The Finance Professionals' Post

Maximize Your CFA Status on Your CV & LinkedIn

By now, CFA candidates know whether or not they have passed or failed. If you didn't pass this time, don't take it too badly. If you retake, use the hundreds of pre-preparation hours as an advantage. 

Of course, after results day, there's a shift in terms of candidacy statuses. For those of you who either passed or are retaking level I this December, you may be thinking about how you can best leverage your CFA status to spruce up your CV. However, one very important factor to bear in mind are the ethics and professional standards set up by CFA Institute on stating such things on your CV. Without knowing it, many candidates are in violation of these bylaws and could be sanctioned by CFA Institute.

Three Must-Know Tips to Nailing Ethics

If you're new to the CFA exams, hopefully by now you're aware of how important mastering ethics is to your CFA studies. In an effort to help, here are three steps to ensure you are on the right path to nailing the ethics section in the exam.

At the Institute

This posting marks the end of a very long series about CFA Institute’s annual conference. Today’s title doesn’t refer to that Institute, though, but to a post-conference visit to the Art Institute of Chicago and the musings about the conference, the business, and the profession that it triggered.

For insight, it’s hard to beat a world-class museum. You come face to face with beauty one minute and brutal reality the next. Your perspectives are altered and your beliefs are challenged. You see the sweep of history—the connections across time reveal themselves and the true innovations seem mysterious and remarkable. You think about notions of quality and the nature of genius, of art and craft, of inspiration and perspiration.

A Call to Action

At the start of the first full day of the CFA annual conference, John Rogers issued a challenge to the members of CFA Institute. Rogers, the organization’s CEO, did not mince words.

“Our industry has forgotten what it takes to maintain the trust of clients, regulators, and the public as a whole,” he said. As a result, “Our profession has lost much of its good standing and public respect.” Alas, it has been “a failure of self-control” that has caused the damage.

So now what? According to Rogers, CFA Institute intends to be a bolder voice for reform of the investment industry. He said that finance came to be thought of as an end in itself, to the detriment of the industry, its professionals, and society.

CFA Institute Integrity List: 50 Ways to Restore Trust in the Investment Industry

The CFA Institute Integrity List is a collection of 50 tangible steps that investment professionals can take to restore trust in the industry. The list was inspired by “real-world” ideas from CFA charterholders and members.

Wall Street in Widescreen: The Financial Crisis of '08 in Cinema

In the fall of 2008, as investment banks exploded and their debris cascaded upon the middle and lower classes, many Wall Street CEOs continued receiving bonuses worth millions. The Financial Crisis of 2008 fit Hollywood’s formula for profit—power, corruption, and lies equal ticket sales—so the recent spate of crisis-related films is not surprising. It is important to analyze the most noteworthy of the new films because they will, undoubtedly, become historical references in their own right in years to come as they help to define the Financial Crisis of 2008 for millions of moviegoers.

Converting Mission-Related Investing into Action in the Foundation World

The global economy appears to be settling into a period of protracted sluggish growth where “outsized” returns will be harder to come by. At the same time, trust in the conventional financial markets has sunk to an all-time low. The moment may therefore have arrived for foundations to move in a meaningful way beyond granting making and the occasional program-related investment (PRI) as the sole tool for expressing their missions and to begin deploying their endowments in the service of their missions through mission-related investing.

Commodities are Different (in a "Full World")

Foreign Policy’s recent “How Goldman Sachs Created the Food Crisis” reflects the dangerous, myopic thinking all too prone to “blame Wall Street” that is a natural consequence of Wall Street’s appalling, anti-social behavior in recent years.

I am no apologist for Wall Street’s modern business practices and ethics, and certainly not for Goldman Sachs, as reflected in this blog and in my 2009 Blankfein Letters. But to confuse the historic shift underway in the commodities markets that is a result of our “full world” economy with Goldman’s or any other Wall Street speculator’s bad behavior is missing the critical point.

The Value of Women on Boards—What Statistics and Common Sense Tell Us

This year’s GovernanceMetrics International’s “2011 Women on Boards” report offers a number of insights into the progress, or lack thereof, being made to bring more women onto corporate boards around the world. The biggest and most depressing news is that “40 percent of the world’s largest publicly listed companies have not appointed even one woman to their boards.” The report also describes a discernable European trend to legislate quotas (undoubtedly in response to the lack of voluntary action on the part of most corporate boards). For example, Norway has established a quota requiring 40% of boards be composed of women), Spain has a quota requirement in the pipeline, and France’s National Assembly has recently passed a quota law. Laws are also under consideration in the Netherlands, Belgium, and Italy.

SEC Rules on Wall Street Pay—Major Intrusion or Minor Annoyance?

When the U.S. Securities and Exchange Commission (SEC) took aim at incentive pay packages at financial institutions in a recent controversial proposal, it was the culmination of a three-year push to rein in executive pay at large banks, brokerages, and hedge funds. The move was not unexpected fol- lowing an era of lucrative incentives that were deemed to have fueled excessive risk taking and contributed to a global financial collapse. The crisis prompted a government rescue and, in turn, an angry reaction from Congress. The effects of the crisis will be long lasting, as reflected in our recent CFA Institute Financial Market Integrity Outlook Survey.

Continue reading "Operations in Financial Services—An Overview" »

Commentary: The King’s Ransom

This week, Galleon hedge fund manager Raj (“King”) Rajaratnam was found guilty on all 14 counts of insider trading. The wiretap evidence incriminating “the King,” including (incredibly) tips from inside the Goldman Sachs boardroom by the former head of McKinsey, was overwhelming and created the specter of a gangster trial. The defense’s strategy suggesting it was all “public information” was insulting to common sense, even more so to market professionals, and was clearly unpersuasive to the jury.

How Your Family Office Can Practice Philanthropy Through Its Investment Practice

While “giving back through philanthropy” will be a key topic for discussion at NYSSA’s 3rd Annual Family Office Conference on May 10, it may be well worth noting that a number of family offices are now discovering that they can express their philanthropic goals not just by “giving back” in the traditional sense but also through their investment practices.

Stephen Viederman has first-hand experience with this innovative approach to philanthropy as the former president of the Jessie Smith Noyes Foundation, a family foundation that was one of the earliest to put its investment assets behind its mission. The practical guidance he has offered to family foundations like Noyes is equally applicable to family offices that are not explicitly “purpose-driven” but whose family members desire to deploy a significant portion of their assets for the social and/or environmental benefits of their community or for the world at large.

Commentary: Carnegie’s “Gospel of Wealth” and the Gates/Buffett Giving Pledge

Andrew Carnegie’s essay titled “Gospel of Wealth” published in 1901, is the touchstone of the great American philanthropic tradition. Its central thesis warns against extreme wealth being passed on to heirs or even charitable institutions ill-equipped to administer its effective disposition. Carnegie’s position on the “duty of the man of Wealth” is quite clear:

First, to set an example of modest, unostentatious living…to provide moderately for the legitimate wants of those dependent upon him; after doing so to consider all surplus revenues which come to him simply as trust funds, which he is called upon to administer, and strictly bound as a matter of duty to administer in the manner which, in his judgment, is best calculated to produce the most beneficial results for the community – the man of wealth thus becoming the mere agent and trustee for his poorer brethren, bringing to their service his superior wisdom, experience and ability to administer, doing for them better than they would or could do for themselves.

2010—The Year of the Integrated Report

Corporations are clearly increasing the quantity and quality of their environmental, social, and governance reporting in response to investor pressure and a growing awareness of the consequences of a failure to manage the associated risks. But few have taken the next step—to formally integrate their financial and ESG reporting. However, 2010 may be remembered as the year the integrated reporting movement truly began to gather steam.

Solutions for Hedge Fund Managers Considering the GIPS Standards

Although the GIPS standards do not address the particular challenges of hedge funds, claiming compliance is possible and increasingly important for hedge funds. Creation of a client presentation, the process and frequency of portfolio valuation, and net performance stream calculation methodology are some of the issues hedge funds tackle in claiming compliance.

Commentary: Footprints and Foreclosure

The global economy now uses 1.5 times the earth’s capacity to regenerate the natural capital we use every year, up from the 1.4 times of the prior year, according to a report of the well-respected Global Footprint Network. In their Living Planet Report 2010, released this week but based on 2007 data, the most recent available, WWF together with the Global Footprint Network and the Zoological Society of London record the most significant milestone since we crossed parity (an ecological footprint of one) back in 1975. This is not good news.

A Toniic for Impact Investors

A small but growing group of high-net-worth individuals are redefining the meaning of investing as they commit increasing portions of their wealth to projects that yield desired social and environmental outcomes as well as financial returns. These pioneer “impact” investors face many challenges, including the task of undertaking time-consuming due diligence and monitoring of investments in far-flung locations, navigating unfamiliar legal systems, and often assuming the heightened risks associated with going it alone without the support and knowledge-sharing of trusted advisors or coinvestors.

Commentary: The End of Investment?

I recently attended a school function and was chatting with a friend (“Pam” for the sake of this post) who is a buy side analyst at a major asset management firm, the kind that manages hundreds of billions of pension fund assets, and 401Ks.

Pam’s firm, like many mainstream asset management companies, is a signatory of the Principles for Responsible Investment (PRI). The first two Principles state:

1. We will incorporate ESG (Environmental, Social, and Governance) issues into investment analysis and decision-making processes.
2. We will be active owners and incorporate ESG issues into our ownership policies and practices.

In response to a simple “how’s work going” type of question, Pam proceeded to tell me how much the business has changed in recent years, suggesting this was in response to the financial meltdown. She told me she no longer writes in-depth research reports. “Everything is about short term trading.” Remarkably to me, she told me all the analysts now run their own portfolios and their bonus is 100% driven by performance.

EU Banks Sovereign Debt Mystery Deepens

Just when you thought it was safe to trust European banks again, the Wall Street Journal analyzed recent EU bank stress tests and found that a number of banks underreported their sovereign debt liabilities. Many investors, and EU regulators, were hoping to put the Greek debt crisis in firmly in the rear view mirror, but given the spotty nature of the bank’s disclosures, this may heighten concerns, rather than put them to rest.

Commentary: Toward a Finance Ethic

“An ethic, ecologically, is a limitation on freedom of action in the struggle for existence. An ethic, philosophically, is a differentiation of social from anti-social conduct. These are two definitions of one thing. The thing has its origin in the tendency of interdependent individuals or groups to evolve modes of co-operation.

“The ecologist calls these symbioses. Politics and economics are advanced symbioses in which the original free-for-all competition has been replaced, in part, by co-operative mechanisms with an ethical content.

Clawbacks in Play with SEC, Dodd-Frank

Act 4, Scene 1—that’s where we are in the drama over corporate clawbacks. Put on stage by SOX (Sarbanes-Oxley), the clawback drama took its latest turn with the passage of the recent financial reform legislation, which goes farther than either SOX or the SEC have moved to date.

From the Archives: Benjamin Graham and the Founding of the CFA

As students begin to prepare for this round of CFA exams it's interesting to look back at the history of the charter. In the mid-1940s a debate raged in the finance community over whether or not there should be a professional rating for security analysts. In this excerpt from the Analysts Journal (January 1945), Benjamin Graham, the man widely considered to be the father of security analysis, argued for the creation of a professional rating, and Lucien O. Hopper argued against the need for certification. Graham's side eventually prevailed, leading to the formation of the CFA in 1959.

Poll: The Goldman Sachs Ruling

On April 16 the SEC filed charges against Goldman Sachs for defrauding investors in a mortgage-backed collateralized debt obligation. The SEC alleged that Goldman Sachs omitted and misstated crucial facts about the CDO, most importantly the role of the hedge fund firm, Paulson & Co.’s direct involvement in the selection of the portfolio and bet against the deal. Three months of uncertainty over the case ended last week when Goldman Sachs agreed to make a $550 million settlement with U.S. regulators. While some watchdogs are disappointed that the settlement is much lower than the estimated $1 billion, others believe that $550 million is enough to stir a change and influence other institutions to employ better business practices. Tell us what you think. 

Are All Components of ESG Scores Equally Important?

Our research questions whether all aspects of responsible investing are equally important for stock analysis. Can the different aspects of ESG performance—that is, performance in environmental and social sectors and corporate governance, as well as operations in “sin” areas—be combined for stock analysis? Our research is geared toward investment practitioners, and we therefore concentrate on stock returns (the main parameter affecting the performance of investment managers) and ROE (return on equity, which is arguably the most important parameter of corporate performance and stock quality). 

Commentary: Shareholder Activism in a Post-Lehman World

As the global economy gradually recovers from the impact of the worst global financial crisis since the 1930s, companies continue to lay off thousands of employees and financial institutions are expected to write down trillions of dollars of toxic assets. In addition, governments have spent or committed to spend exponential sums of money in order to stabilize their economies. Investors have been particularly affected by the consequences of the financial crisis, having suffered a significant reduction in the value of their investments in a number of companies. According to the World Federation of Exchanges, as of February 2009, the global equity market capitalization was estimated to have reduced by $31 trillion since the peak prior to the crisis.

Commentary: Goldman v. United States—What it Really Means

“It is not what a lawyer tells me I may do; but what humanity, reason and justice tell me I ought to do.”

I invoked these words of the statesman and philosopher Edmund Burke to close my December 31, 2009, letter to Lloyd Blankfein. They now have particular resonance. I don’t know if, as the SEC has charged, Goldman committed fraud. However, to focus on the legal technicalities of the case is to miss the larger point. At its core, Wall Street’s failure, and Goldman’s, is a failure of moral leadership that no laws or regulations can ever fully address. Goldman v. United States is the tipping point that provides society with an opportunity to fundamentally rethink the purpose of finance. That reexamination will extend far beyond round one of financial reform and will be far more transformative.

The CDS Market Goes Straight

Media reports in recent months have been filled with accounts of CDSs (credit default/derivative swaps), those complex, opaque instruments sold by AIG that nearly toppled the global financial system. They are the cornerstone of a $700 trillion worldwide industry that has sliced, diced, and shifted astronomical amounts of risk around the financial services sector at dizzying speed and—according to critics—within a regulatory vacuum. On the subject of disclosure, for instance, Fed chairman Ben Bernanke recently lamented the insufficiency of contract-for-difference regulation, noting that few regulators, investors, AIG employees, or AIG shareholders ever knew that the once-mighty AAA-rated insurance behemoth was actually a giant hedge fund that happened to be strapped onto an insurance company.

Successful Self-Regulation of the CDS Market

Many politicians argue that letting Wall Street sort out the CDS risk problem itself, without massive government intervention, is like letting foxes regulate their own access to the chicken coop. Nonetheless, in recent years, coordinated efforts between the Federal Reserve Bank of New York and industry participants working through the Operations Management Group have made notable progress in addressing public concerns about the CDS market.

Centralized Clearing and Counterparty Risk for the CDS Market

The establishment of exchanges and centralized clearing for the CDS market may not necessarily be a panacea for risk, according to Darrell Duffie, professor of finance at the Stanford Graduate School of Business. Duffie argues that the clearing platforms that have been launched to rationalize the CDS market will not remove nearly as much risk as regulators hope.

Hive Mind: Organizational Psychology and the Financial Crisis

Economists agree about the mechanism for the current financial crisis: a plunge in real estate prices led to widespread mortgage defaults, crushing the value of securities backed by those assets. This caused banks to shut down available credit and sent the global economy into a tailspin. “If there hadn’t been a housing bubble, we wouldn’t be having this tragedy today,” says Hersh Shefrin, PhD, professor of behavioral finance at Santa Clara University and the author of Ending the Management Illusion: How to Drive Business Results Using the Principles of Behavioral Finance (McGraw–Hill 2008).

Knowledge of Good and Evil: A Brief History of Compliance

Adam’s bite of forbidden fruit marked the first recorded compliance violation, but not the last. Corporations perpetually struggle to stay compliant with the ever-increasing complexity of laws, rules, and regulations. A board of directors that fails to oversee a system of compliance may not only call into question its fiduciary duty standards, but may give rise to claims of tort liability or even criminal liability. Effective management of compliance risk and reputational risk requires a firm to link ethical business behavior to its culture: to establish ethics as an integral part of a company’s continued business success.

Commentary: The Fault is Not in Our Stars

Over the past couple of decades, there has been a disproportionate focus on trying to obtain a larger slice of the total economic pie, rather than an emphasis on growing the total pie. Related to this as well was a desire for (almost) immediate gratification and an attempt to eliminate downside risk. These tendencies appeared throughout society, from corporate executives to individual consumers, and led to the accumulation of burdensome levels of debt; the passing off of risk as quickly as possible (i.e., packaging and selling of toxic debt); misaligned compensation structures; and, most disturbing, increasingly widespread fraud. This fraud ranged from lying on mortgage applications to lying on corporate financial statements (e.g., WorldCom, Enron), and from the spreading of false rumors in the financial markets to the outright fabrication of customer statements (e.g., Bernie Madoff).

The Hierarchy of Risk: A New Approach to Risk Management

Risk culture is comprised of those values and behaviors, on the parts of both management and employees, which define an organization’s awareness of and approach to risk. As the financial crisis continues, the most successful firms have been those possessing risk cultures with high awareness, quick escalation, and strategic flexibility. There are echoes of behavioral finance in the way an organization’s view of risk may be skewed by its current investment appetite, its compensation and incentives, and its degree of knowledge of historical risk. Complicating this risk culture is quantitative modeling of limited historical data, decreasing transparency due to financial product innovation, and overreliance on credit ratings.

Independent Research: Salvation in the Middle Market

The ghost of Eliot Spitzer that has haunted Wall Street for the past five years has finally been laid to rest. After his investigation into allegations that the major Wall Street firms had mishandled conflicts of interest between their research and investment banking arms, the now-disgraced former governor of New York trumpeted the global settlement as a victory for retail investors over greedy Wall Street titans. He accused the Street of publishing favorable research reports on investment banking clients even though in private the analysts sometimes derided the companies as garbage. Spitzer’s targets never admitted fault, but in his trademark style, the then–attorney general of New York wrested payments from 12 securities houses, which agreed to fund independent research for five years and make third-party reports available to retail clients alongside their own research.

Your Track Record and Compliance History Are Your Franchise

NYSSA Commodity Instructor Michael Martin is interviewed by Stacy-Marie Ishmael of the Financial Times on OTC derivatives regulation and trader compensation at the Milken Global Conference April 28, 2010 in Beverly Hills.

A Centralized Solution: Securitization, Rating Agencies, and the Path to Meaningful Reform

The financial crisis has brought to the fore, and indeed accentuated, the inadequacy of both regulatory bodies and our efforts to measure and mitigate risk throughout the financial system—particularly within the realm of structured finance, or securitization. While it is easy to criticize the performance of various market participants, it would be more productive to contemplate the underlying themes that emerged in the wake of this recent crisis. If we can accurately identify the root causes of the problems, we will be better positioned to resolve them.

Mending the Seams: International Regulatory Reform

As the global economy begins to find its way back from the brink following the financial crisis, the impetus is shifting from the day-to-day efforts to keep the system afloat to the long-term fixes that are needed to maintain and increase its stability and flexibility. All eyes are on the national governments and regulators who continue to shape a structure that either will be up to the task of managing an increasingly globalized economy or will fall short of the mark, resulting in the lack of a sustainable recovery, further crises, or both.

Revisiting StoneRidge: Congress Could Restore Aiders' and Abettors' Liability

A bill introduced to Congress this past summer, and subsequently handed over to a Senate subcommittee for further consideration and/or revisions, could reverse a hotly debated January 2008 US Supreme Court decision. That decision, Stone-Ridge Investment Partners LLC v. Scientific-Atlanta Inc., upheld a lower appeals court’s April 2006 decision that secondary participants in a corporate fraud cannot be held legally liable for their behind-the-scenes participation in the scheme. Their actions, the high court reasoned, were simply too far removed from and could not have been known by investors.

Entrepreneurial Tip Corner: Ethics is the Cornerstone Principle for All Professionals

Someone once remarked, after seeing a long putt of mine barely drop into the hole for a birdie, “Gravity, not just a good idea, it’s the LAW”. Yes, this was a corny remark, but it certainly can be related to ethics within the professions. Ethics is not just a good idea; it’s the LAW for CFA® charterholders and the CPA profession, as well as many other professions.