Business Ethics

Question 1

Standards of professional conduct under professionalism ? (4)

Answer 1

• Knowledge of the Law
• Independence and Objectivity
• Misrepresentation
• Misconduct

Question 2

Standards of professional conduct under integrity of capital markets ? (2)

Answer 2

• Material non-public information
• Market manipulation

Question 3

Standards of professional conduct under duties to clients ? (5)

Answer 3

• loyalty, prudence and care
• fair dealing
• suitability
• performance presentation
• preservation of confidentiality

Question 4

Standards of professional conduct under duties to employers? (3)

Answer 4

• loyalty
• additional compensation arrangements
• responsibilities of supervisors

Question 5

Standards of professional conduct under investment analysis,recommendations and actions ? (3)

Answer 5

• diligence and reasonable biases
• communication with existing and prospective clients
• record retention

Question 6

Standards of professional conduct under conflict of interest ? (3)

Answer 6

• disclosure of conflicts
• priority of transactions
  -referral fees

Question 7

Knowledge of the law

Answer 7

• Understand and comply with all CFA standards, government regulatory laws, etc.
• in the event of conflict the strictest law or regulation must be adhered to
• CFA Institute standards on minimum requirement even if the activity is otherwise legal
• may not knowingly assist others in violating laws
• if you discovered the violations of applicable rules are taking place by coworkers you have to report it

Question 8

Independence and objectivity

Answer 8

• take reasonable care to maintain independence and objectivity
• may not offer, solicit or accept a gift ,compensation or offer which can compromise own or others independence and objectivity
• perception is key

Question 9

Misrepresentation

Answer 9

• must not knowingly make any misrepresentation relating to investment analysis, recommendations, actions or other professional activities
• this includes omitting relevant information, presenting selective data to mislead investors and plagiarism
• plagiarism is using the work of others without crediting the source but crediting the source is not required when using projections from recognised financial and statistical reporting services

Question 10

Misconduct

Answer 10

• must not engage in any professional conduct involving dishonesty, fraud or deceit
• must not commit any act that reflects adversely on their professional reputation, integrity or competence
• as such, a violation of the standard occurs whenever violation of another standard occurs as an ‘indirect violation’

Question 11

Material non-public information

Answer 11

• those who possess material non-public information that could affect the value of an investment must not act or cause others to act on the information
• information is material if it’s disclosure would affect the price of a security or investors investment decision
• it is non-public and thought has been made available to the marketplace
• the mosaic theory states that reaching an investment conclusion through perceptive analysis of public information combined with non-public non-material information is not a violation of the standard

Question 12

Market manipulation

Answer 12

• must not engage in practices that distort prices, mislead market participants or artificially inflated trading volumes

Question 13

Loyalty prudence and care

Answer 13

• duty of loyalty, must act with reasonable care, and exercise prudent judgement
• must act for the benefits of their clients and place their clients interest before their own interest or their employers interest

Question 14

Fair dealing

Answer 14

• deal fairly and objectively with all clients when providing
  1. Investment recommendations and
  2. Undertaking investment actions

Question 15

Suitability

Answer 15

• in an advisory relationship with a client:
  1. Investigate and understand a clients investment experience, knowledge, risk and return objectives, financial needs and constraints prior to making any investment recommendation or taking investment action
  2. Reassess and update this information regularly
  3. Determine if an investment is suitable to the clients needs, constraints,objectives and mandates before making an investment recommendation or taking investment action
  4. Judge suitability of investment considering clients total portfolio
• when managing a portfolio to a specific mandate, strategy or style:
  Make only investment recommendations or take investment actions that are consistent with objectives ,constraints and mandate of the portfolio

Formulate investment policy statement for each client

Question 16

Performance presentation

Answer 16

• the communication of investment results must be fair accurate and complete
• Do not misstate performance
  -do not misrepresent past performance
  -Do not selectively performance
  -Do not imply ability to achieve similar returns to the past

Question 17

Preservation of confidentiality

Answer 17

• keep information about current, former and perspective clients confidential unless
  -Information contains illegal activities
  -Disclosure is required by law
  -The client or prospective client permits disclosure of the information

Question 18

Loyalty

Answer 18

• must act for the benefits of employer and not deprive employer of their advantage of their skills and abilities, divulge confidential info or otherwise cause harm to the employer

Question 19

Additional compensation arrangements

Answer 19

• must not accept benefits or compensation that competes with or creates a conflict of interest with their employers interest unless they obtain written permission from all parties involved
• compensation includes direct and indirect compensation from a client and other benefits received from third parties
• If a client offers a bonus that depends on the future performance of her account, this is an additional compensation arrangement that requires written consent in advance
  -If a client offers a bonus to reward a member for her accounts past performance ,this is a gift that requires disclosure to the members employer to comply with the standard of independence and objectivity

Question 20

Responsibilities of supervisors

Answer 20

• must take reasonable effort to ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations and the code and standards

Question 21

Diligence and reasonable care

Answer 21

• must exercise diligence, independence, and thoroughness in analysing investments, making recommendations, and taking actions
• must have a reasonable and adequate basis ( supported by appropriate research and investigation) for any investment analysis recommendation or action

Question 22

Communication with existing and perspective customers

Answer 22

• disclose to clients the format and general principles of the investment processes used to analyse investments, select securities and construct portfolios
• promptly disclose any changes that might materially affect those processes
• distinguish between fact and opinion in the presentation of investment analysis and recommendation

Question 23

Record retention

Answer 23

• develop and maintain appropriate records to support investment analysis, recommendations, actions and other investment related communications

Question 24

Disclosure of conflicts

Answer 24

• must make full and fair disclosure of all matters that could reasonably be expected to impair independence and objectivity or interfere with respective duties to clients, prospective clients and employer
• must ensure that disclosures are prominent, delivering clear language and communicated effectively

Question 25

Priority of transactions

Answer 25

Investment transactions for clients and employers must have priority over own investment transactions

Question 26

Referral fees

Answer 26

Must disclose to employer, clients and perspective clients any compensation, consideration or benefit received or paid for the recommendation of products or services

Question 27

Conduct as participants in CFA Institute programs

Answer 27

* must not engage in any conduct that compromises the reputational integrity of CFA Institute, designation or programs * if a CFA holder of candidate violate any of the other standards then they violate this standard as well

Question 28

Reference to CFA Institute designation and program

Answer 28

* when referring to the CFA Institute membership, designation or candidacy must not misrepresent or exaggerate the meaning or implications thereof For example you can only refer to being a CFA level two candidate if you have registered for the second exam but can state that you have passed level one of the exam