Ethical and Professional Standards

Question 1

CFA Institute Professional Conduct Program: Disciplinary Review Committee

Answer 1

1. Part of the Board of Governors
2. Responsible for the Professional Conduct Program
3. Enforces the Codes and Standards

Question 2

CFA Institute Professional Conduct Program: Designated Officer

Answer 2

1. Member of the Professional Conduct Staff
2. Conducts Inquiries related to professional conduct
3. May decide:
   
   • no disciplinary sanctions appropriate,
   • to issue cautionary letter, or
   • to discipline member or candidate.
4. Sanctions like condemnation by member’s peers or suspension of participation in CFA program

Question 3

CFA Institute Professional Conduct Program: Inquiries

Answer 3

Inquiries prompted by:

1. Self-disclosure
2. Written complaints
3. Evidence of misconduct
4. Reports from CFA exam proctor

Question 4

Code of Ethics (6)

Answer 4

1. Act with integrity, competence, diligence, respect, and in an ethical manner with public, clients, prospects, employers, employees, or colleagues.
2. Integrity of investment profession and client interests above personal interests
3. Exercise reasonable care, independent judgement when making recommendations, conducting analyses, taking investment actions, and in other professional activities.
4. Practice and encourage others to practice in a professional, ethical manner, which reflects credit on themselves and the profession.
5. Promote integrity; uphold rules governing capital markets.
6. Maintain, improve professional competence and strive to do the same for other investment professionals.

Question 5

Standards of Professional Conduct (7)

Answer 5

1. Professionalism
2. Integrity of Capital Markets
3. Duties to Clients
4. Duties to Employers
5. Investment Analysis, Recommendations, and Acts
6. Conflicts of Interest
7. Responsibilities as a CFA Inst Member or Candidate

Question 6

I) Professionalism: Tenets (4)

Answer 6

1. Knowledge of the Law
2. Independence and Objectivity
3. Misrepresentation
4. Misconduct

Question 7

I) Professionalism: (A) Knowledge of the Law: Standard (3)

Answer 7

1. Understand and comply with all laws, rules, and regulations (including Codes and Standards of any gov’t, regulatory agency, or association governing prof activities
2. Comply with most strict, law, rules, or regulation.
3. Can’t knowingly assist in violation, without dissociation

Question 8

I) Professionalism: (A) Knowledge of the Law: Guidance (6)

Answer 8

1. Most strict
2. First, notify supervisor or compliance
3. May confront wrongdoer directly
4. Dissociate if necessary
5. Inaction may be construed as participation
6. No requirement to report violations to government authorities, except in appropriate cases.

Question 9

I) Professionalism: (A) Knowledge of the Law: Recommended Procedures (6)

Answer 9

1. Keep informed, regularly reviewed written compliance procedures, maintain files
2. Seek compliance/legal advice as needed
3. Encourage firms to adopt code of ethics
4. Distribute information internally on application laws and regulations.
5. Have written procedure for reporting suspected violations
6. Members strongly encouraged to report violations by other members

Question 10

I) Professionalism: (B) Independence and Objectivity: Standard (2)

Answer 10

(1) Use reasonable care, judgment to achieve and maintain independence in professional activities.
(2) Do not offer, solicit, or accept compensation that could compromise independence or objectivity.

Question 11

I) Professionalism: (B) Independence and Objectivity: Guidance (9)

Answer 11

1. Modest Gifts okay
2. Distinguish between gifts from clients and gift from entities trying to influence a member’s behavior
3. May accept gifts from clients, but disclose to employer; get permission if the gift is for future performance.
4. Members responsible for hiring managers should not accept travel, gifts, or entertainment that could impair objectivity.
5. Investment banking relationships- do not bow to pressure to issue favorable research
6. For issuer-paid research, flat-rate fee preferred; disclose.
7. Members working for credit rating firms should avoid influence by issuing firms
8. Users of credit ratings should be aware of this potential conflict.
9. Best practice for analysts to pay for their own commercial travel to firms being analyzed or firm events.

Question 12

I) Professionalism: (B) Independence and Objectivity: Recommended Procedures (5)

Answer 12

1. Protect integrity of opinions-reports should reflect unbiased opinions
2. Create a restricted list
3. Restrict special cost arrangements
4. Limit gifts; clear value limits by firms
5. Be careful with IPO share allocations

Question 13

I) Professionalism: (C) Misrepresentation: Standard (2)

Answer 13

Do not make misrepresentations related to investment analyses, recommendations, actions, or other professional activities.

Question 14

I) Professionalism: (C) Misrepresentation: Guidance (4)

Answer 14

1. Standards covers oral, written, and electronic communications
2. Do not misrepresent qualifications, services of self or firm, or performance record, characteristics of an investment
3. Do not guarantee a certain return
4. No plagiarism- written, oral, or electronic communication.

Question 15

I) Professionalism: (C) Misrepresentation: Recommended Procedures

Answer 15

1. Firm can assist employees by providing a written list of firm’s available services and a description of the firm’s qualifications.
2. Maintain records of materials used to prepare research reports, and quote sources, except for recognized “financial and statistical reporting services”
3. Models and analysis of others at the firm may be used without attribution
4. Should encourage firm to establish procedures for verifying marketing claims or third parties recommended to clients.

Question 16

I) Professionalism: (D) Misconduct: Standard

Answer 16

1. Do not engage in any professional conduct involving fraud, deceit, or dishonesty, or
2. Commit any act that reflects adversely on professional reputation, integrity, or competence.

Question 17

I) Professionalism: (D) Misconduct: Guidance

Answer 17

The Standard covers conduct that may not be illegal, but could adversely affect member’s ability to perform duties.

Question 18

I) Professionalism: (D) Misconduct: Recommended Procedures

Answer 18

(1) Adopt a code of ethics to which every employee must adhere
(2) Disseminate a list of potential violations and associated disciplinary sanctions
(3) Conduct background checks on potential employees- look for good character and eligibility to work in investment industry.

Question 19

II) Integrity of Capital Markets: Tenets

Answer 19

(A) Material Nonpublic Information: Members in possession of nonpublic information that could affect an investment’s value must not act or cause someone else to act on the information

(B) Market Manipulation: Do not engage in practices that could distort prices, or artificially inflate tradings volumes with intent to mislead market participants

Question 20

II) Integrity of Capital Markets: (A) Material Nonpublic Information: Guidance (8)

Answer 20

1. Material: if disclosure of information would affect a security’s price or if an investor would want to know before making an investment decision
2. If price effect is ambiguous, information may not be considered material
3. Extends to info like upcoming rating change, or upcoming influential analysis.
4. Info is nonpublic until available to the marketplace
5. Information available to analysts considered nonpublic until it is made available to general investors.
6. “Acts” include related swaps and options, and mutual funds with the security.
7. If you possess material non-public information, act as if you did not know.

(8) Mosaic theory: no violation when an analyst combines non-material non-public information with public information to reach conclusion.

Question 21

II) Integrity of Capital Markets: (A) Material Nonpublic Information: Recommended Procedures (4)

Answer 21

1. Information barrier or “firewall” is recommended to control interdepartmental communications
2. Information barrier includes use of a restricted list
3. Review employee trades
4. Review/ restrict proprietary trading while firm is in possession of material non-public information

Question 22

II)Integrity of Capital Markets: (B) Market Manipulation: Guidance (2)

Answer 22

1. Do not engage in transaction based manipulation- give false impression of activity/price movement; gain dominant position in an asset to manipulate price of the asset or related derivative.
2. Do not distribute false, misleading information

Question 23

III) Duties to Clients and Prospective Clients: Tenets

Answer 23

• (a) Loyalty, Prudence, and Care
• (b) Fair Dealing
• (c) Suitability
• (d) Performance Presentation
• (e) Preservation of Confidentiality

Question 24

III) Duties to Clients: (A) Loyalty, Prudence, and Care: Standard (3)

Answer 24

1. Duty of loyalty to client- act with reasonable care and exercise prudent judgment
2. Act for benefit of client and place their interest before employer’s or own interests
3. Determine and comply with any applicable fiduciary duty

Question 25

III) Duties to Clients: **(A)** Loyalty, Prudence, and Care: Guidance (8)

Answer 25

1. Take **investment actions** in **client's best interest** 2. Exercise **prudence, care, skill,** and **diligence** that a **person familiar** with such matters **would use** 3. Follow applicable **fiduciary duty** 4. **"Client"** may be investing **public** 5. Manage **pools** of clients **assets** according to terms of **governing documents** 6. Make **investment decisions** in context of **total portfolio** 7. Vote **proxies** responsibly and **disclose proxy voting** **policies to clients** 8. **"Soft dollars"** must **benefit clients**

Question 26

III) Duties to Clients: **(A)** Loyalty, Prudence, and Care: Recommended Procedures (9)

Answer 26

1. Follow **rules and laws** 2. Establish **client investment objectives** 3. Diversity 4. Deal fairly with clients- investment actions 5. **Disclose** all **possible conflicts** 6. Vote **proxies** in **best interest of clients** and ultimate **beneficiaries.** 7. Keep client information confidential 8. Seek **best** trading **execution** for clients 9. Place client interests first

Question 27

III) Duties to Clients: **(B)** Fair Dealing: Standard (4)

Answer 27

Deal fairly with clients when: 1. Providing investment analysis 2. Making investment recommendations 3. Taking investment action 4. Engaging in other professional activity

Question 28

III) Duties to Clients: **(B)** Fair Dealing: Guidance (5)

Answer 28

1. No **discrimination** against clients when disseminating investment recommendations or taking investment actions 2. **Fair does not mean equal** 3. Different levels of service are okay as long as **disclosed** and **do not disadvantage** any clients. 4. Investment recommendations: * ---- All clients must have **fair chance** to act on **every recommendation** * ---- If client is unaware of r**ecommendation change**, **advise before accepting trade order.** 5. Investment actions * ---- Treat all clients fairly- consider **investment objectives and circumstances** * ---- disclose **written allocation procedures** * ---- **do not disadvantage** any clients when distributing **"hot"** issues

Question 29

III) Duties to Clients: **(B)** Fair Dealing: Recommended Procedures

Answer 29

1. Limit **number of people aware** of upcoming changes 2. **Shorten** time frame between **decision** and **dissemination** 3. Have **pre-dissemination guidelines** 4. **Simultaneous dissemination** 5. **Maintain list** of **clients** and their **holdings** 6. **Disclose** trade **allocation procedures** 7. **Review** accounts regularly to **ensure fair** client **treatment** 8. If firm **offers different** levels of **service**, **disclose** this fact to **clients** 9. **Deviation** from **strict pro rata allocation** of IPO is sometimes okay (e.g. minimum block sizes)

Question 30

III) Duties to Clients: **(C)** Suitability: Standard (5)

Answer 30

When in advisory relationship with a client: 1. Make **reasonable inquiry** into client's investment **experience, risk/return objectives**, and financial **constraints prior** to making any **recommendation,** or taking investment **action** 2. Update information regularly 3. Ensure investment is **suitable** to the **client' situation** and **consistent** with written **objectives** before recommending an investment or taking investment action 4. Look at **suitability** in **portfolio context** 5. When responsible for managing a portfolio to a **specific mandate, strategy, or style,** make investment recommendations or take investment actions that are **consistent** with the stated objectives and constraints of the portfolio.

Question 31

III) Duties to Clients: **(C)** Suitability: Guidance

Answer 31

1. When in an **advisory relationship**, gather client information at the **outset** and prepare **Investment Policy Statement** (IPS) 2. **Update** **IPS** at least **annually** 3. **Consider** whether **leverage** (derivatives) is **suitable** for clients 4. If managing a fund to an index or other mandate, **invest according to the mandate**

Question 32

III) Duties to Clients: **(C)** Suitability: Recommended Procedures

Answer 32

When formulating IPS for client, know the clients: 1. Return objectives, 2. Risk tolerance 3. Determine the clients constraints: * (a) liquidity needs * (b) expected cash flows, investable funds * (c) time horizon, * (d) tax considerations. * (e) regulatory/legal constraints * (f) unique circumstances/needs

Question 33

III) Duties to Clients: **(D)** Performance Presentation: Standard

Answer 33

1. When **communicating investment performance** information, make reasonable efforts to ensure that it is **fair, accurate**, and **complete** 2. Can make **brief presentation**, **note limited nature**, and make detailed information available **upon request**.

Question 34

III) Duties to Clients: **(D)** Performance Presentation: Guidance

Answer 34

1. Do not **misstate** or **mislead** about investment performance 2. Do not **misrepresent past performance** 3. Provide **fair** and **complete** performance information 4. Do not **share** or **imply** ability to **achieve returns** similar to those achieved in the past

Question 35

III) Duties to Clients: **(D)** Performance Presentation: Recommended Procedures

Answer 35

1. **Consider** audience **sophistication** when presenting performance 2. Use **performance of weighted composite** of **similar portfolios** 3. Use **terminated accounts** as part of **historical performance** 4. Make all **disclosures** and **maintain records**

Question 36

III) Duties to Clients: **(E)** Preservation of Confidentiality: Standard

Answer 36

1. Keep current and prospect client information confidential, unless: * Illegal activities are suspected 2. Disclosure is required by law 3. Client or prospect allows disclosure of the information

Question 37

III) Duties to Clients: **(E)** Preservation of Confidentiality: Guidance

Answer 37

1. In some cases it may be **required by law** to report activities to **relevant authorities** 2. The standard extends to **former clients** 3. **Exception:** May provide **confidential information** to the **CFA institut**e for an investigation under **Professional conduct program**

Question 38

III) Duties to Clients: **(E)** Preservation of Confidentiality: Recommended Procedures

Answer 38

1. **Avoid discussing** any information received by a client **except** to **colleagues** working on the **same project** 2. Follow firm's **electronic data storage procedures; recommend adoption** of procedures if none exist

Question 39

IV) Duties to Employers: Tenets (3)

Answer 39

* **(A)** Loyalty * **(B)** Additional Compensation Arrangements * **(C)** Responsibilities of Supervisors

Question 40

IV) Duties to Employers: **(A)** Loyalty: Standard

Answer 40

On matters related to employment: 1. act for the **benefit** of the **employer** and 2. **do not deprive** employer of the advantage of **skills/abilities**, 3. **divulge confidential** information, or 4. otherwise harm to employer.

Question 41

IV) Duties to Employers: **(A)** Loyalty: Tenets

Answer 41

1. General 2. Independent Practice 3. Leaving an Employer 4. Whistleblowing

Question 42

IV) Duties to Employers: **(A)** Loyalty-General: Guidance (3)

Answer 42

1. Place **client interests first** but consider effects on firm **sustainability** and **integrity** 2. Members encouraged to give **employers** a copy of the **codes and standards** 3. No **incentive** or **compensation** structure that **encourages unethical behavior**

Question 43

IV) Duties to Employers: **(A)** Loyalty-Independent Practice: Guidance

Answer 43

1. If planning to engage in **independent practice, notify employers** of **services** provided, expected **duration**, and **compensation** 2. Do not proceed without consent of employer

Question 44

IV) Duties to Employer: **(A)** Loyalty-Leaving an Employer: Guidance

Answer 44

1. **Act** in the **best interest** of employer until **resignation is effective** 2. Employer **records** (cell phone, PDA, home computer, etc...) on **any medium** are **property** of the **firm** 3. Simple **knowledge of names** of **former clients** is **okay**; **do not solicit prior to leaving** 4. **No prohibition** on use of **experience** or **knowledge** gained at former employer

Question 45

IV) Duties to Employer: **(A)** Loyalty-Whistleblowing: Guidance

Answer 45

1. Permitted only if it **protects client** or **integrity of capital markets** 2. **Not permitted** for **personal gain**

Question 46

IV) Duties to Employers: **(B)** Additional Compensation: Standard

Answer 46

Do not accept **gift, benefit, consideration, or compensation** that **competes with**, or creates a **conflict of interest with,** **employer's interest** unless written **consent is obtained from all parties involved.**

Question 47

IV) Duties to Employers: Additional Compensation: Guidance

Answer 47

1. **Compensation** and **benefits** cover direct compensation by the **client** and other benefits received from **third parties** 2. For **written consent** from "all parties involved" **email is acceptable**

Question 48

IV) Duties to Employers: **(B)** Additional Compensation: Recommended Procedures

Answer 48

1. **Written report to** employers with **details of proposed compensation** in addition to n**ormal compensation and benefits** 2. Details of **incentives** verified by offering party 3. Include **nature of compensation, amount**, and **duration of agreement**

Question 49

IV) Duties to Employers: **(C)** Responsibility of Supervisors: Standard

Answer 49

Make **reasonable efforts** to **detect** and **prevent violation** of applicable laws, rules, regulations, and **Codes and Standards** by anyone **subject** to your **supervision** or authority.

Question 50

IV) Duties to Employers: **(C)** Responsibility of Supervisors: Guidance (3)

Answer 50

1. Supervisors must take steps to **prevent employees from violating**, laws, rules, regulations, or the Codes and Standards 2. Supervisors must make **reasonable efforts** to **detect violations** 3. Should **enforce non-investment rules** as well (i.e. mandatory vacations)

Question 51

IV) Duties to Employers: **(C)** Responsibility of Supervisors: Recommended Procedures

Answer 51

1. Adequate compliance procedures should: - * --Be clear and understandable - * --Designate a compliance officer * --Have checks/balances: Permitted conduct * ---Have procedures for reporting violations 2. Supervisor and compliance officer should: * ---Distribute procedures; update periodically * ---Continually educate staff * ---Review employee actions * ---Promptly initiate procedures once a violation has occurred 3. Once a violation has occurred, a supervisor should: * ---Respond promptly * ---Conduct a thorough investigation - * --Place appropriate limitations on the wrongdoer until investigation is complete

Question 52

V) Investment Analysis, Recommendations, and Actions (Investment ARAs): Tenets (3)

Answer 52

* **(A)** Diligence and Reasonable Basis * **(B)** Communication with clients and prospective clients * **(C)** Record Retention

Question 53

V) Investment ARAs: **(A)** Diligence and Reasonable Basis: Standard (2)

Answer 53

1. Exercise **diligence, independence, thoroughness** in **analyzing** investments, **making investment recommendations**, and taking **investment actions** 2. Have a **reasonable and adequate basis** supported by **research**, for analysis, recommendation, or action

Question 54

V) Investment ARAs: **(A)** Diligence and a Reasonable Basis: Guidance

Answer 54

1. Make **reasonable effort** to cover all **relevant issues** when arriving at an investment recommendation 2. Level of **diligenc**e will **depend on product or service** offered 3. For **2nd/3rd party research**, determine **soundness of the research**-review assumptions, rigor, timeliness, and independence of analysis 4. **Encourage firms** to **adopt policy of periodic review of 3rd party research** regarding assumptions, rigor, timeliness, objectivity, and independence.

Question 55

V) Investment ARAs: **(A)** Diligence and Reasonable Basis: Recommended Procedures

Answer 55

1. Establish **due diligence procedures** for judging if recommendation has met reasonable and adequate basis criteria 2. **Develop measurable criteria** for assessing quality of research 3. Consider scenarios **outside recent experience** to assess **downside risk of quantitative models** 4. Make sure firm has procedures to **evaluate external advisors** they use or promote, include how often to review 5. **Written procedures of acceptable scenario testing,** range of scenarios, **cash flow sensitivity** to **assumptions** and **inputs** 6. Procedures for **evaluating outside information providers** including how often 7. **No need to dissociate** from group research the member **disagrees** with

Question 56

V) Investment ARAs: **(B)** Communications with Prospective/Clients: Standard

Answer 56

1. Disclose **basic format/general principles** of investment processes used to **analyze investments**, **select securitie**s, and c**onstruct portfolios** 2. Promptly **disclose** and changes that may affect those **processes materially** 3. Use **reasonable judgment** to identify which **factors are important** to investment analyses, recommendations, or actions 4. Include those **factors** in **communications** with prospective/ clients 5. Distinguish between **fact and opinion** in presentation of investment analysis and recommendations 6. Clearly communicate **potential gains and losses** on an investment

Question 57

V) Investment ARAs: **(B)** Communication with Prospective/ Clients: Guidance

Answer 57

1. Include **basic characteristics** of the security 2. Inform clients of any **change i**n i**nvestment processes** 3. **Suitability** of investment-portfolio context 4. **All communication covered, not just reports**

Question 58

V) Investment ARAs: **(C)** Record Retention: Standard

Answer 58

Develop and maintain **appropriate records** to **support** investment analyses, recommendations, actions, and other investment-related **communications with clients and prospective clients**

Question 59

V) Investment ARAs: **​(C)** Record Retention: Guidance

Answer 59

1. Maintain records to support research, and the rationale for conclusions and actions 2. Records are the **firm's property** and **cannot** be taken without the **firm's consent** 3. If **no regulatory requirement,** CFAI recommends retention for **7 years**

Question 60

V) Investment ARAs: **​(C)** Record Retention: Recommended Procedures

Answer 60

1. When member changes firms, must **recreate records** from **public sources** and **new firm's information** (can't rely on memory of material's from old firm 2. **Responsibility to maintain records** generally falls with the **firm** 3. However, **individuals** must retain documents that support **investment-related communications**

Question 61

VI) Conflicts of Interest: Tenets (3)

Answer 61

* **(A)** Disclosure of Conflicts * **(B)** Priority of Transactions * **(C)** Referral Fees

Question 62

VI) Conflicts of Interest: **​(A)** Disclosure of Conflicts: Standard

Answer 62

1. Make **full, fair disclosure** of all matters that could reasonably **impair independence/objectivity**, or **interfere** with duties to **clients, prospects, or employer** 2. Ensure **disclosures** are **prominent**, delivered in **plain language**

Question 63

VI) Conflicts of Interest: **​(A)** Disclosure of Conflicts: Guidance

Answer 63

1. **Disclose to Clients** * ---All matters that could **impair objectivity**-allow clients to **judges motives, biases** * ---For example, between member or firm and issuer, investment banking relations, broker/dealer market-making activities, significant stock ownership, board service 2. **Disclose to Employers** * ---Conflicts of Interest-**ownership of stock analyzed/recommended,** **board participation**, financial and other pressures that may influence decisions * ---Also cover conflicts that could be **damaging** to employer's business

Question 64

VI) Conflicts of Interest: ​**(A)** Disclosure of Conflicts: Recommended Procedures

Answer 64

1. **Disclose compensation arrangements** with **employer** that **conflict** with **client's interests** 2. If firm **does not permit disclosure**, consider **dissociating** from the activity 3. **Firms** are encouraged to include **compensation information** for promotional materials

Question 65

VI) Conflicts of Interest: **​(B)** Priority of Transactions: Standard

Answer 65

1. Investment transaction for clients and employers must have **priority over transactions** in which a member of candidate is the **beneficial owner** 2. Do not use knowledge of **pending trades** for **personal gain**

Question 66

VI) Conflicts of Interest: **(B)** Priority of Transactions: Guidance

Answer 66

1. **"Beneficial owner"-** has **direct/indirect personal interest** in the security 2. **Client, employer transactions** taken priority over **personal transactions** (including beneficial ownership 3. **Family membe**r accounts that are **client accounts** must be treated as other client accounts

Question 67

VI) Conflicts of Interest: **(B)** Priority of Transactions: Recommended Procedures

Answer 67

1. Establish **blackout/restricted periods** 2. Establish **reporting procedures** and prior **clearance requirements** 3. Disclose policies on **personal investment** to **clients,** upon request firm's compliance procedures should: * Limit participation in equity IPOs * Restrict purchase of securities through private placements.

Question 68

VI) Conflicts of Interest: **(C)** Referral Fees: Standard

Answer 68

Disclose to **employers, prospective/clients,** as appropriate, any **compensations, considerations, or benefit** **received from, or paid to**, others for the **recommendations** of products or services

Question 69

VI) Conflicts of Interest: **(C)** Referral Fees: Guidance

Answer 69

1. Disclosure allows **clients and employers** to evaluate f**ull cost of service** and any **potential biases** 2. Disclosure is made **prior to any formal agreement** for services 3. Disclose the **nature** of the **consideration** 4. Encourage firms to have **clear policy** regarding **referral compensation** 5. Firms that do not prohibit should have **clear approval process** 6. Members should update **referral compensation disclosure** to **employer** at least **quarterly**

Question 70

VII) CFA Responsibilities: Tenets

Answer 70

* (A) Conduct as members/candidates in the CFA program * (B) Reference to CFAI, the CFA Designation or program

Question 71

VII) CFA Responsibilities: **(A)** Conduct: Standard

Answer 71

Do not engage in any conduct or activity that **compromises** the reputation or integrity of the CFA **Institute** or **designation**, or the securities of the **exams**

Question 72

VII) CFA Responsibilities: **​(A)** Conduct: Guidance

Answer 72

Conduct Includes: 1. Cheating on an exam 2. Disregarding rules or policies or security measures related to exam administration 3. Giving **confidential information** to **other members** or the **public** 4. **Improper use** of the **CFA designation** to **further personal** and **professional objectives** 5. **Misrepresenting** the CFAI Professional Development Program or the **Professional Conduct Statement.** 6. Don't Disclose: * **Formulas** tested or not tested on the exam * Specific **question** information * **Topic emphasis** on the exam or topics tested.

Question 73

VII) CFA Responsibilities: **​(B)** Reference: Standard

Answer 73

When referring to the CFAI, membership, candidacy, or designation, do not misrepresent or exaggerate the meaning or implications of membership in the CFAI, holding the designation, or candidacy in the program.

Question 74

VII) CFA Responsibilities: **​(B)** Reference: Guidance

Answer 74

1. CFA Institute membership: * ---Complete **PCS annually** * ---Pay **membership dues annually** 2. Failure to comply with the above results in an **inactive member status** 3. Using the CFA designation: * ---Use the marks "Chartered Financial Analyst" or "CFA" in a manner that **does not misrepresent** or **exaggerate** the meaning or implications of holding the CFA designation. 4. Reference to the CFA Program: * ---Candidates may **reference participatio**n in the CFA program, but do not **imply achievement** of **partial** designation * ---Okay to say "**passed all levels on first attempt"** but do not imply **superior ability**. 5. Improper use of CFA marks: * ---"Chartered Financial Analyst" and "CFA" marks must be used **after the charterholder's name**, or a**s an adjectives, not as a noun.**

Question 75

VII: CFA Responsibilities: **​(B)** Reference: Recommended Procedures

Answer 75

Make sure that your employer is aware of the proper references to the CFA designation or CFA candidacy.

Question 76

GIPS: Purpose

Answer 76

1. The Global Investment Performance Standards were created to make **performance measurements** among firms **comparable**, with **standardized calculation** and **reporting practices.** 2. GIPS aims to **avoid misrepresentation** of performance by **investment firms** and to give clients **relevant information** to evaluate past performance.

Question 77

GIPS: Parties Affected

Answer 77

* Firms * Prospective and current clients

Question 78

GIPS: Composites

Answer 78

1. **Composite**: a grouping of **individual discretionary & non-disretionary portfolios** with s**ame investment strategy, objective**, or **mandate.** 2. A composite must include all portfolios (**present and past**) that the firm has managed in accordance with this particular strategy. 3. Groupings must be **pre-identified**

Question 79

GIPS: Verification: Purpose

Answer 79

* **Voluntarily** a firm may hire an independent third party to verify its claims of GIPS compliance * Primary purpose of verification is to provide assurance that compliance with GIPS is on a **firm-wide** basis

Question 80

GIPS: Verification: Requirements

Answer 80

1. Must be performed by a third-party on a firm-wide basis 2. Verifier must attest that firm has complied with GIPS requirements for composite construction, and firm's processes/procedures are established to present performance in accordance to proper calculation methods, data, and format.

Question 81

GIPS: Objectives

Answer 81

1. Obtain global acceptance of calculation and presentation standards-fair, comparable format with full disclosure 2. Ensure **consistent, accurate performance** data- reporting marketing, presentation 3. Promote Fair competition 4. Promote global industry **"self-regulation"**

Question 82

GIPS: Key Characteristics

Answer 82

1. Define firm as "distinct business entity" 2. Fair-representation 3. Include all **fee-paying** portfolios in composites for 5-year minimum, or since inception (add performance for each year-10 years 4. Certain calculations/presentations standards are required, along with disclosures 5. Input data must be accurate 6. GIPS required and recommended provisions 7. No partial compliance allowed 8. If GIPS conflicts with local law, follow local law, but disclose conflict

Question 83

GIPS: Claim of Compliance

Answer 83

Once GIPS requirements are met: 1. [Firm name] has **prepared** and presented this report in **compliance** with the **Global Investment Performance Standards** 2. **No statement** referring to **calculation methodologies** used in a composite presentation being "in accordance with GIPS"

Question 84

GIPS: Firm's Fundamental Responsibilities

Answer 84

1. Provide compliant presentation to all prospects 2. Provide composite list/description to all prospects who make a request 3. On client request, provide compliant presentation and composite description 4. Joint marketing, separate noncompliant firm

Question 85

GIPS: Firm Definition and Historical Record

Answer 85

1. To claim compliance, firm defined as the "distinct business entity" held out to clients 2. Include all actual fee-paying, portfolios in composites for a minimum of 5-years (or since firm or composite inception 3. Must add 1 year of compliant performance history each year until a 10-year record is presented

Question 86

GIPS: Countries with Existing Standards

Answer 86

* Firms in compliance with country-specific GIPS may continue to claim compliance prior to 1-1-06 * When country-specific regulations differ from GIPS, follow country-specific, but disclose conflict.

Question 87

GIPS: 9 Major Sections

Answer 87

* (0) Fundamentals of Compliance * (1) Input Data * (2) Calculation Methodology * (3) Composite Construction * (4) Disclosure * (5) Presentation and Reporting * 6) Real Estate * (7) Private Equity * (8) Wrap Fee/Separately Managed Account (SMA) Portfolio

Question 88

**0)** GIPS: Fundamentals of Compliance

Answer 88

Issues for firms to consider when claiming GIPS compliance, including definition of firm

Question 89

**1)** GIPS: Input Data

Answer 89

Must be consistent, for full, fair, comparable performance presentations

Question 90

**2)** GIPS: Calculation methodology

Answer 90

Certain methodologies are required; be uniform in methods

Question 91

**3)** GIPS: Composite Construction

Answer 91

Create meaningful, asset-weighted composites

Question 92

**4)** GIPS: Disclosures

Answer 92

Certain info must be disclosed about presentation/policies

Question 93

**5)** GIPS: Presentation and Reporting

Answer 93

Present Investment performance according to GIPS requirements

Question 94

**6)** GIPS: Real Estate

Answer 94

Provisions also apply to real estate investments, regardless of level of control the firm has over management of the investment

Question 95

**7)** GIPS: Private equity

Answer 95

Value according to GIPS Private Equity Valuation principles, unless open-end or evergreen fund (then follow regular GIPS)

Question 96

**8)** Wrap Fee/ Separately Managed Account (SMA) Portfolio

Answer 96

A supplement to sections 0-5 with specific reference to those provision with don't apply to Wrap Fee/SMA portfolios and some provision here supersede those in sections 0-5