CFA Level 3 > Ethics > Flashcards

Ethics Flashcards

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1
Q

What is the structure of the CFAI Professional Conduct Program?

A

The Board of Governors oversees the Professional Conduct Program. The PCP, in conjunction with the DRC, enforce the standards. The DRC is a volunteer committee. This panel comes into play when members or candidates do not accept their punishments. The panel reviews the material to help make a decision.

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2
Q

Where do CFAI inquiries come from?

A
  1. Self reporting on the annual conduct statement
  2. Written complaints
  3. CFAI staff becomes aware of a violation
  4. Exam day violations
  5. Social Media team
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3
Q

What are the potential consequences of a CFAI violation?

A
  1. Public Censure
  2. Suspension of membership
  3. Revocation of charter
  4. Can’t complete the program
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4
Q

What are the six key elements of the code of ethics?

A
  1. Integrity, competence, diligence, and respect to public, clients, prospective clients, employers, and others.
  2. Place integrity of the profession and interests of the clients above all else
  3. Use reasonable care and judgement when conducting research, making recommendations, taking actions.
  4. Practice and encourage others to be ethical
  5. Promote the integrity and viability of the global market for the ultimate benefit of society
  6. Maintain or improve professional competence
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5
Q

What are the elements of professionalism?

A
  1. Knowledge of the law
  2. Independence and objectivity
  3. Misrepresentation
  4. Misconduct
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6
Q

What are the most common violations of Professionalism - Knowledge of the Law?

A
  1. Member does not comply to the most strict between the law and the code
  2. Members do not seek out guidance on regulations in laws in which they may be distributing product or giving investment advice
  3. They knowingly break the law/code
  4. You do not dissociate yourself from reports or actions that you realize are incorrect, illegal, or unethical.
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7
Q

What can a member do to ensure they do not violate Professionalism - Knowledge of the Law?

A
  1. You must stay informed for laws, rules, regulations. This can be done through consulting other experts
  2. Review procedures
  3. Maintain current files showing that you are aware of relevant laws and regulations
  4. When in doubt, seek legal councel from a third party lawyer or the compliance department
  5. Dissociate from those who are breaking the law or code
  6. Firms should have a code of ethics and procedures for reporting violations
  7. Firms should provide information on applicable laws to employees
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8
Q

What are the most common violations of Professionalism - Independence and Objectivity?

A
  1. Oversubscription of IPOs to investment managers personal accounts
  2. You are not rejecting any offers that could compromise objectivity
  3. Not disclosing gifts given to them by clients. Should be done before, when possible
  4. Write favorable research reports after being pressured. This could include non-favourable, but ambiguous reports that do not express opinions clearly.
  5. Firms do not put firewalls between IB and sales + trading.
  6. Obscuring your benchmark or performance attribution
  7. Soliciting gifts or contributions if it can be perceived that is alters your opinion.
  8. Not disclosing when you are paid to write a research report, and not writing it objectively.
  9. not distinguishing between opinion and fact
    10.
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9
Q

What can a member do to ensure they do not violate Professionalism - Independence & Objectivity?

A
  1. Protect the integrity of your opinion
  2. Create a restricted list
  3. Restrict special cost arrangements
  4. Limit gifts
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10
Q

What are the most common violations of Professionalism - Misrepresentation?

A
  1. Knowingly making false statements
  2. Knowingly leave out information
  3. Not providing full disclosure on website
  4. Not ensuring that current information is on the website
  5. Not misrepresenting on the website
  6. Guaranteeing return on risky investments
  7. Misrepresenting firm or individual qualifications, services, or performance.
  8. Using an incorrect benchmark
  9. Using an incorrect valuation method for illiquid investments
  10. Plagiarism - you must credit all sources.
  11. Plagiarism - not citing specific names
  12. using estimates without disclaimers
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11
Q

What can a member do to ensure they do not violate Professionalism - Misrepresentation?

A
  1. Verify outside information
  2. Maintain webpages
  3. Maintain copies of all research used
  4. Attribute research and quotes
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12
Q

What are the most common violations of Professionalism - Misconduct?

A
  1. Lying, cheating, stealing, dishonesty
  2. Not taking the appropriate steps in due diligence
  3. Falsely reporting other CFAI members
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13
Q

What are the most common violations of Integrity of Capital Markets - Material Nonpublic Information?

A
  1. Using material information that has not been disseminated
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14
Q

What is Mosaic theory?

A

You can use conclusions derived by an analyst through uses and public and nonmaterial nonpublic information is fine, even if it would be considered material if communicated directly by an insider.

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15
Q

What can a member do to ensure they do not violate Integrity of Capital Markets - Material Nonpublic Information?

A
  1. Try to have public dissemination of material information
  2. Put in firewalls
  3. Separate documents
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16
Q

What are the most common violations of Integrity of Capital Markets - Market Manipulation?

A
  1. Disseminating false or misleading information

2. Distorting transactions

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17
Q

What are the most common violations of Duties to Clients - Loyalty, Prudence, and Care?

A
  1. You do not act in the sole benefit of the client
  2. Not realizing that the duty of care is to the end beneficiaries
  3. Not avoiding potential conflicts of interest
  4. Do not evaluate investment portfolios as a whole
  5. Does not seek best execution when using brokers
  6. Does not educate when proxy voting
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18
Q

What can a member do to ensure they do not violate Duties to Clients - Loyalty, Prudence, and Care?

A
  1. Establish very clear investment objectives for a client
  2. Consider all information when you take action
  3. Diversify
  4. Deal fairly with all clients
  5. Disclose conflicts of interest
  6. Disclose compensation agreements
  7. Maintain confidentiality
  8. Seek best execution
  9. Put client needs first
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19
Q

What are the most common violations of Duties to Clients - Fair Dealing?

A
  1. Not communicating recommendations on an equitable basis
  2. Not notifying clients of changes in opinion
  3. Not fairly distributing IPOs or new issues - using odd-lots
  4. Favouring institutional clients over retail, or vice versa
  5. Not disclosing allocation procedures to clients.
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20
Q

What can a member do to ensure they do not violate Duties to Clients - Fair Dealing?

A
  1. Shorten time frame between decision and action
  2. publish guidelines for behaviour
  3. Simultaneous dissemination
  4. Document trade allocation procedures
  5. Processing orders FIFO with considerations for bundling
  6. Giving all clients a prorated share of the order based on account size
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21
Q

What are the most common violations of Duties to Clients - Suitability?

A
  1. Do not conduct a suitability analysis
  2. Do not use appropriate asset allocation
  3. Do not update IPS when material changes happen.
  4. Concentration
  5. Not addressing the suitability of unsolicited trades
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22
Q

What can a member do to ensure they do not violate Duties to Clients - Suitability?

A
  1. Use an IPS
  2. Update the IPS
  3. Always analyze suitability
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23
Q

What are the most common violations of Duties to Clients - Preservation of Confidentiality?

A
  1. Not protecting confidentiality even after a client leaves

2. Not ensuring proper security

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24
Q

What are the most common violations of Duties to Employers - Loyalty?

A
  1. Engaging in conduct harmful to employer in general
  2. Participating in independent, competing practices with compensation without permission.
  3. No obtaining employer consent for such practices before hand
  4. Soliciting employer clients before leaving
  5. Taking client lists
  6. Not erasing employment information after leaving
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25
What can a member do to ensure they do not violate Duties to Employers - Loyalty?
1. Have a competition policy | 2. Follow the policy
26
What are the most common violations of Duties to Employers - Additional Compensation Arrangements?
1. Not obtaining written consent from employer when compensation from other sources could cause a conflict
27
What are the most common violations of Duties to Employers - Supervisor Responsibilities?
1. Not making reasonable efforts to prevent and detect violations 2. Not establishing compliance systems 3. Not providing any training or education 4. Not bringing inadequate systems to senior management 5. Not reporting violations 6. not investigating violations 7. Not placing limits on employees after violations
28
What are the most common violations of Analysis, Recommendations, and Actions - Diligence and Reasonable Basis?
1. Not determining whether third party research is sound before using it. 2. Not determining whether data is correct 3. Not understanding your quant models 4. Not considering your models potential pitfalls
29
What are the most common violations of Analysis, Recommendations, and Actions - Communications?
1. Not distinguishing between facts and opinions | 2. Not include risk factors that are relevant for investments
30
What are the most common violations of Analysis, Recommendations, and Actions - Record Retention?
1. Not retaining all research and correspondence
31
What are the most common violations of Conflicts of Interest - Disclosure?
1. Not fully disclosing conflicts in plain english 2. Not providing enough information to allow people to asses whether a conflict exists 3. Not reporting conflicts promptly
32
What are the most common violations of Conflicts of Interest - Priority of Transactions?
1. Frontrunning | 2. Not letting your clients go first
33
What can a member do to ensure they do not violate Conflicts of Interest - Priority of Transactions?
1. Limit member participation in IPO's 2. Restrictions on private placements 3. Establish restricted and blackout periods 4. Establish preclearance procedures for member trades 5. Require members provide duplicate trade confirmations 6. Require member ownership disclosure
34
What are the most common violations of Conflicts of Interest - Referral Fees?
1. Not disclosing when you receive benefits from referrals | 2. You must disclose to clients before hand
35
What are the most common violations of CFAI Responsibilities - Conduct?
1. Disclosing test topics
36
What are the most common violations of CFAI Responsibilities - Reference?
1. Exaggerating the CFA or implying it makes you better 2. Using any CFA information if you are not actually enrolled in an exam or the institute 3. Putting CFA after a pseudonym
37
What are the characteristics of a profession that allow it to establish trust?
1. Normalization of behaviour 2. Providing a service to society 3. Client focused 4. Body of expert knowledge 5. Encourage and facilitate professional development 6. Monitored conduct 7. Collegial 8. Recognized oversight bodies 9. Encourage member engagement
38
What are the four steps in the ethical decision making framework?
1. Identify - relevant facts, people involved, conflicts, etc 2. Consider - what are the influences and biases at play? Seek additional guidance 3. Decide and act 4. Reflect
39
What is the purpose of the Asset Manager Code?
1. Guidepost for ethical and professional guidelines for asset managers 2. Minimum ethical standards
40
What are the six responsibilities of the Asset Manager Code?
1. Act professional and ethical at all times 2. Act for the benefit of clients 3. Act with independence and objectivity 4. Act with skill, competence, and diligence 5. Communicate with clients in a timely and accurate manner 6. Uphold the applicable capital markets rules
41
What are the firm benefits of adopting GIPS?
1. Credibility 2. Competitiveness 3. Identify opportunities to strengthen internal controls
42
What is the purpose of GIPS?
to set forward a worldwide best practice of calculating and presenting performance, promote fair representation of accurate data, full disclosure, and encourage fair competition
43
How many years of performance must be validated under GIPS to claim compliance?
Either 5 years or since inception. After you reach 5 years, you must add each subsequent year up to 10 years
44
Can you use years of non-compliance and still claim GIPS compliance?
Yes - if the data is from before the 21st century and it is disclosed
45
What defines separate business entities under GIPS?
1. Presented to clients as separate 2. Discretion used in investment process 3. Distinct clients or market served
46
What are the four general GIPS recommendations (not requirements)?
1. Firm should comply with recommendations 2. Firms should be verified 3. Broadest definition of the firm 4. Should provide GIPS client presentations annually
47
What is fair value under GIPS?
1. Arms length transaction price 2. Includes earned income 3. When not available in the market, must use objective and unadjusted proxies
48
What are the GIPS recommendations regarding input data and performance measurement?
1. Portfolios be valued on any day that external cash flows occur. 2. Valuations should be by a qualified third party 3. Accrue investment management fees in performance numbers
49
How often must portfolios (composites) be valued?
Once per month and on the date of all large cash flows
50
What does the Code say about the CCO being part of the investment team?
It is required that the person be competent and credible, but it is only recommended that the person is independent of operations and investments.
51
What does management commitment have to do with GIPS compliance?
Implementation efforts for GIPS are high. Unless senior management makes it a high priority, communicates this to the firm, establishes an adequate budget, and oversee the plan, it is unlikely that GIPS compliance will be reached.
52
How long must discontinued composites remain on the composite list?
5 years
53
How do firm changes affect the calculations of composites?
You are not permitted to alter composites due to corporate activity
54
How should dividends be treated for GIPS purposes?
Securities held ex dividend should have dividend accrued to them - this is a recommendation
55
What is the difference between the original Dietz and modified Dietz?
Original Dietz assumes middle of period cash flows, whereas modified takes weighted as of the actual date of cash flows. Original Dietz is no longer allowed (post 2005).
56
How does GIPS treat the calculation of trading expenses?
1. You cannot estimate - numbers must be actual 2. Trading costs are commissions, exchange fees, spreads from brokers 3. You must either deduct real trading fees, total bundled fees, or the portion of bundle allocated to trading expenses.
57
How should non-recoverable taxes be treated in calculating gross returns under GIPS?
They should be deducted if unrecoverable
58
Can non fee paying assets be included in composites?
They can, assuming they are discretionary and it is disclosed.
59
Could you exclude a portfolio from a composite if there are very high liquidity need?
Yes
60
When should new portfolios be included in the composite?
In a timely manner, typically the next full performance period. This does not apply if it takes time to invest the funds.
61
What time frame should you use for eliminating portfolios from the composite?
Once you lose discretion, include up until the last performance period then remove.
62
Under what two conditions can a portfolio be reassigned to a different composite?
1. The client mandate changes 2. Composite is redefined. In both cases, historical performance must remain with the old composite.
63
What does GIPS recommend regarding temporary new accounts?
It is recommended that large cash inflows be placed in a separate account to not affect the composite until funds are invested.
64
What does carve out composites have to do with cash balances?
Unless a carve out segment has a separately managed cash balance, it should not be carved out. Policies must be made clear if there are carve out segments.
65
When must you disclose a measure of internal dispersion?
If the composite contains more than 6 portfolios.
66
Under what circumstance must returns be ported from an acquired asset manager?
1. Same decision making process 2. Most people stay 3. The acquired firm brings records.
67
If you acquire a non compliant firm, how long do you have to bring it to compliance?
1 year
68
How often does GIPS suggest that performance presentations be updated?
Quarterly
69
How often does real estate need to be valued?
At least quarterly after 2008
70
How often must real estate be valued by an external party?
If no transactions, at least annually unless the agreement states 36 months
71
If market prices are unavailable, what is the heirarchy of valuation we should use?
1. Quoted prices for similar investments 2. Market based input prices 3. Subjective prices
72
What are the options for presenting performance on GIPS compliant advertisements?
1. 1/3/5 annualized composites 2. PTD and 1/3/5 3. PTD and 5 years returns
CFA Level 3
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