CFA L2 Ethics Flashcards

Question

Independence and objectivity- RECOMMENDATIONS for firms

Answer 1

* Restrict employee participation in IPOs/private placements unless approval is given * Create a restricted list * Have a compliance officer * Limit gifts from non-clients to token items only.

Answer 2

Members must not knowingly make any misrepresentations in professional activities. They must make diligent efforts to prove that third party material is reliable. Actions that violate this standard are: * Presenting 3rd party research as your own unless the information is factual data from a recognized financial/ statistical reporting service. * Guaranteeing a specific return on securities when you can't. * Selecting a valuation firm because it puts a high value. * Selecting an unreasonable performance benchmark. * Presenting data that omits relevant facts. * Present misleading info about the firm or its history. * Using 3rd party marketing materials that are misleading. ## Footnote * Even if using a reputable statistical source, a member should still cite the source if they use a combo of different statistical sources rather than just one.

Answer 3

* Prepare a summary for clients of your experience and what you can do * Encourage employers to verify 3rd party marketing materials * Cite sources * Keep copies of materials used in research reports * Create a list of the firm's qualifications and services * Periodically review your documents for any misrepresentation

Answer 4

Do not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence. Any act involving lying, cheating, or stealing is considered dishonest.

Answer 5

* Develop a code of ethics * Give employees a list of potential violations and sanctions, including dismissal. * Check the references of potential employees

Answer 6

* Material nonpublic info * Market manipulation

Answer 7

Do not act on impactful classified info that could affect the value of an investment. Information is material "if its disclosure would affect the price of a security or if a reasonable investor would want the information before making an investment decision". The only people within your firm that you can share with are designated supervisor of compliance issues (who's not necessarily YOUR supervisor). THIS IS REQUIRED under Mosaic theory ## Footnote * Mosaic theory states that there is NO violation if an analyst reaches an investment conclusion about a corporate action through analysis of public information combined with NONMATERIAL nonpublic info. Ex: If you're walking through a mall and see a large group of kids wanting to buy a certain clothing item and you rate that clothing item a buy, this is fine under the Mosaic Theory.

Answer 8

* Encourage their firms to adopt procedures to prevent the misuse of material nonpublic information * Encourage the firm to disseminate info to the public

Answer 9

* Create an information barrier to control communication between departments * Review employee trading * Maintain watch, restricted, and rumor lists

Answer 10

Do not engage in practices that distort prices or distort trading volume w/ the intent to mislead market participants. Transaction-based manipulation includes, but is not limited to, transactions that artificially distort prices or volume. Information-based manipulation includes, but is not limited to, spreading false rumors about a firm in order to induce others to trade. ## Footnote * Sometimes prices/volume can get distorted by member actions but it is only considered a violation if the intent is to mislead

Answer 11

* Loyalty, prudence, and care * Fair dealing * Suitability * Performance Presentation * Preservation of confidentiality

Answer 12

CFA members must put their client's interests before their own & must: * Exercise prudence, care, skill, and diligence * Manage pool of client assets in accordance w/ governance * Make investment decisions that benefit the entire portfolio * Vote proxies in an informed and responsible manner * Inform clients of any limitations in an advisory relationship * Client brokerage or 'soft dollars' must be used to benefit the client * The client" may be the investing public as a whole rather than a specific entity or person." ## Footnote * Brokerage commissions may NOT be used for a member's operating expenses. They MUST be used for the benefit of the client. * Brokerage is an asset of the client. * Directed brokerage occurs when the client requests that a portion of the client's brokerage be used to purchase services that directly benefit the client. * Tax liabilities of beneficiaries MUST be considered.

Answer 13

* Follow rules & laws * Establish client risk/return objectives * Diversify the portfolio * Deal fairly w/ clients * Keep client info confidential * Seek best trading execution for clients * Establish regular client meetings

Answer 14

* Deal fairly and objectively with all clients. * Different service levels are acceptable, but they must not negatively affect any clients. * Disclose the different service levels to all clients/ prospects, and make premium levels of service available to all those willing to pay for them. * Treat clients fairly in light of their investment objectives and circumstances. * Treat both individual and institutional clients in a fair and impartial manner. * Members distributing IPO shares must distribute shares in an oversubscribed IPO to clients and may not withhold shares for themselves. If the issue is oversubscribed, then the issue is to be prorated to all subscribers Fair ≠ equal

Answer 15

* Maintain a list of clients and holdings—use to ensure that all holders are treated fairly * Encourage firms to establish compliance procedures to treat all clients fairly

Answer 16

* Limit # of people aware of upcoming change * Shorten time frame between decision and dissemination * Have pre-decision guidelines * Simultaneous dissemination * Disclose trade allocation procedures * Review accounts regularly to ensure fair client treatment * Execute orders on FIFO basis

Answer 17

When a CFA member is in an advisory position they must take into account the client's risk/return objectives and investing knowledge prior to making any investment decisions for them. Members should document unsuccessful attempts to update client information and circumstances. Things that must be considered when making an IPS: * client identification * investment objectives (risk/return) * investment benchmark

Answer 18

* Make an IPS for each client * Review client's IPS periodically * Update IPS at least annually

Answer 19

The advisor should discuss w/ client why it is unsuitable. If the investment is not material and won't affect the portfolio, follow firm's guidelines on unsuitable investments. If it is material, update IPS. If they decline updating IPS, follow firm policies and possibly end relationship w/ client.

Answer 20

When communicating investment performance info, make *reasonable* efforts to ensure that it is fair, accurate, and complete. Do not misstate performance or mislead clients about their/ the firm's investment performance. For brief presentations, members must make detailed information available on request and indicate that the presentation has offered only limited information. ## Footnote * The word reasonable has a high standard w/ CFA * Members are required to promptly disclose any changes in benchmarks used in performance presentation. Members should explain the reasons for changing the benchmark and present the performance reports using both the old and new methodologies so that clients may compare them. * Returns can be presented net of fees and/or gross of fees.

Answer 21

* Encourage firms to adhere to Global Investment Performance Standards. * Consider sophistication of audience * Present the performance of several accounts rather than just one * Include terminated accounts as part of historical performance and clearly state when they were terminated. * Include all appropriate disclosures to fully explain results * Maintain data and records used to calculate the performance being presented

Answer 22

Keep info about past, current, or prospective clients confidential unless *disclosure of illegal activity, disclosure is required by law, or the client permits disclosure*. The confidentiality standard applies to any information that a member has learned in the performance of his duties for the client. This standard also applies to former clients. *Exception: It is allowed to provide confidential info to the CFA Institute under the Professional Conduct Program.*

Answer 23

* Only disclose client info to authorized colleagues * Members should follow firm procedures for storage of electronic data and recommend adoption of such procedures if they are not in place.

Answer 24

* Loyalty * Additional compensation arrangements * Responsibilities of a supervisor

Answer 25

Act for the benefit of the employer. Do not engage in any activities that would injure the firm, deprive it of profit, or deprive it of the advantage of employees' skills and abilities. **Always place client interests above interests of employer, but consider the effects of actions on firm integrity and sustainability. Act in best interest of employer until resignation is effective.** This standard DOES NOT have a blanket prohibition against independent practice in competition with a member's employer. *You just must have WRITTEN permission from **employer**, and inform them of types of service to be rendered, the expected duration, and the expected compensation*. Employer records in any form are property of the firm. ## Footnote * A departing employee is "generally free to make arrangements or preparations to go into a competitive business before terminating the relationship with the employee's employer provided that such preparations do not breach the employee's duty of loyalty".

Answer 26

* Give employer copy of CFA Code & Standards * Use separate social media accounts for professional and personal

Answer 27

* Employers should not have incentive and compensation systems that encourage unethical behavior. * Firms should have policies surrounding employee outside practice, employee resignation/termination, incident reporting, and employee classification.

Answer 28

This standard is concerned with accepting benefits that may create a conflict between a member's interests and her employer's interests. Do not accept any sort of compensation that competes or creates a conflict of interest w/ your employer unless WRITTEN (email is fine) permission from all parties. Clients can give gifts, as stated in Independence and Objectivity, but they should not be to persuade an employee to do something. Nonmonetary compensation may still create a conflict of interest.

Answer 29

Make an immediate WRITTEN/EMAIL (NOT ORAL) report to the employer/ compliance officer detailing any proposed additional compensation and services. If working part-time, discuss any arrangements that may compete with their employer's interest at the time they are hired and abide by any limitations their employer identifies.

Answer 30

Details of additional compensation, including any performance incentives, should be verified by the offering party.

Answer 31

Make reasonable efforts to ensure that anyone subject to their supervision complies with applicable laws, rules, regulations, and the Code and Standards. Make sure the firm has an adequate compliance system. **A member or candidate faced with no compliance procedures or with procedures he believes are inadequate must decline supervisory responsibility in writing until adequate procedures are adopted by the firm**.

Answer 32

* recommend that employer adopt a code of ethics. * Provide code of ethics to employees and clients * If you are compliance officer: Update the compliance system and staff continuously * Require professional conduct evaluations * Review employee actions to monitor compliance * Conduct thorough investigations * Place appropriate limitations on wrongdoers until investigation is complete

Answer 33

An adequate compliance system should: * Be understandable * Have a compliance officer * Have checks/balances * Have procedures for reporting violations

Answer 34

* Diligence and reasonable basis * Record retention * Communication w/ clients and prospective clients

Answer 35

Exercise diligence, independence, and thoroughness in analyzing investments. Also, have a reasonable and adequate basis, supported by appropriate research and investigation. The level of research needed to satisfy the requirement for due diligence will differ depending on the product or service offered. Make a reasonable effort to cover ALL relevant issues when arriving at an investment recommendation. If the member believes that the consensus opinion has a reasonable and adequate basis and is independent and objective, the member or candidate need not decline to be identified with the report. If the member or candidate is confident in the process, the member or candidate does not need to dissociate from the report, even if it does not reflect his or her opinion. Using secondary/third-party research is allowed as long as the research is adequately reviewed for accuracy and thoroughness. ## Footnote * If working in a group project, and all the group members have performed dilligent work but you disagree with the result, you are not required to disassociate/dissent. However, if the other group members did not perform dilligent work, you are required to disassociate/dissent. * ***A research report can specify VaR as an appropriate risk metric, but the report should clarify that the quality of the VaR estimate depends on the quality of model inputs.***

Answer 36

* National/global economic conditions * Firm's financial results and history * Limitations of models used * Peer group comparison

Answer 37

* Members should encourage their firms to adopt a policy for periodic review of the quality of third-party research. * Have written procedures for acceptable scenario testing. * Procedures for evaluating outside info providers, including how often

Answer 38

* Disclose to clients the general principles of the investment processes used to analyze investments, select securities, and construct portfolio and promptly report any updates to this process. * Promptly disclose any changes that might significantly affect the investment processes. * Disclose any risks or limitations to this process. * Distinguish between fact and opinion in this process. * Explain models used to clients and any limits of the model.

Answer 39

Selection of relevant factors in a report can be a judgment call so members should maintain records indicating the nature of the research, and be able to supply additional information if it is requested by the client or other users of the report.

Answer 40

Develop and maintain appropriate records to support investment analysis. Maintain research records that support the reasons for the analyst's conclusions. These records are property of the firm. All communications with clients through any medium, including emails and text messages, are records that must be retained.

Answer 41

If no regulatory standards or firm policies are in place, the Standard recommends a seven-year minimum holding period.

Answer 42

The responsibility to maintain records generally is the firm's responsibility.

Answer 43

* Disclosure of conflicts * Priority of transactions * Referral fees

Answer 44

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/employers. The most common conflict that requires disclosure is actual ownership of stock in companies that the member recommends or that clients hold. Another common source of conflicts of interest is a member's compensation/bonus structure. Disclosures of conflicts should be prominent and easily understandable. Employees must comply with prohibitions imposed by their employer.

Answer 45

Any special compensation arrangements should be disclosed.

Answer 46

Investment transactions for clients/ employers must have priority over investment transactions in which a Member/ Candidate has a direct/indirect interest. Client accounts that belong to family members should be treated like any other account so long as there is no direct interest on the part of the analyst. Client has highest priority, then employer, then employee. Personal transactions may be undertaken only after clients and the member's employer have had an adequate opportunity to act on a recommendation. Members must not act on information about pending trades for personal gain. ## Footnote * Persons with access to information during the normal preparation of research recommendations are subject to this standard. * The recommended procedures suggest investment personnel should examine all planned personal trades to identify possible conflicts before the execution of the trades.

Answer 47

Members can avoid conflicts that arise with IPOs by not participating in them.

Answer 48

All firms should have basic procedures in place that address conflicts created by personal investing that: * Establish limits on employee participation in IPOs/ private placements. * Establish blackout/restricted periods: no trading. * Establish reporting procedures, including duplicate trade confirmations, disclosure of personal holdings and beneficial ownership positions, and pre-clearance procedures.

Answer 49

DISCLOSE to employers and to AFFECTED prospects and clients, any type of compensation paid or received for the recommendation of a product/service. ## Footnote * Must disclose the payment and the estimated value of that payment.

Answer 50

Encourage employer to adopt clear procedures regarding compensation for referrals. ## Footnote * Provide employer w/ updates at least quarterly.

Answer 51

Firms that do not prohibit referral fees should have clear procedures for approval and policies regarding the nature and value of referral compensation received.

Answer 52

Do not engage in any activity that harms the reputation of the CFA Institute. This conduct includes: * Cheating on CFA exam * Telling other candidates about what was on the exam * Not following rules and policies of the CFA Program * Giving any confidential info about the CFA program to people that shouldn't know * Misrepresenting info on the Professional Conduct Statement (PCS) or the CFA Institute Professional Development Program.

Answer 53

Do not misrepresent the CFA designation. Members must sign the PCS annually and pay the annual dues.

Answer 54

Members should be sure that their firms are aware of the proper references to a member's CFA designation or candidacy, as errors in these references are common.

Answer 55

A set of voluntary standards used by investment managers throughout the world to ensure the full disclosure and fair representation of their investment performance. Can be presented time-weighted or money-weighted. It was created because if investment firms can report their performance however they want, there is room for biasWhen measuring and presenting their investment performance, GIPS compliant firms are required to include terminated accounts in their performance history

Answer 56

Fundamentals of complianceInput data and calculation methodologyComposite and pooled fund maintenanceComposite time-weighted return reportComposite money-weighted return reportPooled fund time-weighted return reportPooled fund money-weighted return reportGIPS advertising guidelines

Answer 57

A grouping of individual discretionary portfolios representing a similar investment strategy, objective, or mandate.Reporting on the performance of composites gives clients and prospects information about the firm's success in managing various types of securities and results for various investment styles.A composite must include all portfolios (current and past) that the firm has managed in accordance with this particular strategy. The firm should identify which composite each managed portfolio is to be included in before the portfolio's performance is known.Ex: Large cap stocks, investment-grade domestic bonds, etc.

Answer 58

How a firm determines which of the portfolios it manages should be included in a composite.

Answer 59

True. If verification is to be done, it MUST be done by a third party.

Answer 60

At least 5 years

CFA L2 Ethics Flashcards

(86 cards)