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Question 1

What is ethics generally viewed as

Answer 1

A set of basic principles that ensure people behave for the benefit of all

Question 2

Why is ethics important?

Answer 2

1. Building trust in markets
2. Promoting trust in investment professionals
3. Instilling trust in other stakeholders
4. Earning the trust of regulators

Question 3

When does the industry become vulnerable to government intervention?

Answer 3

When practitioners in an industry are seen to be behaving unethically and putting their own interests ahead of those of their clients and in some cases ahead of taxpayers’ interests

Question 4

What are the main risks when a firm behaves unethically?

Answer 4

It risks prosecution and payment of compensation to clients. However one of the main risks of unethical behaviour is reputational risk

Question 5

Consequences of unethical conduct

Answer 5

1. Disciplinary action from a professional body
2. Disapproval from clients, colleagues and the industry peer group
3. Negative publicity and loss of job

Question 6

What is the CFA code of ethics

Answer 6

It sets out the ethical standards that all CFA Institute Members and CFA Candidates who are registered to take CFA exams must follows

Question 7

How many elements are there to the CFA Code of Ethics?

Answer 7

6

Question 8

What do the Standards of Professional Conduct promote?

Answer 8

Promote fair and ethical behaviour and are organised into seven broad categories

Question 9

What are the seven categories of the Standards of Professional Conduct?

Answer 9

1. Professionalism
2. Integrity of capital markets
3. Duties to clients
4. Duties to employers
5. Investment analysis, recommendations and actions
6. Conflics of interest
7. Responsibilities as a CFA Institute Member or CFA Candidate

Question 10

I Professionalism

Answer 10

A Knowledge of the law
B Independence and objectivity
C Misrepresentation
D Misconduct

Question 11

II Integrity of capital markets

Answer 11

A Material non-public information
B Market manipulation

Question 12

III Duties to clients

Answer 12

A Loyalty, prudence and care
B Fair dealing
C Suitability
D Performance presentation
E Preservation of confidentiality

Question 13

IV Duties to employers

Answer 13

A Loyalty
B Additonal compensation arrangements
C Responsibilities of supervisors

Question 14

V Investment analysis, recommendations and actions

Answer 14

A Diligence and reasonable basis
B Communication with clients and prospective clients
C Record retention

Question 15

VI Conflicts of interest

Answer 15

A Disclosure of conflicts
B Priority of transactions
C Referral Fees

Question 16

VII Responsibilities as a CFA Institute Member or CFA Candidate

Answer 16

A Conduct as participants in CFA Institute Programs
B Reference to CFA Institute, the CFA designation and the CFA program

Question 17

Motivations for unethical behaviour

Answer 17

1. Undue pressure or incentives to perform
2. Ability to blame others
3. Ability to rationalise unethical behaviour
4. Conflicts of interest skewing judgment
5. Lack of rigour due to overcapacity
6. Disregard for clients
7. Failure to act

Question 18

What can negative investment outcomes be attributed to?

Answer 18

1. Taking on too much risk
2. Purchasing inappropriate investments
3. Lack of diversification
4. Excessive trading that incurs unjustified transaction costs
5. Purchasing products that charge fees not commensurate with performance

Question 19

6 elements in the code of ethics

Answer 19

1. Act with integrity, competence, diligence and respect
2. Place of the integrity of investment profession and interest of clients above own personal interests
3. Use reasonable care and exercise independent professional judgment
4. Practice, and encourage others to practice in a professional manner
5. Promote the integrity of capital markets for the benefit of society
6. Maintain and improve professional competence and of others