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Chartered Financial Analyst

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Chartered Financial Analyst (CFA) is an international professional designation offered by the CFA Institute (formerly known as AIMR) to financial analysts who complete a series of three examinations. In order to become a "CFA Charterholder" candidates must pass all three six-hour exams, possess a bachelor's degree (or equivalent education or work experience), and have 48 months of work experience in the investment decision making process. CFA charterholders are also obligated to adhere to a strict Code of Ethics and Standards governing their professional conduct.[1]

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, bonds and their derivative assets. The program focuses on portfolio management and financial analysis, and provides a general knowledge of other areas of finance.

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.[2]

History

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). Many Financial Analysts (FA credential) were "grandfathered" into CFA charterholders without taking any of current levels as a result of 1990 merger with between the ICFA and FAF.

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.[3]

Requirements

The basic requirements for participation in the CFA program include holding or being in the final year of a university degree (or international equivalent), or having four years of qualified, professional work experience in an investment decision-making process. [4]

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. Fees for the June 2008 exams range from $600 to $930, depending on the date at which the candidate registers to take the exam. Exams are challenging, with only 35% passing the Level I, 46% passing Level II, and 53% passing Level III exam in June 2008.[5][6] 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 and Pacific Asia.

Year Level I Level II Level III
2008 35% 46% 53%
2007 39% 40% 50%
2006 40% 48% 76%
2005 35% 56% 55%
2004 35% 32% 64%
2003 41% 47% 68%
2002 44% 47% 58%
2001 49% 46% 82%
2000 52% 54% 65%
  • 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. However, candidates that fail are informed of how well they did compared to other candidates that failed, e.g. top 10% of candidates that failed. 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[2] and the minimum passing score is set by the Board of Governors after each exam. The Board of Governors reviews 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. This scoring method is commonly known as Angloff Method. It is the most commonly used approach to setting standards in finance designations examinations including Certified in Financial Management (CFM) and Certified Management Accountant (CMA).

The CFA curriculum

The curriculum for the CFA program is based on a Candidate Body of Knowledge established by the CFA Institute.[7]. For exams in 2008 onwards candidates automatically receive the curriculum readings from CFA Institute when they register for the exam. There is no possibility to register for the exam without receiving the curriculum. There is also no possibility to order the curriculum separately. If the student fails an exam and has the possibility to resit in the same year, the CFA Institute offers a slight rebate and will not send the curriculum again (the curriculum only changes from one year to the other). However if the student resits in another year as the year of failure, he will receive the curriculum again as it may have been subject to changes. For the test, only two types of calculators are allowed (the Hewlett Packard 12C and the Texas Instruments BA II Plus).

The curriculum includes:

  • Ethical and Professional Standards
  • Quantitative Methods (such as the time value of money, and statistical inference)
  • Economics
  • Financial Reporting and 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.)

Ethics

The ethics section is primarily concerned with compliance and reporting rules when managing an investor's money or when issuing research reports. Some rules pertain more generally to professional behaviour (such as prohibitions against plagiarism); others specifically relate to the proper use of the designation for charterholders and candidates. All of these rules are delineated in the 'Code and Standards'.

Quantitative analysis

The curriculum is dominated by statistics; other topics such as the time value of money are also addressed. The topics are fairly broad, covering standard topics such as hypothesis testing, regression analysis and time series analysis, as well as portfolio related topics. (Some quantitative topics 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.)

Economics

Both micro- and macroeconomics are covered, including international economics (mainly related to currency conversions and how they are affected by international interest rates and inflation). By Level III, the focus is on applying economic analysis to portfolio management and asset allocation.

Accounting

Accounting is heavily tested at Levels I and II, but is not a significant part of Level III. The Curriculum includes financial statement analysis and corporate finance.

Security analysis

The curriculum includes coverage of global markets, as well as analysis of the various asset types: equity (stocks), fixed income (bonds), derivatives (futures, forwards, options and swaps), and alternative investments (Real Estate, Private Equity, Hedge Funds and Commodities). The first levels of the test require familiarity with these instruments; the focus of Level II is valuation; Level III studies incorporation of these instruments into portfolios.

Portfolio management

This section increases in importance with each of the three levels - it integrates and draws from the other topics, including ethics. It includes Modern portfolio theory (efficient frontier, Capital asset pricing model, etc); investment practice (defining the investment policy, resultant asset allocation, order execution); and measurement of investment performance.

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
  • The Society of Actuaries (SOA) granted the credit of Validation by Educational Experience (VEE)-Economics to the candidates who passed the CFA Level I exam. SOA also granted both the credits of VEE-Corporate Finance and VEE-Applied Statistical Methods to the candidates who passed the CFA Level II exam.[8]
  • 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.[9]
  • 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.[10]
  • Taiwan's Financial Supervisory Commission (FSC)[12] has approved the Chartered Financial Analyst (CFA) designation with two-year practical working experience and passed the test of regulations of Securities Investment Trust & Consulting Enterpriese and the test for common knowledge of finanacial markets and professional ethics, the common subjects, as equivalent to a local recognised industry qualification of Certified Securities Investment Analyst (CSIA) in Taiwan , after reviewed and approved by Securities Investment Trust & Consulting Association (SITCA)].[13]
  • The Academic and Accreditation Advisory Committee of Hong Kong'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.[14]
  • 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.[15]
  • 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).[16]
  • The CFA charterholders are recognized by PRMIA (Professional Risk Managers' International Association) as the equivalent of passing first two required exams.[17]
  • Exemptions are available for various modules in the South African Registered Persons Examination, depending on the candidate's level. [18] [19] No exemptions are available for the examination on local market regulations and compliance.

Trademark disputes

CFA Institute 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. In 1998, CFA Institute's predecessor organization, AIMR, sued and won a judgment against ICFAI/CCFA.[20] The judgment prohibited ICFAI/CCFA and its members from using the CFA or Chartered Financial Analyst mark in the United States and Canada. In August 2006, an Indian court issued a temporary injunction against the Indian organization as well.[21] The judgments made no assessment of the quality of the Indian program and merely discussed the trademark violation. The Indian Association of Investment Professionals is the only organization in India which is affiliated with the CFA Institute.[22] In September 2007 The Trademark Registry, India 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. With the default judgement vacated ICFAI informed Indian CFA Charter holders that they could legally use their Charter in the US and Canada. However, on September 4 2007, the Court reversed its decision to vacate after a motion to reconsider that decision was filed by the CFA institute.[23] [24]

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.[25]

References

  1. ^ http://www.italiancfasociety.it/store/27_english_code.pdf
  2. ^ a b http://www.cfainstitute.org/cfaprog/overview/pdf/IntoOur5thDecade.pdf
  3. ^ http://www.cfainstitute.org/pressroom/06releases/20060404_01.html
  4. ^ http://www.cfainstitute.org/cfaprog/charterholder/program/program_require.html
  5. ^ http://www.cfainstitute.org/aboutus/press/release/06releases/20060816_01.html
  6. ^ http://www.cfainstitute.org/aboutus/press/release/08releases/20080123_01.html
  7. ^ http://www.cfainstitute.org/cfaprog/courseofstudy/topic.html
  8. ^ http://eande.soa.org/vee/standardized-exams.htm
  9. ^ http://apps.nyse.com/commdata/PubInfoMemos.nsf/AllPublishedInfoMemosNyseCom/7FD95C14517BB299852569D90054A1B2/$FILE/EXHIBITS%20A(1)%20-%20A(5).XLS
  10. ^ http://www.nasd.com/RegistrationQualifications/BrokerGuidanceResponsibility/Qualifications/NASDW_011105
  11. ^ http://www.sii.org.uk/web5/infopool.nsf/HTML/mGrades-Of-Membership?OpenDocument
  12. ^ http://www.fscey.gov.tw/
  13. ^ http://www.sitca.org.tw/
  14. ^ http://www.hksfa.org/about_HKSFA/profile.html
  15. ^ http://www.hkbvf.org/
  16. ^ http://www.hksi.org/big5/membership/overseas.html
  17. ^ http://www.prmia.org
  18. ^ http://www.saifm.co.za/13.htm
  19. ^ http://www.saifm.co.za/rpe.htm
  20. ^ http://www.cfainstitute.org/aboutus/press/release/98releases/traderule.html
  21. ^ http://www.cfainstitute.org/aboutus/press/release/06releases/20060817_01.html
  22. ^ http://www.cfainstitute.org/programs/socservices/socpage.asp?society=INDIA
  23. ^ http://www.cfainstitute.org/aboutus/worldwide/asiapac/indiaFAQ.html##usinjunction
  24. ^ http://www.cfainstitute.org/aboutus/worldwide/asiapac/india/pdf/finalorder_4sept07.pdf
  25. ^ http://www.patent.gov.uk/tm/t-decisionmaking/t-challenge/t-challenge-decision-results/o31506.pdf
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