(C) Referral Fees: disclose VII — Member/Candidate: • VII(A) Conduct as Members and Candidates: don't cheat or compromise CFA Institute exams • VII(B) Reference to Designation: only after passing all exams; not before

Deep Dive

IV(A) Loyalty — when leaving employer: don't take confidential info, client lists, proprietary research. Indian employment contracts often include 3-12 month non-compete. Follow contract. IV(B) Additional Compensation: disclose to employer + clients arrangements that might create conflict. IV(C) Supervisor responsibility: implement systems to detect/prevent. Failure = violation by inaction. V(A) Diligence: superficial analysis violates. Outsourcing to third-party research: validate before relying. V(B) Communication: clearly distinguish fact ("revenue grew 20%") from opinion ("we think 25% next year"). Disclose limitations + assumptions. V(C) Record Retention: SEBI requires 5 years for IA; CFA standard 7+ years. VI(A) Conflicts: disclose prominently in plain language. Buried disclosure = non-compliance. VI(B) Priority: trade for clients + employer first; personal trades after they've had reasonable time. VII: most-tested for L1 candidates: don't share exam content, claim to be CFA before passing, etc.

Advanced

Common L1 ethics traps: VI(A): "I disclosed in fine print" — not enough. Must be prominent + plain language. VI(B): Personal account follows client/employer. If recommendation goes out at 9am, personal trade after clients' reasonable response time (often 24+ hours later). VII(B): "CFA Level II passed" — OK. "CFA charter pending" — OK if currently in program. "CFA" — only after charter. Subtle but tested. IV: most-tested in "leaving employer" scenarios. Memorise: take general skills + own client lists + public information; don't take proprietary models, employer's research database, employer's confidential client lists.

Regulatory references
  • CFA Standards IV(A)-VII(B)
  • SEBI IA Regulations on conflicts
  • Indian Contract Act on employment
Common mistakes & pitfalls
  • Personal trade before client trade.
  • Taking employer info when leaving.
  • Not disclosing conflicts prominently.
  • Claiming CFA designation before passing.

Frequently asked

Can I take my client list to new firm?
Yes, your own established relationships. Not employer's confidential client database. Distinction: "I know Mr. X" vs "Firm's file on Mr. X".
Disclosure of conflicts: how prominent?
Plain language, prominent placement, in writing. Not buried in fine print. Standard VI(A) requires this.

Practice questions

Click each question to reveal the answer and explanation.

Q 1
Personal account trade should:
  1. (a)Always come first
  2. (b)Come after client and employer trades have had time to act
  3. (c)Match client trade exactly
  4. (d)Avoid all
Correct: (b) Come after client and employer trades have had time to act
VI(B) Priority of Transactions: client + employer before personal. Wait for clients to act first.
Q 2
Leaving employer with their proprietary models:
  1. (a)Allowed if you helped create them
  2. (b)Standard IV violation
  3. (c)Allowed for ex-employees
  4. (d)Required for fairness
Correct: (b) Standard IV violation
IV: don't take employer's proprietary materials. Take only your own client relationships and general knowledge.
Q 3
Standard V(A) requires:
  1. (a)Surface-level analysis
  2. (b)Reasonable basis (real diligence) for recommendations
  3. (c)Following others
  4. (d)Maximum efficiency
Correct: (b) Reasonable basis (real diligence) for recommendations
V(A) Diligence: recommendations need reasonable basis. Real diligence required, not superficial assessment.
Q 4
CFA candidate can claim:
  1. (a)"CFA Level II" if passed Level II
  2. (b)Full CFA designation while preparing for Level III
  3. (c)CFA after Level I only
  4. (d)Anything they want
Correct: (a) "CFA Level II" if passed Level II
VII(B): can mention level passed (e.g., "CFA Level II"). Cannot claim full "CFA" designation until charter awarded.
Q 5
Disclosure of conflicts must be:
  1. (a)Buried in fine print
  2. (b)Prominent + plain language + in writing
  3. (c)Verbal only
  4. (d)Optional
Correct: (b) Prominent + plain language + in writing
VI(A) Conflicts: prominent + plain language + in writing. Allows clients to evaluate.
Educational purposes only. The numbers, returns, and examples used in this lesson are illustrative. Past performance does not guarantee future results. Mutual fund and securities investments are subject to market risks. This lesson is not investment advice; for advice tailored to your circumstances, consult a SEBI-registered Investment Adviser. Read our full disclaimer.