Chapter 2

Question 1

Ethics definition

Answer 1

Set of basic principles that ensure people behave for the benefit of all

Question 2

Problems with regulations

Answer 2

Slow to implement so new products and tech can be used to exploit out of date regs

Question 3

Ethical behaviour is important because (4)

Answer 3

Building public trust in markets

Promoting trust in financial professionals
Instilling trust in stakeholders

Earning trust of regulators

Question 4

Two schools of thought for unethical behaviour

Answer 4

Caused by ….

Environment or situation person is in eg. Good person in bad environment may still end up being unethical

As a result of attitude or personality of the individual, environment is less important

Question 5

What can lead to unethical behaviour

Answer 5

Pressure to perform
Ability to blame
Ability to rationalise - other parties also being unethical
Conflict sof interest
Lack of rigour
Disregard for clients
Failure to act

Question 6

What must firms do with their clients

Answer 6

Put clients interest above its own
Act with loyalty
Deal fairly and objectively with all clients
Provide recommendations
Provide fair info
Preserve confidentiality

Question 8

How does compliance differ to ethics

And example

Answer 8

Compliance is abiding to the law

Ethics is doing what’s right

Selling a product that a individual does not need is not illegal but not right either

Question 9

What can happen if industry is found to be unethical (5)

Answer 9

Higher industry taxes
Increased regs
Breaking up business
Restrictions
Greater disclosure requirements

Question 10

Punishment for unethical behaviour of a firm

Answer 10

Fines, loss of licence, compensation being paid, downgrade in esg rating.

Repetitional risk

Question 11

Negative outcomes from investment managers due to (5)

Answer 11

Taking on too much risk

Purchasing inappropriate investments

Lack of investment diversification

Excessive trading = large transaction costs

Buying products with large fees

Question 12

What is a vulnerable customer

Answer 12

More likely to suffer harm

Question 13

Insistent customer?

Answer 13

Someone who doesn’t follow the managers advice and instead does something riskier

Question 14

Six elements of the code of ethics

Answer 14

Act with integrity

Put clients above the investment managers

Reasonable care when doing investment analysis

Practice ethically

Promote integrity of capital market s

Maintain and improve professional competence

Question 15

Standards of professional conduct (7)

Answer 15

Professionalism
Integrity of cap markets
Duties to client
Duties to employers
Investment analysis
Conflicts of interest
Responsibilities as CFA member

Question 17

What must investment professionals do with laws and what happens if there is a conflicting law in different regions

Answer 17

Bust abide by all laws and regs set

Abide by the stricter law in conflicting circumstances

Question 18

Professionalism can be split into 5 things

Answer 18

Knowledge of the law
Independence
Misrepresentation
Misconduct
Competence

Question 19

What could compromise and persons independence and objectivity

Answer 19

Being given gifts/compensation by the client

Question 20

What is the rule on gifting

Answer 20

They are allowed to receive gifts as long as it disclosed with the company

However they should refrain from accepting lavish gifts and pay for their own expenses

Question 22

What else should firms disclose to ensure independence and objectivity

Answer 22

Corporate relationships

Question 23

What is misrepresentation

Answer 23

Any untrue statement that is misleading

Question 24

What are examples of misrepresentation

Answer 24

Their qualifications
Services provided
Performance record
Garaunteeing returns
Plagiarism

Question 26

Examples of plagiarism

Answer 26

Basing report on another analyst report Using excerpts from articles Using information without referring to og source

Question 27

How is integrity of capital markets upheld

Answer 27

Individuals must not act on material non public information No Market manipulation

Question 28

What is mosaic theory

Answer 28

Predicting events from public info and non material non public information

Question 29

How is information prevented from getting to the wrong teams in same firms

Answer 29

Firewalls

Question 30

What is market manipulation

Answer 30

Must not engage in practices that distort prices or artificially inflate trading volume which could mislead market participants

Question 31

Examples of market manipulation

Answer 31

Transactions that artificially distort prices or volumes traded Taking dominant position to manipulate price Dissemination of false or misleading information

Question 32

What are the duties to clients

Answer 32

Loyalty /care Fair dealing Suitability Performance presentation Confidentiality

Question 33

What is fair dealing

Answer 33

Professional does not favour one client ahead of another All changes must be announced to all clients at same time

Question 34

What should be done if issue is over subscribed or is a block trade

Answer 34

It should be distributed on a pro rata basis

Question 35

When you have an advisory client, you should…(3)

Answer 35

Determine risk and return objectives Determines clients financial contraints and financial situation Judge suitability of investment based on context of clients portfolio

Question 36

What is a fact find and what does it establish (4)

Answer 36

Way to find out about their clients Type of client and their attitude to risk Risk and return objectives Investment contraints (liquidity, time horizon, taxes) Performance benchmarks

Question 37

What has car created in regards to fiat and accurate performance representation

Answer 37

Global investment performance standards (GIPS) = common accepted set of standards

Question 38

Rule on confidentiality

Answer 38

Must keep info on current, former and potential clients confidential unless: - info involves illegal activities - disclosure is required by law - client permits disclosure of info

Question 39

What are the principle of the duties to employers

Answer 39

Loyalty Additional compensation arrangements Responsibility of supervisors

Question 40

What is the loyalty code for duties to employer

Answer 40

Must act for the benefit of the employer and not deprive their employer of their skills and abilities and not harm employer

Question 41

Additional compensation arrangement rule

Answer 41

Must not accept gifts or benefits which create conflict with employer unless they have permission

Question 42

Responsibilities of supervisor rule

Answer 42

Make reasonable efforts to ensure that anyone subject to their supervision complies with laws and regs

Question 43

Compliance procedures should…. (8)

Answer 43

Clear and easy to understand Outline permissible conduct Outline scope of procedures Implement check system Compliance offer designated Procedure for reporting Procedures to document Describe hierarchy of supervision

Question 44

Principles of investment analysis and recommendations

Answer 44

Diligence and reasonable basis Communication with clients Record retention

Question 45

When abiding to diligence and reasonbvale basis for investment analysis, members must :(2)

Answer 45

Exercise diligence in investment research Have reasonable basis

Question 46

Communication with clients, members must (5)

Answer 46

Disclose the nature of services provided Disclose the format and general principles of investment processes Limits and risk with investment Determine factors that are important to investment process Distinguish between fact and opinion?

Question 47

Record retention rule

Answer 47

Must maintain records to support their investment analysis and recommendations

Question 48

Principles of conflict of interest

Answer 48

Disclosure of conflicts Priority of transactions Referral fees

Question 49

Why should people disclose their conflicts

Answer 49

Could impair their independence and objectivity

Question 50

What is priority of transactions rule

Answer 50

Investment transactions for client must have priority over transactions in which member is a the beneficial owner

Question 51

What is a beneficial owner

Answer 51

Owns the shares directly or has an indirect interest in security

Question 52

What is referall fees rule

Answer 52

Members must disclose if they receive a fee in order to recommend another individual or firm

Question 53

Principles of responsibilities of a CFA institute Member

Answer 53

Must not engage in activities that compromises integrity of cfa institute Must not incorrectly refer to cfa institute

Question 54

Who issues the IMC

Answer 54

CFA UK

Question 56

Are investment professionals allowed to go into private practice

Answer 56

They can but must obtain prior permission from employer first

Question 58

Front running violates what cfa standrd

Answer 58

Conflict of interest