leb term paper

7/31/2019 LEB Term Paper

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Applicability of Professional Codes and Standards in the Capital Market of

Bangladesh

with Reference to the CFA Code of Ethics and Standards of Professional Conducts

Submitted to:Barrister M. Zillur RahmanCourse InstructorLegal Environment of Business (LEB)

Submitted by:Mashnun Habib Roll # 45M. Rashedur Rahman Roll # 52Batch MBA 45E

Institute of Business AdministrationUniversity of Dhaka


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December 31, 2011

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Table of Contents

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Executive Summary

Securities market is considered to be one of the vital elements of any economy. Every

market needs strong regulatory framework to operate properly and ensure thesecurity of the investment of different investors. In Bangladesh, the capital market is

regulated by the Securities and Exchange Commission (SEC). Although there are rules

and regulations for the capital market many of which have been formulated by the

SEC, they have not been able to regulate the ethics and professional behavior of the

capital market participants. Consequently, vested quarters have been able to

manipulate prices in the stock market and manage to get away for unethical and

corrupt practices.

However, there are internationally recognized rules and standards for regulating

behavior in the investment field like the Standards of Professional Conduct and Codes

of Ethics developed by the Chartered Financial Analyst (CFA) Institute. All of the CFAInstitute members and CFA Program candidates must adhere to the Code and

Standards in their investment profession and operations.

The government or securities regulator in Bangladesh could adopt relevant codes and

standard from the CFA Institute and use them in various aspects of securities trading

and market practices. These could even be incorporated as separate rules and

regulations which the different market players have to adhere to. The study discusses

the relevant sevens standards of professional conduct and the six code of ethics and

has looked into local cases and examples which contradict or violate specific

standards and codes. These case studies show that implementation of CFA standards

and codes into existing rules could have prevented malpractices in the local market.

Incorporation of standards and codes like the ones in the CFA Institute into the

current regulatory frameworks would bring better governance, transparency and

accountability of the capital market. Thus corrupt practices and unethical means that

have been employed in stock market debacles could be reduced. If the integration of

CFA standards and codes can truly safeguard of the investment and interest of all

market players, especially the small investors, peoples confidence in the stock

market would return which would be highly beneficial for the national economy.

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Background

Securities market is considered to be one of the vital elements of any economy. Tofunction properly, every market needs strong regulatory framework and the strength

of regulation works as the indicator of how developed that market is.

In Bangladesh, the capital market is regulated by the Securities and Exchange

Commission (SEC). For market development, it has drafted many regulatory codes

from time to time starting from the70s. Some of the notable acts/rules/ordinances

that work as legal framework to the market are:

o Securities and Exchange Ordinance, 1969

o

Securities and Exchange Rules, 1987

o Securities and Exchange Commission Act, 1993

Unfortunately, the SEC has so far not been very successful in formulating any

Act/Code that may regulate the ethics and professional behavior of the capital market

participants. As a result, in many cases practitioners lack the boundaries of industry

ethics. Allegations, of market manipulators have been being able to get away with

their fraudulent practices repeatedly which has led to during the stock market

crashes in 1996 and 2011 is an example of this.

However, there is a widely accepted form of such a code developed by the Chartered

Financial Analyst (CFA) Institute. CFA Institute has been known as the leader of

professional certification in the field of investment practices. First created in the

1960s, the Code of Ethics and Standards of Professional Conduct are the ethical

benchmark for investment professionals around the globe, regardless of job title,

cultural differences, or local laws. All of the CFA Institute members and CFA Program

candidates must adhere to the Code and Standards. The institute also recommends

other financial institutes to adopt the same code without any prior approval from the

CFA Institute.

Our objective is to discuss how this code can be used in the local capital market to

define the ethical and moral boundaries, as well as to set professional standards.

Objectives

o To analyze the existing sources of regulatory rules/acts/policies related to

investment in capital market of Bangladesh, if there is any

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o To discuss the basics of CFA Code of Ethics and Standards of Professional

Conducts in brief

o To examine and compare the extent to which local regulations and rules

adhere to these codes and standards

o To come up with recommendation as to where and how CFA codes and

standards can be useful to create consciousness against corruption, fraud and

manipulation of capital market

o To analyze some cases from the Bangladesh market where the presence and

application of any such codes and professional standards could prevent

malpractices by market participants

Sources of Information

The study would, primarily, be based on secondary information. However, interviewsof the relevant capital market professionals would also be taken into consideration,

wherever applicable. The recent probe report submitted by Mr. Ibrahim Khaled in

March, 2011 would be used as the source of case study.

Scope

This study would only focus on the ethical obligation and professional conducts of the

capital market participants and professionals. This would consider the general context

of the capital market without specific focus on any particular sub-area.

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Capital Market of Bangladesh

Capital market is a mechanism to flow fund from the hands of small savers(individuals and institutions) at low costs to those entrepreneurs who do need fund to

start business or to business. In the other words, capital market mechanism gives a

part ownership of big companies/corporations to small savers like you and me. In

simple term, it is a globally accepted scheme to share ownership of economic

development with general public.

History of capital market: Capital market started in USA at Wall Street in 1653. 1t

came to Mumbai, the commercial capital of India around 1890. However, investment

in shares boomed in late 1970s. It took many years to come to the land, now

comprising Bangladesh. The origin of stock market in Bangladesh goes back to April

28, 1954 when a stock exchange was formed under the name East Pakistan Stock

Exchange Association at Narayanganj. Trading started in 1956. It was renamed East

Pakistan Stock Exchange Ltd. Transferred to Dhaka in 1958 and again renamed

Dhaka Stock Exchange Ltd in 1964. (Investopedia, 2011)

Trading remained suspended during the Liberation War in 1971. The Dhaka Stock

Exchange resumed operation in 1976 with nine listed companies as against 452

today. Capital market in Bangladesh got momentum with the establishment of

Securities and Exchange Commission in 1994. A big wing was added to the capital

market with the incorporation of Chittagong Stock Exchange on April 1, 1995.

Operation of CSE started on October 10, 1995. However, there was a market crash inNovember 1996. Thousands of investors lost their capital and ran away from the

capital market. At that time there was trading floor at both the stock exchanges.

Trades were conducted through cry-out system. A high powered enquiry committee

was constituted to investigate the cause of the market crash, to suggest remedial

actions to avoid such crash in future. Cry-out system of trading was replaced by

automated trading system under LAN. Virtually capital market facilities are now

expandable to all big cities. The CSE has offered internet trading facility to get excess

even from outside the country. The DSE will operate the service soon. The Asian

Development Bank granted aid to strength the SEC capacity to become a pro-active

regulator and facilitator. Now, we are institutionally better equipped to become avibrant capital market.

Product of capital market: a) Shares, b) Debentures, c) Mutual funds, d) Bonds, e)

Derivatives, f) Future and options.

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Players of capital market: a) Investors, b) PLCs, C) Stock Exchanges, d) Brokers

and Dealers, e) Merchant banks, f) Securities and Exchange Commission, g) CDBL

(DSE, 2011).

Operation of capital market: Each and every step of capital market operation is

regulated. Regulations may come from SEC, Stock Exchanges and CDBL underSecurities Act (DSE, 2011).

Parameters used to measure size of capital market: a) Number of listed

companies, b) Number of securities, C) Size of market capitalization, d) Index, e) Daily

trade volume, f) GSP ratio to market capitalization

Efficiency indicators of capital market: a) PE multiple, b) Dividend yield, c)

Liquidity, d) Visible presence of regulators, e) Exit route regulation for sick PLC.

CSE role in Bangladesh capital market development: Automation, On-line trading,

SAFE, Securities Institute, International Seminar, Investors training etc.

Future action plan for vibrant capital market in Bangladesh: a) Strengthen

SEC, b) Capital Market Education: at school, college and university levels, c) Training

of Directors of PLC, Regulator and Broker house officials etc, d) Certification system

for certain level of officials, e) Introduction of new Products, f) Incentives for listing

with Stock Exchange, g) New pricing mechanism for IPO, h) Appropriate fiscal

measures, i) Fully automated settlement system, j) Separate bench at High Court.

The Economist Intelligence Unit: The Economist Intelligence Unit is the world's

foremost provider of country, industry and management analysis. Founded in 1946

the Economist Intelligence Unit of The Economist magazine is now a leading research

and advisory firm with more than 40 offices worldwide. For nearly 60 years, theEconomist Intelligence Unit has delivered vital business intelligence to influential

decision-makers around the world.

The Economist's international reach and unfettered independence make it the most

trusted and valuable resource for international companies, financial institutions,

universities and government agencies. Its mission is to provide executives with

authoritative analysis and forecasts to make informed global decisions.

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Regulatory Framework of Bangladesh Capital Market

The securities market in Bangladesh is guided by laws and regulations like the

Security Act 1920, the Securities and Exchange Ordinance, 1969, Securities andExchange Rules, 1987 and the Securities and Exchange Commission Act, 1993. The

DSE and CSE have their own internal rules, and regulations such as the DSE

Automated Trading Regulations 1999, Dhaka Stock Exchange Investors Protection

Fund Regulation 1999, the Margin Rules 1999, and Settlement of Stock Exchange

Transaction Rules 1998. (Khan, Banglapedia: Stock Exchange, 2006)

Securities and Exchange Commission

The regulatory body of the capital market of Bangladesh is the Securities and

Exchange Commission (SEC), which was established on 8th June, 1993 under the

Securities and Exchange Commission Act, 1993. The Commission is a statutory bodyand attached to the Ministry of Finance. The Chairman and Members of the

Commission are appointed by the government and have overall responsibility to

administer securities legislation.

The Commission's main functions are:

Regulating the business of the Stock Exchanges or any other securities market

Registering and regulating the business of stock-brokers, sub-brokers, share

transfer agents, merchant bankers and managers of issues, trustee of trust

deeds, registrar of an issue, underwriters, portfolio managers, investment

advisers and other intermediaries in the securities market

Registering, monitoring and regulating of collective investment scheme

including all forms of mutual funds

Monitoring and regulating all authorized self-regulatory organizations in the

securities market

Prohibiting fraudulent and unfair trade practices relating to securities trading in

any securities market

Promoting investors education and providing training for intermediaries of thesecurities market

Prohibiting insider trading in securities

Regulating the substantial acquisition of shares and take-over of companies

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Undertaking investigation and inspection, inquiries and audit of any issuer or

dealer of securities, the Stock Exchanges and intermediaries and any self-

regulatory organization in the securities market

Conducting research and publishing information

Securities and Exchange Ordinance, 1969

The Securities and Exchange Ordinance, 1969 was made during Pakistan era to

provide for the protection of investors, regulations of capital markets and dealings in

securities. The Ordinance contains sections about the issue of capital and puts

restriction on of issue of capital outside Bangladesh by local companies and control

on purchase of securities. It gives the SEC power to call for information, approved

prospectus of issuing capital and deal with false information.

It also contains important sections on Registration and Regulation of Stock

Exchanges, which also puts control on listing of securities and restrictions on dealings

of securities and on regulation of issuer companies. The chapter on Prohibitions andRestrictions contains sections on restrictions on credit, pledging and lending of

customers securities, prohibition of fraudulent acts and false statements, secrecy

and power of SEC to issue prohibitory orders.

Another chapter sets out rules regarding holding enquiry, penalty for certain refusal,

failure or contravention of the Act, orders and appeals. Miscellaneous issues like

delegation of power, exemption, indemnity of the SEC, power of SEC to make rules

and regulations, securities acquired in good faith, constitution of advisory committee,

and regulation of business of investment advisers and investment companies are also

covered (Securities and Exchange Ordinance, 1969).

Securities and Exchange Rules, 1987

The Securities and Exchange Rules, 1987 sets out detailed rules about trading in

securities and explains how to apply the laws in the Securities and Exchange

Ordinance, 1969. Besides, it provides format of forms for different applications by the

capital market stakeholders.

It contains detailed rules about qualification or conditions of eligibility of members of

stock exchanges. Its sub-rules also contain criteria for cancellation and suspension of

membership. The section on manner of transaction of members business sets out

rules for taking orders of purchase and sale of securities from customers, limits ontransaction in the members own account, execution of transactions and various

regulatory reports and notes.

The SEC Rules also describes various regulations on maintenance of books of

accounts and audit by members and stock exchanges. It also exerts timeline for

submission of periodical returns and annual report by the stock exchanges. Some

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sections also describe the procedure for listing of securities and method, mode and

specific contents for submission of annual report and periodical reports by issuers.

The Forms part clearly provides detailed format for application for registration of a

stock exchange including mandatory parts and fields. An important form is the form

for listing a security in a stock exchange. The required documents and statements tobe provided as per the form include the Memorandum and Articles of Association,

Prospectus of the security issue, copies of balance sheet and audited accounts, brief

history of the company, dividend history, copy of specific agreements, and details of

directors and persons holding 10% or more shares. A schedule to this form describes

key requirements in the balance sheet, the profit and loss account, cash flow

statement, auditors report, etc. Other Format includes Customer Account Information

Form and submission of periodical returns to the SEC chairman (Securities and

Exchange Rules, 1987).

Securities and Exchange Commission Act, 1993

The Securities and Exchange Commission Act, 1993 was made for the establishment

of the Securities and Exchange Commission (SEC) for the purpose of providing for the

protection of the interests of investors in securities, the development of the securities

market and for matters connected therewith or ancillary thereto. The Act sets out the

composition of the SEC which consists of a Chairman and four members who are

appointed by the Government. It also specifies certain qualifications required to be a

member or Chairman of the Commission and also rules regarding their tenures,

activities and procedures for removal and/or resignation (Securities and Exchange

Commission Act, 1993).

The Act describes procedures for holding meetings of the Commission and themanner of taking decisions. Section 8 of the Act describes the functions of the

Commission as well as its authority over and responsibilities to different aspects of

the capital market. Section 8 gives SEC the power of issuing registration certificates

for securities trading, without which no stock broker, share transfer agent, portfolio

manager, underwriter, etc. can sell or deal in any security.

Punishment for contravention to any provisions of the Act is a term of imprisonment

not exceeding five years or a fine not exceeding Taka Five Lac or both. The Act also

specifies the court of Cognizance (Session Court) for such offence and the appeal

process by aggrieved parties. The Act holds liable the owner, director, manager,

secretary or any other officer or agent of a company if that company is deemed guiltyof the contravention of the provision.

The Act provides the Commission some powers like power to make rules and

regulations to carry out purposes of the Act, power to exempt parties from certain

provisions of the Act and power of delegation. The Act also contains provisions for

Fund for the Commission and sections for annual budget statement, maintenance of

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accounts and audit of the Commission and submission of various reports to the

Government by the SEC.

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CFA Code of Ethics and Professional Conduct and Case

Studies

There is a widely accepted form of ethical code developed by the Chartered FinancialAnalyst (CFA) Institute. CFA Institute has been known as the leader of professional

certification in the field of investment practices. First created in the 1960s, the Code

of Ethics and Standards of Professional Conduct are the ethical benchmark for

investment professionals around the globe, regardless of job title, cultural differences,

or local laws. All of the CFA Institute members and CFA Program candidates must

adhere to the Code and Standards. The institute also recommends other financial

institutes to adopt the same code without any prior approval from the CFA Institute

Standards of Professional Conduct

The Standards of Professional Conduct is comprised of the following 7 sections (CFA

Institute, 2003):

I: ProfessionalismII: Integrity of Capital MarketsIII: Duties to ClientsIV: Duties to EmployersV: Investment Analysis, Recommendations, and ActionsVI: Conflicts of InterestVII: Responsibilities as a CFA Institute Member or CFA Candidate

Professionalism

Knowledge of the LawCapital market professionals must understand and comply with all applicable laws,rules, and regulations of any government, regulatory organization, licensing agency,or professional association governing their professional activities. In the event ofconflict, everyone must comply with the more strict law, rule, or regulation. Anyprofessional must not knowingly participate or assist in any violation of laws, rules, orregulations and must disassociate themselves from any such violation.

Case 1:The stock market probe team observed that 19 persons from two addresses

purchased shares of Tk19cr through private placement. The probe team questions theexistence of so many persons in the same address which is a irregularity. (Star OnlineReport, 2011)

Independence and ObjectivityProfessionals must use reasonable care and judgment to achieve and maintainindependence and objectivity in their professional activities. They must not offer,solicit, or accept any gift, benefit, compensation, or consideration that reasonably

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could be expected co compromise their own or another's independence andobjectivity.

Case:It has been alleged that to earn higher revenue an issue manager of a large IPO (inhospitality sector of DSE) was forced to increase their valuation of the IPO. Here,

instead of independent valuation, that issue manager changed it so that it can ensurerepeat purchase of such survices by that particular company. (Names are notmentioned)

MisrepresentationAnyone working in the capital market must not knowingly make anymisrepresentations relating to investment analysis, recommendations, actions, orother professional activities.

Example:If anyone without having any knowledge of fundamental analysis of banking industryrecommends someone on bank stocks with pretention that he/she is a bank analyst,

which would be a form of misrepresentation.

Case:The probe report mentioned that issuer companies, issue managers, asset valuationagencies, audit firms, dealers, brokerage firms and many others are involved inmyriad illegal activities that include direct listing in IPO issuance and pre-IPOactivities, revaluation of company assets, fixing of high indicative value, manipulationof book-building method and non-transparency in placement. For example, in somecases of IPO issuance, pre-IPO private placement of shares was made to persons closeto the companies owners and management at a much lower price than the IPO priceswhich included premium on face value.

MisconductNone should engage in any professional conduct involving dishonesty, fraud, or deceitor commit any act that reflects adversely on their professional reputation, integrity, orcompetence.

Case:3 months back, a trader ofShako Securities took money from the clients, told themthat he was buying shares for them but in reality he did not. Rather he went awaywith the money. Any such conduct would be under the category of misconduct andshould be seriously punishable.

Integrity of Capital Markets

Material Nonpublic informationAny insider or outsider who possesses material nonpublic information that couldaffect the value of an investment must not act or cause others to act on theinformation.

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Case:The directors of Beach Hatchery, a company listed on DSE, were summoned by theSEC to show-cause for misuse of material information that they had before thatinformation went public. They bought shares before showing high profits since asdirectors they had known that the EPS would have been higher. Any such misuse ofnonpublic material information is seriously reprehensible.

Market manipulationNone should engage in practices that distort prices or artificially inflate tradingvolume with the intent to mislead market participants.

Case 1:In the recent Stock Market Probe Report submitted by Ibrahim Khaled, he mentionedthat the some investors of a company named BD Thai Aluminum artificially tried toinflate the prices of the stock by trading serially so that they can put the price up byexecuting a series of trades within a few minutes.

Case 2:The probe of Mr. Khaled also found out a case of share price scamming in jointcollaboration. A group of 10 people made a verbal deal with another 10-membergroup. They sold and purchased their shares sending the prices high only to sell outthe whole chunk in the market at a very high price later. (Star Online Report, 2011)

Case 3:The probe report also analyzed the impact of stock split and issuance of rights shareson price movement of securities. During 2009-10, 45 companies carried out stocksplit and 62 companies have declared to carry out the same. These companiescontributed 81.5% of the total gain in market capitalization from July 2009 toDecember 2010. Some of them were found to be the sole players for the gain in theirrespective sectors over the similar period. SEC decisions on denomination of sharesalso frequently changed which violated Sections 17 (e) Sub-sections (2) and (5) of theSecurities and Exchange Ordinance, 1969.

Some of the same companies also offered rights shares in the same period eitherfollowed by or preceding the split. The highest gain on share price on split andissuance of rights share was done by CMC Kamal Textile Mills Ltd.

Duties to Clients

Loyalty, Prudence, and CareEmployees have duties of loyalty to their clients and must act with reasonable careand exercise prudent judgment. They must act for the benefit of their clients andplace their clients interests before their employers or their own interests.

Case:Several brokers have been punished in the last 3 months for misuse of clients moneyin buying their proprietary shares instead of buying them for their clients. As the

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appointee of the clients, they were supposed to prioritize the clients trade over theirown.

Fair dealingProfessionals, specially, the ones working in the merchant banks or brokerage firmsmust deal fairly and objectively with all clients when providing investment analysis,

making investment recommendations, taking investment action, or engaging in otherprofessional activities.

Example:When merchant banks manage several customer accounts they tend to favor thelarge accounts since they bring more commissions than the other accounts. Any suchdiscrimination is strictly prohibited under this code.

Suitability

1. When employees are in an advisory relationship with a client, they must:

a. Make a reasonable inquiry into a clients or prospective clients investmentexperience, risk and return objectives, and financial constraints prior to making anyinvestment recommendation or taking investment action and must reassess andupdate this information regularly.

b. Determine that an investment is suitable to the clients financial situation andconsistent with the clients written objectives, mandates, and constraints beforemaking an investment recommendation or taking investment action.

c. Judge the suitability of investments in the context of the clients total portfolio.

Case:

Some merchant bankers have opened investors' accounts on their own. They are alsooperating only one beneficiary account (BO) account for every 5,000 to 10,000accounts, showing sheer negligence to the laws. As a result, investors stay behind theBO account and beyond the public eye. Their accounts with merchant banks havebecome the den of corruption and irregularities as these BO accounts do not containthe names of people whose shares are being traded. (Byron & Rahman, 2011)

2. When portfolio managers are responsible for managing a portfolio to a specificmandate, strategy, or style, they must make only investment recommendations ortake only investment actions that are consistent with the stated objectives andconstraints of the portfolio.

Example:Some investors put all their savings on the capital market without knowing all therisks. It is the responsibility of the discretionary portfolio manager to identify it thosestocks are of good quality, the companies are doing well and they have very goodfuture. After that analysis, if the manager finds out that those stocks are safeinvestment for the mentioned investors, only then he should buy them for the clients.

Performance Presentation

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When communicating investment performance information, everyone must makereasonable efforts to ensure that it is fair, accurate, and complete.

Case:In the third quarter of 2011, two of the largest Asset Managers in Bangladesh (Namenot mentioned) showed positive income even though the market was down by more

than 40% at that time. Later their balance sheet revealed that instead of showing thesecurity values at historical costs, they showed the values at current prices. This is aclear violation of IAS (International Accounting Standard). They did it so that theirincome statement shows profit instead of losses. This is a clear misrepresentation ofthe real picture and should be punished.

Preservation of ConfidentialityProfessionals must keep information about current, former, and prospective clientsconfidential unless:1. The information concerns illegal activities on the part of the client or prospectiveclient,

2. Disclosure is required by law, or3. The client or prospective client permits disclosure of the information

Case:In October11, SEC asked for the security holdings of all the asset managers just toensure some compliance maintenance. Only SEC as the regulator of the market hasthat right. Any person other than the SEC or Trustee cannot know the portfolioholding of an asset manager since this is a company secret.

Duties to Employers

LoyaltyIn matters related to their employment, employees must act for the benefit of theiremployer and not deprive their employer of the advantage of their skills and abilities,divulge confidential information, or otherwise cause harm to their employer.

Additional Compensation arrangementsAny analyst/broker/trader must not accept gifts, benefits, compensation, orconsideration that competes with or might reasonably be expected to create aconflict of interest with their employers interest unless they obtain written consentfrom all parties involved.

Example: If any analyst gets bonus for his works from the company she/he is doinghis/her valuation report on, there might be a hint of non-transparency. For thisreason, any such compensation arrangement which is beyond the regularcompensation of the company he/she is working in should be disclosed to her/hisemployer.

Responsibilities of supervisors

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Capital market professionals must make reasonable efforts to detect and preventviolations of applicable laws, rules, regulations, and the Code and Standards byanyone subject to their supervision or authority.

Investment Analysis, Recommendations, and Actions

Diligence and reasonable basisAll the professionals under this code must:

1. Exercise diligence, independence, and thoroughness in analyzing investments,making investment recommendations, and taking investment actions.

2. Have a reasonable and adequate basis, supported by appropriate research andinvestigation, for any investment analysis, recommendation, or action.

Example:Any private equity firm cannot invest its clients money without properly judgingwhether the company they are investing in is sound, profitable and investable.

Case:The probe report found two instances of conversion of loans into ordinary shares withsubstantially low conversion prices as compared to prevailing market price. In thefirst case, BEXTEX Ltd. Inherited the same loans from an earlier amalgamation videwhich huge amount of capital was reduced. Shares were issued to New EnglandEquities Ltd. and BEXIMCO Group of Companies as repayment of their loans toBEXTEX Ltd. at the price of Tk32 per share when the market price was Tk70 pershare.In the second case, Fu Wang Ceramics carried out loan conversion to shares whenhuge number of shares was issued to Mr. Alexander Lee as a nominee of one of thedirectors, Mr. Chin Hua Hsu who also lent the company a sum of money. (Khaled,2011)

Communication with Clients and Prospective Clients

Asset/Portfolio managers must:1. Disclose to clients and prospective clients the basic format and general principlesof the investment processes they use to analyze investments, select securities, andconstruct portfolios and must promptly disclose any changes that might materiallyaffect those processes.2. Use reasonable judgment in identifying which factors are important to theirinvestment analyses, recommendations, or actions and include those factors incommunications with clients and prospective clients.3. Distinguish between fact and opinion in the presentation of investment analysisand recommendations

Example: If Company X gets frequent benefits intermittently from some of thecompanies in which Company X invests, this might signal a non-transparent benefitarrangement in exchange of higher valuation recommendation. For this reason, thereshould be clear disclaimer of whatever additional compensation Company X isreceiving that might raise the question of conflict of interest.

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Record retentionAnalysts or portfolio managers must develop and maintain appropriate records tosupport their investment analyses, recommendations, actions, and other investmentrelated communications with clients and prospective clients.

Conflicts of Interesta. Disclosure of Conflicts

Employees who fall under the jurisdiction of this code must make full and fairdisclosure of all matters that could reasonably be expected to impair theirindependence and objectivity or interfere with respective duties to their clients,prospective clients, and employer. They must ensure that such disclosures areprominent, are delivered in plain language, and communicate the relevantinformation effectively.Case:A renowned Head of Investment working in a multinational bank (Names notmentioned) was fired in 2010 from her position over the dispute that she unethicallywithout disclosing her relationship with a client tried to get a higher quota of IPO for

that client. The number of shares she managed to give that client was more thanwhatever he legally would have got. After digging down the facts, when the truth wasfound, that lady was fired for not disclosing her relationship with that client beforeshe had executed that trade.

b. Priority of Transactions.Investment transactions for clients and employers must have priority over investmenttransactions in which a professional is the beneficial owner.

Case: In the brokerage houses, every customer should be valued equally irrespectiveof his trade size. In Bangladesh, the customers having large portfolio tend to get extrabenefits from the broker houses that the general investors do not. This is strictly

prohibited in this code.

c. Referral feesEmployees must disclose to their employer, clients, and prospective clients, asappropriate, any compensation, consideration, or benefit received from or paid toothers for the recommendation of products or services.

Responsibilities as a CFA Institute Member or CFA Candidate

This specific section only applies to the member of CFA Institute and, therefore, anyorganization adopting this code may withdraw this section.

Any professional following this code must:

1) Act with integrity, competence, diligence, respect, and in an ethical manner

with the public, clients, prospective clients, employers, employees, colleagues in

the investment profession, and other participants in the global capital markets.

Case:

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The Stock Market Probe Report 2011 has suspected 6 traders for market

manipulation and illegal trading. Mr. Golam Mustafa, one of the suspects, played a

key role in artificially raising stock prices by employing unethical methods like

placing excessive price offers and then withdrawing them, and buying shares

through a brokerage house and selling them through another account the same

day.

2) Place the integrity of the investment profession and the interests of clients

above their own personal interests.

3) Use reasonable care and exercise independent professional judgment when

conducting investment analysis, making investment recommendations, taking

investment actions, and engaging in other professional activities.

Case: Some companies overvalued their assets in collaboration with unethical

audit firms to influence the market. They include Libra Infusions (overvalued by

3472 percent), Sonali Ansh Industries (626 percent), Rahim Textile (518 percent),

BD Thai Aluminium (298 percent), Orion Infusion (413 percent), Ocean Containers

Ltd (296 percent) and Shinepukur Ceramic (120 percent). (Byron & Rahman, 2011)

4) Practice and encourage others to practice in a professional and ethical manner

that will reflect credit on themselves and the profession.

Case: The committee found various irregularities, including the existence of omnibusaccounts, that allowed some market players to make exorbitant profits at the

expense of the retail investors. Among the 60 identified primarily included Vice-

Chairman of Beximco and the mastermind of the 1996 market crash, Mr. Salman F

Rahman, former DSE president Rakibur Rahman, SEC chairman Ziaul Khandaker, SEC

member Mansur Alam and BNP politician Mosaddek Ali Falu. The report mentioned

that pro-government business tycoons, including Salman and Rakibur, exerted

influence within the SEC by influencing the appointment of its members who allegedly

took decisions favorable to the vested quarters.

5) Promote the integrity of and uphold the rules governing capital markets.

Example:

The share market probe report also observed that Abu Sadat Mohamad Sayem and

Abdul Momin had violated the Securities and Exchange Ordinance, 1969 by doing

serial trading in Eastern Housing Limited shares.

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6) Maintain and improve their professional competence and strive to maintain and

improve the competence of other investment professionals.

Case:

The probe found that a number of SEC and ICB high officials have been engaged in

share trading in the name of family members or relatives. Those officials have been

named in the report, finance ministry sources said. The probe body has evidence that

SEC Executive Officer Anwarul Kabir Bhuiyan has traded shares in his wife's name

while ICB DGM Kofil Uddin Ahmad Chowdhury in his wife and brother-in-law's names.

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