Ethics Flashcards
(83 cards)
1
Q
Explain ethics.
A
A set if shared beliefs about good (acceptable) or bad (unacceptable) behaviour
In the investment profession – conduct that balances self-interest and impact on outcomes for stakeholders
2
Q
Code of ethics
A
To communicate to the public that a profession’s members will use their knowledge and skills to serve their clients in an honest and ethical manner
3
Q
Standards of conduct
A
not required as part of the code of ethics
4
Q
Professions
A
occupational groups that require specialised knowledge, focus on ethical behaviour and service to community or society. May set and enforce standards for professional behaviour, require continuing education, and require putting client interests first
5
Q
Describe the need for high ethical standards in investment management
A
Need for high ethical standards in investment management – a lack of trust in investment professionals makes potential investors less likely to use investment industry services. Increase perceived risk of providing capital; increasing the cost of capital. Providing incomplete or false information leads to misallocation of capital and slower growth
6
Q
Suitability standard
A
match investment recommendations to clients’ risk tolerances and return requirements
7
Q
Fiduciary standard
A
act in best interest of clients
8
Q
Identify challenges to ethical behavior
A
- Social pressure
- Loyalty to employer, supervisor, or co-worker
- Money, power, or prestige
9
Q
Compare and contrast ethical standards with legal standards
A
Some actions may be illegal but ethical – civil disobedience (protesting)
Some actions may be legal but not ethical – taking shared in oversubscribed IPO instead of allocating them to clients
In general, ethical principles set a higher standard than laws and regulations
10
Q
Describe a framework for ethical decision making.
A
- Identify facts available or needed; ethical principles; stakeholders and conflicts
- Consider alternatives and situational influences; seek guidance
- Make a decision and act on it
- Evaluate outcome: intended results? Ethical principles considered adequately?
11
Q
Disciplinary Review Committee of CFA institute Board of Governors
A
has responsibility for the Professional Conduct Program and for enforcement of the Code and Standards
12
Q
CFA Institute, through Professional Conduct staff, conducts inquiries related to professional conduct
Inquiry can be prompted by:
A
- Self-disclosure by member or candidate
- Written complaints about a member of candidate’s professional conduct
- Evidence of misconduct by a member or candidate
- Report by a CFA exam proctor
- Analysis of exam scores and materials, monitoring of websites and social media
13
Q
CFA Institute Professional Conduct staff may decide:
A
- That no disciplinary sanctions are appropriate
- To issue a cautionary letter
- To discipline the member or candidate
Sanctions may include condemnation by member’s peers or suspension of candidate’s participation in the CFA Program
14
Q
Identify the six components of the Code of Ethics
A
- Act in an ethical manner - Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets.
- Integrity is paramount and clients always come first - Place the integrity of the investment profession and the interests of clients above their own personal interests.
- Use reasonable care; be independent - Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.
- Be a credit to the investment profession - Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.
- Uphold capital market rules and regulation - Promote the integrity and viability of the global capital markets for the ultimate benefit of society.
- Be competent - Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.
15
Q
The Standards of Professional Conduct:
A
I. Professionalism
II. Integrity of Capital Markets
III. Duties to Clients
IV. Duties to Employers
V. Investment Analysis, Recommendations, and Actions
VI. Conflicts of Interest
VII. Responsibilities as a CFA Institute Member or CFA Candidate
16
Q
I(A) – knowledge of the law
A
Understand and comply with all laws, rules, and regulations (including Code and standards) of any government, regulatory agency, or association governing professional activities
Comply with more strict law, rule, and regulation
Do not knowingly assist in violation, otherwise dissociate from activity
17
Q
I(A) – knowledge of the law (guidance)
A
- Most strict rule
- First, notify supervisor or compliance
- May confront wrongdoer directly
- Dissociate if necessary
- Inaction may be construed as participation
- No requirement to report violations to government authorities, may be appropriate in certain cases
18
Q
I(A) – knowledge of the law (Recommended procedures)
A
- Keep informed, regularly review written compliance procedures, maintain files
- Seek compliance/legal advice as needed
- Encourage firms to adopt code of ethics
- Distribute information internally on applicable laws and regulations
- Have written procedures for reporting suspended violations
- Members strongly encouraged to report violations
19
Q
I(B) – Independence and objectivity
A
Use reasonable care, judgement to achieve and maintain independence in professional activities
Do not offer, solicit, or accept any compensation that could compromise independence or objectivity
20
Q
I(B) – Independence and objectivity (guidance)
A
- Modest gifts okay
- Distinguish between gifts from clients and gifts from entities trying to influence a member’s behaviour
- May accept gift from clients – disclose to employer – get permission if for future performance
- Members responsible for firing outside managers should not accept travel, gifts, or entertainment that could impair their objectivity
- Investment banking relationships – do not bow to pressure to issue favourable research
- For issuer-paid research, flat fee structure is preferred; must disclose
- Members working for credit rating firms should avoid influence by issuing firms
- Users of credit ratings should be aware of this potential conflict
- Best practice is for analysts to pay for their own commercial travel to firms being analysed or to firm events
- If possible to inform as well
21
Q
I(B) – Independence and objectivity (Recommended procedures)
A
- Protect integrity of opinion -reports should reflect unbiased opinion
- Create a restricted list – not going to release opinions or trading
- Restrict special cost arrangements
- Limit gifts; clear value limits by firm
- Be careful with IPO share allocation
22
Q
I(C) – Misrepresentation
A
Do not make misrepresentations relating to investment analysis, recommendations, actions, or other professional activities
23
Q
I(C) – Misrepresentation (guidance)
A
- Standard covers oral, written, and electronic communications
- Do not misrepresent qualifications, services of self or firm, performance record, or characteristics of an investment
- DO not guarantee a certain return
- No plagiarism
24
Q
I(C) – Misrepresentation (Recommended procedures)
A
- Firms can assist employees by providing a written lost of the firm’s available services and description of the firm’s qualifications
- Maintain records of materials used to prepare research reports, and quote source, except for recognised financial and statistical reporting services
- Models and analysis of others at the firm may be used without attribution
- Should encourage firm to establish procedures for verifying marketing claims of third parties recommended to clients
25
I(D) – Misconduct
Do not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on professional reputation, integrity, or competence
26
I(D) – Misconduct (guidance)
This standard covers conduct that may not be illegal, but could adversely affect a member’s ability to perform duties
27
I(D) – Misconduct (Recommended procedures)
* Adopt a code of ethics to which every employee must adhere
* Disseminate a list of potential violations and associated disciplinary sanctions
* Conduct background checks on potential employees – look for good character and eligibility to work in investment industry
28
II(A) - Material Non-public Information
Members in possession on non-public information that could affect an investment’s value must not act or cause someone else to act on the information
29
II(A) - Material Non-public Information (guidance)
* ‘material’ – if disclosure of information would affect a security’s price or if an investor would want to know before making an investment decision
* If price effect is ambiguous, information may not be considered material
* Extends to info such as upcoming ratings change and influential analysis to be released
* Information is ‘non-public’ until is has been made available to the marketplace
* Information made available to analysts is considered non-public until it is made available to investors in general
* Act includes related swaps and options and mutual funds with the security
* May use firm-provided information for certain specified purposes (e.g., DD for transaction with firm)
* Mosaic Theory – no violation when an analyst combines nonmaterial, non-public information with public information to reach conclusion
30
II(A) - Material Non-public Information (Recommended procedures)
* Information barrier or ‘firewall’ is recommended to control interdepartmental communications
* Information barrier includes use of restricted list
* Review employees trades
* Increase review/restrict proprietary trading while firm is in possession of material non-public information
31
II(B) - Market Manipulation
Do not engage in practices that distort or artificially inflate trading volume with intent to mislead market participants
32
II(B) - Market Manipulation (guidance)
Do not engage in transaction-based manipulation
* Giving false impressions of activity/price movement
* Gaining dominant position in an asset to manipulate price of the asset or a related derivative
Do not distribute false, misleading information
33
III(A) - Loyalty, Prudence, and Care
Duty of loyalty to clients – act with reasonable care and exercise prudent judgement
Act for the benefit of clients and place their interests before employer’s or own interest
Determine and comply with any applicable fiduciary duty
34
III(A) - Loyalty, Prudence, and Care (guidance)
* Take investment actions in client’s best interests
* Exercise prudence, care, skill, and diligence that a person familiar with such matters would use
* Follow applicable fiduciary duty
* “client” may be investing public
* Manage pools of client assets according to terms of governing documents
* Make investment decisions in context of total portfolio
* Vote proxies responsibly and disclose proxy voting polices to clients
* “soft dollars” must benefit client (brokerage relationship generates money for client)
35
III(A) - Loyalty, Prudence, and Care (Recommended procedures)
* Follow rules and laws
* Establish client investment objectives
* Diversify
* Deal fairly with clients – investment actions
* Disclose all possible conflicts
* Vote proxies in best interest of clients and ultimate beneficiaries
* Keep client information confidential
* Seek best trading execution for clients
* Place client interests first
36
III(B) - Fair Dealing
Deal fairly and objectively with all clients when:
* Providing investment analysis
* Making investment recommendations
* Taking investment action
* Engaging in other professional activities
37
III(B) - Fair Dealing (guidance)
* No discrimination against any clients when disseminating investment recommendations or taking investment action
* Fair does not mean equal
* Different levels of service are okay as long as disclosed and do not disadvantage any clients
* All clients must have fair chance to act on every investment recommendation
* If client is unaware of recommendation change, advise before accepting trade order
* Treat all client fairly – consider investment objectives and circumstances
* Disclose written allocation procedures
* Do not disadvantage any clients when distributing “hot” issues
38
III(B) - Fair Dealing (Recommended procedures)
* Limit number of people aware of upcoming changes
* Shorten time frame – decision to dissemination
* Have pre-dissemination guideless
* Simultaneous dissemination
* Maintain list of clients and their holdings
* Disclose trade allocation procedures
* Review accounts regularly to ensure fair client treatment
* If firm offers different levels of service, disclose this fact to all clients
* Deviations from strict pro rata allocation of IPO is sometimes okay (minimum block sizes)
39
III(C) – Suitability
When an advisory relationship with a client:
* Make reasonable inquiry as to client’s investment experience, risk/return objectives, financial constraints prior to making any recommendations, or taking investment action
* Update information regularly
* Ensure investment is suitable to client’s situation and consistent with written objectives before recommending an investment or taking investment action
* Look at suitability in a portfolio context
When responsible for managing a portfolio to a specific mandate, strategy, or style, only make recommendations or take investment actions that are consistent with the stated objectives and constraints of the portfolio
40
III(C) – Suitability (guidance)
* When in advisory relationship, gather client information at the outset and prepare IPS
* Update IPS at least annually
* Consider whether leverage (derivatives) is suitable for client
* If managing a fund to an index or other mandate invest according to mandate
41
III(C) – Suitability (Recommended procedures)
When formulating IPS for client, know the client’s:
* Return objectives
* Risk tolerance
Determine the client’s constraints:
* Liquidity needs
* Expected cash flows, investable funds
* Time horizon, tax considerations
* Regulatory/legal constraints
* Unique circumstances/needs
42
III(D) - Performance Presentation
When communicating investment performance information. Make reasonable efforts to ensure that it is fair, accurate, and complete
Can make brief presentation, note limited nature, and make detailed information available on request
43
III(D) - Performance Presentation (guidance)
* Do not misstate performance or mislead clients about investment performance
* Do not misrepresent past performance
* Provide fair and complete performance information
* Do not state or imply ability to achieve returns similar to those achieved in the past
44
III(D) - Performance Presentation (Recommended procedures)
* Consider audience sophistication when presenting performance
* Use performance of the weighted composite of similar portfolios
* Include terminated accounts as part of historical performance
* Make all disclosures and maintain records
45
III(E) - Preservation of Confidentiality
Keep current and prospective client information confidential, unless:
* Illegal activities are suspected
* Disclosure is required by law
* Client or prospect allows disclosure of the information
46
III(E) - Preservation of Confidentiality (guidance)
* In some cases it may be required by law to report activities to relevant authorities
* The Standard extends to former clients
* Exception: may provide confidential information to CFA Institute for an investigation under Professional Conduct Program
47
III(E) - Preservation of Confidentiality (Recommended procedures)
* Avoid discussing any information received from a client expect to colleagues working on the same project
* Follow firm’s electronic data storage procedures; recommend adoption of procedures if none exist
48
IV(A) – Loyalty
On matters related to employment, act for benefit pf employer and do not deprive employer of the advantage of skills/abilities, divulge confidential information, or otherwise cause harm to employer
49
IV(A) – Loyalty (guidance)
* Place client interest first but consider effects on firm integrity and sustainability
* Members encouraged to give employer a copy of the Code and Standards
* No incentive or compensation structure that encourages unethical behaviour
Independent practice:
* If planning to engage in independent practice, notify employer of services provided, expected duration, and compensation
* Do not proceed without consent from employer
Leaving an Employer:
* Act in best interest of employer until resignation is effective
* Employer records on any medium (e.g., cell phone, PDA, home computer) are property of the firm
* Simple knowledge of names of former clients is okay; but don’t solicit prior to leaving
* No prohibition on use of experience or knowledge gained at former employer
Whistleblowing:
* Permitted only if it protects client or integrity of capital markets
* Not permitted for personal gain
50
IV(A) – Loyalty (Recommended procedures)
Encourage firms to adopt policies regarding:
* Outside practice, non-complete agreements
* Leaving employer (resignation, termination)
* Incident reporting
* Employee classification (full-time, part-time, contractor)
51
IV(B) – Additional Compensation Arrangements
Do not accept gifts, benefits, compensation, or consideration that competes with, or creates a conflict of interest with, employer’s interest unless written consent is obtained from all parties involved
52
IV(B) – Additional Compensation Arrangements (guidance)
* Compensation and benefits covers direct compensation by the client and other benefits received from third parties
* For written consent from “all parties involved” email is acceptable
53
IV(B) – Additional Compensation Arrangements (Recommended procedures)
* Written report to employer with details of proposed compensation in addition to normal compensation and benefits
* Details of incentives verified by offering party
* Include nature of compensation, amount, and duration of agreement
54
IV(C) - Responsibilities of Supervisors
Make reasonable efforts to ensure that anyone subject to your supervision or authority complies with applicable laws, rules, regulations, and Code and Standards
55
IV(C) - Responsibilities of Supervisors (guidance)
* Supervisors must take steps to prevent employees from violating laws, rules, regulations, or the Code and Standards
* Supervisors must make reasonable efforts to detect violations
56
IV(C) - Responsibilities of Supervisors (Recommended procedures)
Adequate compliance procedures should:
* De clear and understandable
* Designate a compliance officer
* Have checks/balances; permitted conduct
* Have procedures for reporting violations
Supervisors and compliance officer should:
* Distribute procedures; update periodically
* Continually educate staff
* Review employee actions
* Promptly initiate procedures once a violation has occurred
Once a violation has occurred, a supervisor should:
* Respond promptly
* Conduct a thorough investigation
* Place appropriate limitations on the wrongdoer until investigation is complete
57
V(A) - Diligence and Reasonable Basis
Exercise diligence, independence, thoroughness in analysing investments, making investment recommendations, and taking investment action
Have a reasonable and adequate basis, supported by research, for analysis, recommendation, or action
58
V(A) - Diligence and Reasonable Basis (guidance)
* Make a reasonable effort to cover all relevant issues wen arriving at an investment recommendation
* Level of diligence will depend on product or service offered
Using secondary or third-party research:
* Determine soundness of the research – review assumptions, rigor, timeliness, and independence
* Encourage firm to adopt policy of periodic review of quality of third-party research, assumptions, timeliness, rigor, objectivity, and independence
59
V(A) - Diligence and Reasonable Basis (Recommended procedures)
* Establish policy that research and recommendations should have reasonable and adequate basis
* Review/approve research reports and recommendations prior to external circulation
* Establish due diligence procedures for judging if recommendation has met reasonable and adequate basis criteria
* Develop measurable criteria for assessing quality of research
* Consider scenarios outside recent experience to assess downside risk of quantitative models
* Make sure firm has procedures to evaluate external advisers they use or promote including how often to review
* Written procedures of acceptable scenario testing, range of scenarios, cash flow sensitivity to assumptions and inputs
* Procedure for evaluation outside information providers including how often
* No need to dissociate from group research that the member disagrees with
60
V(B) - Communication With Clients and Prospective Clients
Disclose basic format/general principles of investment processes used to analyse investments, select securities, and construct portfolios
Promptly disclose any changes that may affect those processes materially
Disclose risks and limitations (e.g., liquidity, capacity) associated with investment process:
* Use reasonable judgment in identifying which factors are important to investment analyses, recommendations, or actions
* Include those factors in communications with clients/prospective clients
Distinguish between fact and opinion in presentation of investment analysis and investment recommendations
Clearly communicate potential gains and losses on an investment
61
V(B) - Communication With Clients and Prospective Clients (guidance)
* Include basic characteristics of the security
* Inform clients of any change in investment process
* Suitability of investment – portfolio context
* All communications covered not just reports
62
V(B) - Communication With Clients and Prospective Clients (Recommended procedures)
* The inclusion or exclusion of information depends on a case-by-case review
* Maintain records
63
V(C) - Record Retention
Develop and maintain appropriate records on support investment analyses, recommendations, actions, and other investment-related communications with clients and prospective clients
64
V(C) - Record Retention (guidance)
* Maintain records to support research, and the rationale for conclusions and actions
* Records are firm’s property and cannot be taken when member leaves without firm’s consent
* If no regulatory requirement or firm policy, CFA Institute recommends retention period of 7 years
65
V(C) - Record Retention (Recommended procedures)
* Responsibility to maintain records generally falls with the firm
* However, individuals must retain documents that support investment-related communications
66
VI(A) - Disclosure of Conflicts
Make full, fair disclosures of all matters that could reasonably be expected to impair independence/objectivity, or interfere with duties to client, prospects, or employer
Ensure disclosures are prominent, delivered in plain language
67
VI(A) - Disclosure of Conflicts (guidance)
Disclosure to clients:
* All matters that could impair objectivity – allow clients to judge motives, biases
* For example, between member or firm and issuer, investment banking relations, broker/dealer market making activities significant stock ownership, board service
Disclosure to employers:
* Conflicts of interest – ownership of stock analysed/recommended, board participation, financial and other pressures that may influence decisions
* Also covers conflicts that could be damaging to employer’s business
68
VI(A) - Disclosure of Conflicts (Recommended procedures)
* Disclose compensation arrangements with employer that conflicts with client’s interests
* If firm does not permit disclosures, consider dissociating from the activity
* Firms are encouraged to include compensation information in promotional material
69
VI(B) Priority of Transactions
Investment transactions for clients and employers must have priority over transactions in which a member or candidate is beneficial owner
Do not use knowledge of pending trades for personal gain
70
VI(B) Priority of Transactions (guidance)
* “Beneficial owner” – has direct/indirect personal interest in the securities
* Client, employer transactions take priority over personal transactions (including beneficial ownership)
* Family member accounts that re client accounts must be treated as other client accounts
71
VI(B) Priority of Transactions (Recommended procedures)
Firms’ compliance procedures should:
* Limit participation in equity IPOs
* Restrict purchases of securities through private placements
* Establish blackout/restricted periods
* Establish reporting procedures and prior clearance requirements
* Disclose polices on personal investing to clients, upon request
72
VI(C) - Referral Fees
Disclose to employer, clients, and prospective clients, as appropriate, any compensation, consideration, benefit received from, or paid to, others for the recommendation of products or services
73
VI(C) - Referral Fees (guidance)
* Disclosure allows clients and employers to evaluate full cost of service and any potential biases
* Disclosure is to be made prior to entering into any formal agreements for services
* Disclose the nature of the consideration
* Encourage firm to have clear policy regarding referral compensation
* Firms that do not prohibit should have clear approval process
* Members should update referral compensation disclosure to employer at least quarterly
74
VII(A) - Conduct as Participants in CFA Institute Programs
Do not engage in any conduct that comprises the reputation or integrity of CFA Institute or CFA designation, or the integrity, validity, or security of CFA Institute programs
75
VII(A) - Conduct as Participants in CFA Institute Programs (guidance)
Conduct includes:
* Cheating on the exam
* Disregarding rules and polices or security measures related to exam administration
* Giving confidential information to candidates or public
* Improper use of CFA designation to further personal and professional objectives
* Misrepresenting the CFA Institute Professional Development Program or the Professional Conduct Statement
Don’t disclose:
* Formulas tested or not tested on the exam
* Specific questions information
* Topic emphasis on the exam or topics tested
76
VII(B) - Reference to CFA Institute, the CFA Designation, and the CFA Program
When referring to CFA Institute, membership, designation, or candidacy, do not misrepresent or exaggerate the meaning or implications of membership in CFA Institute, holding the CFA designation, or candidacy in the CFA program
77
VII(B) - Reference to CFA Institute, the CFA Designation, and the CFA Program (guidance)
CFA Institute membership
* Complete PCS annually
* Pay membership dues annually
* Failure to comply with above results in an inactive member status
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
Reference to the CFA program
* Candidate may reference participation in CFA program, but do not imply achievement of any type of partial designation
* Okay to say “passed all levels on first attempt” but do not imply superior ability
78
VII(B) - Reference to CFA Institute, the CFA Designation, and the CFA Program (Recommended procedures)
Make sure that your employer is aware of the proper references to the CFA designation and CFA candidacy
79
Why GIPS were created:
* To make performance measures among firms comparable, using standardised methodology
* To avoid misrepresentation of investment performance
o Report top preforming portfolios
o Excluding poor preforming or terminated funds (survivorship bias)
o Manipulating time periods
* To give clients specific information useful in evaluating past performance
80
Describe the key concepts of the GIPS Standards for Firms.
1. Fundamentals of compliance – issues for firms to consider when claiming GIPs compliance including definition of firm
2. Input data and calculation methodology – must be consistent and uniform across firms, for full, fair, comparable performance presentations
3. Composite and pooled fund maintenance – create meaningful, asset-weighted composites; including pooled funds in a composite when they fit its definition
4. Composite time-weighted return report
5. Composite money-weighted return report
6. Pooled fund time-weighted return report
7. Pooled fund money-weighted return report
8. GIPS advertising guidelines – requirements for any advertising that refers to a firm’s claim of GIPS compliance
81
Explain the purpose of composites in performance reporting
Composite – grouping of individual discretionary portfolios with same investment strategy, objective, or mandate
A composite must include all actual fee-paying discretionary portfolios (current and past) that the firm has managed in accordance with this particular strategy
Groupings must be pre-identified above minimum asset level
82
Describe the fundamentals of compliance, including the recommendations of the GIPS standards with respect to the definition of the firm and the firm's definition of discretion.
To claim compliance, define firm – “distinct” business entity, including all geographic locations operating under that name
If a client restricts an account such that a manager cannot carry out the intended strategy, the firm may deem the client’s portfolio “non-discretionary” and exclude it from composites (degree of discretion)
83
Independent GIPS Verification
* Firms are encouraged (not required) to pursue independent verification of GIPS compliance.
* The primary purpose is to provide assurance that compliance with GIPS is on a firm-wide basis
* Firm may have the verifier perform a detailed performance examination of one or more composites and state this has been completed
* If a firm pursues verification, it must be performed by an independent third party
* The verifier must attest that firm has complied with GIPS requirements for composite construction on a firm-wide basis, and the firm’s processes/procedures are established to present performance using GIPS-compliant calculation methods, data, and format
