Chartered Financial Analyst (CFA) is an international professional
designation offered by the CFA Institute of USA (formerly known as AIMR) to financial analysts who complete a series of three
examinations and work for at least four years in the investment decision making process
which is not related to the Indian CFA offered by ICFAI in
India. CFA charterholders are also obligated to adhere to a strict Code of Ethics and Standards
governing their professional conduct.
The CFA Designation
The CFA designation is a qualification for finance and investment professionals, particularly in the fields of
investment management, investment
banking and financial analysis of stocks, bond and their derivative
assets.
The predecessor of the CFA Institute, the Financial Analysts Federation (FAF) was originally established in 1947 as a service
organization for investment professionals in its societies and chapters. In 1990, in hopes of boosting the credential's public
profile, the CFA Institute (formerly the Association for Investment Management and Research or AIMR) was created from the merger
of the FAF and the Institute of Chartered Financial Analysts (ICFA).
From 1963 (when the CFA designation was first awarded) to 2006, approximately 78,000 people from
at least 126 different countries have been awarded the right to use the CFA designation, 68,000 of them in the years since 1990.
As of 2006, more than 116,000 more people are currently enrolled to take one of the examinations.
(However, a very small number of the most senior CFA charterholders who took their exams before 1970 were "grandfathered" in,
having sat only the equivalent of today's Level III test instead of undergoing the current three level exam procedure. [1])
The CFA program began in the United States, but has become increasingly international
with many people becoming charterholders across Europe, Asia and Australia. By 2003 fewer than half
the candidates in the CFA program were based in the US and Canada, with most of the other
candidates based in Asia or Europe. India and China have shown some of the highest growth from 2005-2006 with
increases of 25% and 53% respectively in the total number of charterholders.[2]
The basic requirements for membership in the CFA program include holding or being in the final year of a four-year university
degree(or international equivalent), or having four years of qualified, professional work experience in an investment
decision-making process. The requirement necessary to begin the process of examination is to have four years of general work
experience, a four year degree, or a combination of both, opening the door to a broad range of individuals. [3] The program
focuses on portfolio management and financial
analysis, and provides a generalist knowledge of other areas of
finance.
Trademark Disputes
The CFA designation is not affiliated with the Chartered Financial Analyst degree offered by the ICFAI (Institute of Chartered Financial Analysts of India) University of India or its affiliate the Council of
Chartered Financial Analysts. ICFAI offers Masters degrees in Finance which to lead to the
Indian CFA Charter issued by the CCFA which is the Indian
council for Indian CFA's.
In 1998, CFA Institute's predecessor organization, AIMR, sued and won a judgment [4]
against ICFAI/CCFA. The judgment prohibited ICFAI/CCFA and its members from using the CFA or Chartered Financial Analyst mark
in the United States and Canada which is now annulled.
In August 2006, an Indian court issued a temporary injunction against the Indian organization as well. [5] The judgments made no assessment of the quality of the Indian program and merely discussed the trademark
violation. The Indian Association of Investment Professionals[6]
is the only organization in India which is affiliated with the CFA Institute.
In January 2007, the Trademark Registry, UK refused to grant protection to the CFA charter. The word 'chartered' is restricted
in the United Kingdom due to the association with royal
charters. [7]
In September 2007 The Trademark Registry, India refused to grant the CFA charter to CFA Institute but removed the right of the
Institute to use the CFA title and as a result of this the CFA Charter and Trademark now exclusively belongs to the Indian
ICFAI in India.
On May 8, 2007, the US District Court for the Eastern District of Virginia vacated a Default Judgment issued against ICFAI
that the CFA Institute obtained in October, 1998. ICFAI recently moved to reopen the case and to vacate the Default Judgment
because the Court lacked jurisdiction over ICFAI at the time the Default Judgment issued. Recognizing the merits of the ICFAI
arguments, the Court vacated the October in the 1998 Default Judgment.
With the default judgement vacated ICFAI has informed that all the Indian CFA Charter
holders can now officially and legally use their Charter in the US and Canada. The bar on Indian
CFA's practising in the US has also been annulled as a result of the judgement.
However, on September 4, 2007, the US District Court for the Eastern District of Virginia reversed its decision to vacate the
1998 injunction against ICFAI after a motion to reconsider that decision was filed by the CFA institute. [8] [9]
The CFA exam
A group of CFA candidates waiting in front of the testing location of San Francisco before the test. Dec 2, 2006
Candidates generally take one exam per year over three years and are written at a postgraduate level for financial professionals. Exams are challenging, with only 40% passing the
Level I and II exams and 50% passing Level III in June 2007. [10] In 2006, Europe achieved the highest average pass rate for the Level I, II and
III of the exam with an overall success rate of 57% of candidates; versus 54% for the USA and 49% in Asia & Pacific Asia.
Although the stated curriculum is at masters level, the exams are based on multiple-choice pattern and historically candidates
have prepared for -and passed the exams using highly simplified study notes provided by third party vendors.[11].
- The Level I study program emphasizes tools and inputs and includes an introduction to asset valuation and portfolio
management techniques.
- The Level II study program emphasizes asset valuation and includes applications of the tools and inputs (including economics,
financial statement analysis, and quantitative methods) in asset valuation.
- The Level III study program emphasizes portfolio management and includes strategies for applying the tools, inputs, and asset
valuation models in managing equity, fixed income, and derivative investments for individuals and institutions.
All three exams are administered on paper, on a single day; the Level I exam is administered twice a year (usually the first
weekend of June and December). The Level II and III exams are administered once a year, usually the first weekend of June. Each
exam consists of two three-hour sessions. Level I is multiple choice - all information required to answer the question is
contained in the question. Level II is item set - a vignette followed by selected response questions. To answer each question,
the candidate must refer to the vignette as there is insufficient information in the question stem. Level III consists of a
session of short-answer questions and a session that is item set. On the multiple-choice/item set sections, there is no penalty
for wrong answers.
Candidates who have taken the exam receive a score report that is intended to be fairly unspecific: there is no overall score
for the test, only a Pass/Fail result. For each category of questions, each test-taker is given a broad range within which his or
her performance falls: below 50%, between 50% and 70%, and above 70%. The passing grade for the exams has been defined as 70% of
the top percentage of exam papers until 1989; since then, the grading method is not explicitly published.[12] and
the minimum passing score is set by the Board of Governors after each exam. The Board of Governors review the results of a
Standard Setting process and input from psychometricians. Standard Setting is a process by which CFA Charterholders from around
the world review the exam and recommend, for each question, a minimum passing score for the "just qualified candidate". The
minimum passing scores for each question are aggregated and presented to the Board of Governors as a recommended minimum passing
score for the entire exam. The Board of Governors is not bound by this recommendation, but does recognize it as very important
information.
The CFA curriculum
The curriculum for the CFA program is based on a Candidate Body of
Knowledge established by the CFA Institute. The curriculum includes:
- Ethics and Professional Standards
- Quantitative Methods (such as the time value of money, and statistical inference)
- Economics
- Financial Statement Analysis
- Corporate Finance
- Analysis of Investments (stocks, bonds, derivatives, venture capital, real estate, etc.)
- Portfolio Management and Analysis (asset allocation, portfolio risk, performance measurement, etc.)
For exams in 2008 onwards candidates are required to purchase the curriculum readings from CFA Institute. Unsuccessful
candidates are required to buy the same curriculum again when they re-Register for the exam.
The ethics section is primarily concerned with compliance and reporting rules when managing an investor's money or when
issuing research reports, although there are some rules which pertain to more general professional behaviour (such as
prohibitions against plagiarism). There are also rules that specifically relate to
the proper use of the designation for charterholders and candidates. All of these rules are delineated in the 'Code and
Standards'.
The section on quantitative analysis is dominated by statistics and time series analysis. Other financial fundamentals such as
the time value of money are also addressed. The statistics topics are fairly broad, but the main focuses are risk analysis, hypothesis testing and regression
analysis. For the test, only two types of calculator are allowed (the Hewlett Packard 12C
and the Texas Instruments BA II Plus). The test also features other quantitative topics, but
these are covered in other sections. For example, calculating depreciation of assets is a part of financial statement analysis
(accounting), and determining currency arbitrage is a part of international economics.
Both micro and macro economics are covered. There are sections for international economics, mainly related to currency
conversions and how they are affected by international interest rates and inflation.
The accounting section is heavily tested at Levels I and II, but is not a significant part of Level III. It is divided into
financial statements analysis and corporate
finance. Financial statement analysis considers the statement of cash flows, the balance sheet, and the income statement.
Each of these documents gives a distinct view into the state and operations of a company. Corporate finance uses these views of
the company to make decisions about projects, deciding how they will impact the company.
The section on security analysis is divided by the types of security. There is a general section on global markets, sections
on equity (stocks), fixed income (bonds), and derivatives (futures, forwards, options and
swaps). The first levels of the test require familiarity with these instruments, then the focus develops into correctly valuing
them, and how to properly use them.
The final section is portfolio management. This section increases in importance with each of the three levels. Portfolio
management is an analysis of the process of managing money. It depends heavily on all of the other topics. When managing money
for others, ethics is obviously important. This section deals with how the investors' needs are met by the portfolio manager.
Modern portfolio theory is also tested: the efficient frontier, Capital asset
pricing model, etc.
The Code of Ethics
Members of CFA Institute (including charterholders and candidates for the CFA designation) must:
- 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.
- Place the integrity of the investment profession and the interests of clients above their own personal interests.
- Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment
recommendations, taking investment actions, and engaging in other professional activities.
- Practice and encourage others to practice in a professional and ethical manner that will reflect credit on ourselves and the
profession.
- Promote the integrity of, and uphold the rules governing, capital markets.
- Maintain and improve their professional competence and strive to maintain and improve the competence of other investment
professionals
Legal & Other Recognition
- New York Stock Exchange (NYSE) granted CFA charterholders the option to take
only the portion of the Supervisory Analyst examination dealing with exchange rules on research standards and related matters.
(Details)
- U.S. Securities and Exchange Commission (SEC) may
grant exemption of the Series 86 testing requirements to financial analysts passing the CFA Level II examination who also meet
other requirements of the NASD. [13]
- The Academic and Accreditation Advisory Committee of HK's the Securities and Futures Commission (SFC) has approved the
Chartered Financial Analyst (CFA) designation as a recognised industry qualification for the licensing of Responsible Officers in
Hong Kong. (Details)
- The charterholders of Chartered Financial Analyst (CFA) who meet the competence requirement, which include both education
training and work experience, may apply to register with the Hong Kong Business
Valuation Forum (HKBVF) as Registered Business Valuer (RBV) in Hong Kong. (Details)
- The charterholders of Chartered Financial Analyst (CFA) are recognized by HK's Hong Kong Securities Instutites (HKSI) as the
equivalent level of HKSI full membership (MHKSI). (Details)
- The CFA charterholders are recognized by PRMIA (Professional Risk Managers' International Association) as the equivalent of
passing first two required exams. ([15] PRMIA)
External links
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