Ethics Flashcards
1
Q
What must Members and Candidates do if they encounter a violation of laws, rules, or regulations?
A
1A. Members and Candidates must disassociate themselves from any such violation.
2
Q
What must Members and Candidates comply with regarding ethics and standards?
A
1A. Members and Candidates must comply with all applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct).
3
Q
What should Members and Candidates do in the event of a conflict between different laws, rules, or regulations?
A
1A. Members and Candidates must comply with the stricter law, rule, or regulation.
4
Q
Are Members and Candidates allowed to participate in violations of laws, rules, or regulations?
A
1A. No, Members and Candidates must not knowingly participate or assist in any violation of laws, rules, or regulations.
5
Q
Which code must Members and Candidates follow in addition to governmental and regulatory rules?
A
The CFA Institute Code of Ethics and Standards of Professional Conduct.
6
Q
Violation or not: Doing something allowed by local laws overseas but not CFA institute standards.
A
Violation of 1A.
7
Q
Violation or not: Knowingly participating or assisting in unethical activity done by others.
A
1A. Violation
8
Q
Violation or not: Not reporting a legal violation to govt. or regulatory official
A
Not a violation: It is appropriate but not always required.
9
Q
What must Members and Candidates use to achieve and maintain independence and objectivity in their professional activities?
A
1B. Members and Candidates must use reasonable care and judgment.
10
Q
Are Members and Candidates allowed to offer, solicit, or accept gifts or benefits?
A
1B. No, Members and Candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that could reasonably be expected to compromise independence and objectivity.
11
Q
What could compromise the independence and objectivity of Members and Candidates?
A
1B. Offering, soliciting, or accepting any gift, benefit, compensation, or consideration.
12
Q
Violation or not: Yielding to pressure from another department
A
1B. Violation
13
Q
Violation or not: Accepting expensive gifts and using them for own business marketing
A
1B. Violation
14
Q
Violation or not: Employee allocating shares to own account even if IPO is oversubscribed
A
1B. Violation
3B. Violation
15
Q
Violation or not: Following instructions without using one’s own judgement
A
1B. Violation
16
Q
Violation or not: Accepting fee for an issuer pay research report based on conclusion of report
A
1B. Violation
Accepting fee - not violation, but accepting fee based on conclusions is.
17
Q
Violation or not: Gifts from third parties to use their services over others
A
1B. Violation
18
Q
Violation or not: Accepting a small token
A
1B. Not a Violation
19
Q
Violation or not: Accepting gifts from clients for good performance after disclosure to employer
A
Not a Violation
(Require written permission if accepting potential gift for FUTURE performance)
20
Q
Violation or not: Private Jet use for a remote location not accessible otherwise for work purposes
A
Not a Violation
21
Q
Violation or not: Gifts from Subject Companies
A
1B. Violation
22
Q
Misrepresentation
A
1C. Must not knowingly misrepresent investment analysis, recommendations, actions, or other professional activities
23
Q
Violation or Not: No specific reference to source of Information
A
1C. Violation
24
Q
Violation or not: Citing assurance of consistency in future performance/guaranteed returns
A
1C. Violation, 5B Violation
25
Violation or not: Claiming third party research as own
1C. Violation
26
Violation or not: Taking credit for someone else's work
1C. Violation
27
Violation or not: Unintentional error while preparing material
Not a violation
28
Violation or not: Informing clients of guarantee built into product (Ex: T-Bills return)
Not a violation
29
Violation or not: Using information from recognized financial data and reporting without citing sources (ex: Treasury Website)
Not a violation
30
Misconduct
1D. must not engage in dishonesty, fraud, deceit or commit any act that compromised professional reputation, integrity or competence.
31
Violation or Not: Drunk while making financial decisions
1D Violation
32
Violation or not: Including receipt that is not part of company trip expense
1D Violation
33
Violation or Not: Reporting to CFA institute for professionally unrelated disputes
1D Violation
34
Violation or not: Altering facts of a situation
1D Violation
35
Violation or not: Stating vague statements to mislead investors
1D Violation
36
Violation or not: Violation of law not reflecting on members honesty, integrity or competence (Eg: Protest)
Not a violation
37
Violation or not: Personal Bankruptcy without any intention to fraud
Not a violation
38
Mosaic Theory
2A Public Material + Non Public Non Material information can be used together and it will not be a violation
Can trade, recommend or disclose
39
Material Non-Public Information
2A Not allowed to Use - if used = insider trading
Material = can affect value of investment
40
Violation or not: Failure to prevent transfer of material non public info to others
2A Violation
41
Violation or not: Using material non-public information & using public information to cover up for it.
2A Violation
42
Violation or not: Using unreliable material non public information
Not a violation
43
Market Manipulation
2B - must not engage in practices that distort market prices or artificially inflate trading volume with the intent to mislead market participants
44
Violation or not: Spreading false rumours to induce trading
2B Violation
45
Violation or not: Posting false information on social media to increase/ decrease price Simultaneous buying & selling of its subsidiaries, citing volume as evidence of market liquidity.
2B Violation
46
Violation or not: Giving buy recommendation: and then selling client shares when prices have gone up due to the recommendation.
2B Violation
47
Violation or not: Giving a company a smaller number of shares than what it has subscribed, only to get that company's goodwill attached.
2B Violation
48
Violation or not: Hedging any potential loss from a decline in price of a stock prior to completion of the sale transaction.
Not a Violation
49
Violation or not: Transactions meant for minimizing tax liabilities.
Not a violation
50
Violation or not: Exploiting Arbitrage opportunities between stock and options.
Not a violation
51
Loyalty Prudence & Care
3A - duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment.
- must act for the benefit of their clients and place their clients' interests before their employer's or their own interests
52
Violation or not: Investment made against mandate even if it provided high returns.
3A Violation
53
Violation or not: Trading with selective brokers to get recommendations from them for getting more clients.
3A Violation
54
Violation or not: Using client brokerage for services that does not benefit the client.
3A Violation
55
Violation or not: Doing more than required trade in client A/C to accomplish client's goal & generate commission income.
3A Violation - churning of stock
56
Violation or not: Disadvantaging Client because he is related to you
3B Violation
57
Fair Dealing
3B - Treat all clients fairly and objectively
58
Violation or not: Giving opinion on something to selected clients only.
3B Violation
59
Violation or not: Trading in one A/C prior to trading or announcing recommendation for other clients.
3B Violation
60
Violation or not: Arrangement made for shares of an IPO of selected clients just before offer is made to general public
3B Violation
61
Violation or not: Immediately trading for own A/C after announcing recommendation change to its clients without giving clients to act
3B Violation
62
Violation or not: mail clients with email addresses & regular mail to ones without an email address.
Not a violation
63
Suitability
3C - must make reasonable inquiry into a client's investment objectives, and constraints prior to recommendation update info regularly.
- Determine client's financial situation
- maintain consistency with the objectives, mandates of a fund
- Judge the suitability of investments in the context of the client's total portfolio.
64
Violation or not: Failing to determine client's objectives and constraints prior to investing.
3C Violation
65
Violation or not: Investing in illiquid securities even if it generates high return if IPS requires liquid securities.
3C Violation
66
Violation or not: Investing in securities in a fund that does not suit the mandate of the fund.
3C Violation
67
Performance presentation
3D must make reasonable efforts to ensure that it is fair, accurate, complete, and timely. (FACT)
68
Violation or not: Failure to credit team in resume
3D Violation
69
Violation or not: Advertising the details of past performance of the funds managed at prior firm without identifying that it was earned while working at that firm.
3D Violation
70
Violation or not: Advertising simulated results of a strategy as actual performance
3D Violation
71
Violation or not: Changing firm's performance attribution method without disclosing it to the clients.
3D Violation
72
Violation or not: Implying future returns will reflect past performance.
3D Violation
73
Preservation of confidentiality
3E - keep client info confidential
exceptions: required by law (given to relevant authority, info concerns illegal activity, client permits disclosure.
74
Loyalty to Employer
4A - must act for benefit of employer
- not deprive employer of any advantage of their skills and abilities
- not divulge confidential info or cause harm to employer
75
Violation or not: Receiving free parking spot for volunteer work in similar field
4A Violation - must disclose and obtain written consent
76
Violation or not: Taking model you had created from previous employers without permission
4A Violation
77
Violation or not: Mention of past performance of fund without employer permission
4A Violation
78
Violation or not: Soliciting clients after leaving a job from memory
Not a Violation
79
Violation or not: Soliciting clients while at work for new firm one is going to start
4A Violation
80
Additional Compensation Arrangement
4B - must not accept benefits, compensation or consideration that competes with or creates conflict of interest with employer unless written consent is obtained from all parties
81
Violation or not: Client gives employee vacation incentive if a particular return is achieved - employee accepts, no disclosure to firm
4B Violation
82
Violation or not: Purchasing shares for clients of the Company in which he is in BOD - received that companies products at no charge
1B, 4B Violation
83
Responsibility of Supervisor
4C - must make reasonable efforts to ensure any subordinate complies to all LRRs and codes.
84
Violation or not: Heavy trading in a stock at a firm's trading desk not on the firms recommended list
4C Violation - duty of supervisor to check
85
Violation or not: Only reporting violation of employee to upper management & providing written warning to employees to cease such activities.
4C Violation - not sufficient
86
What should a member do if a firms compliance is inadequate to comply with code of ethics and LRRS?
Member should decline supervisory responsibility until firm adopts reasonable compliance procedures in writing.
87
Diligence & Reasonable Basis
5A - must exercise diligence, independence, and thoroughness in analysing investments, making investment recommendations, and taking investment actions.
- Have a reasonable and adequate basis, supported by appropriate research and investigation
88
Violation or not: Member selects external advisor for equity based on low fee & does not consider performance or service.
5A Violation
89
Violation or not: Issuing recommendation based on what others are buying /IPO shares priced without doing adequate research.
5A Violation
90
Violation or not: Making recommendation for a company (which is offering the firm underwriting services) based on its maximum production level and not expected production level.
5A Violation
91
Violation or not: While using 3rd party research report, not reviewing assumptions & evaluating objectivity.
5A Violation
92
Group Consensus
(of all analysts) is not required. If 'A' writes a report & B' while reviewing makes changes, 'A' does not need to do anything further. If 'A' believes that 'B' did not have reasonable basis, he should get his name removed.
93
Violation or not: Compensate analysts based on the quality of their research.
Not a violation
94
Violation or not: Member proposes hedge fund to client after proper and adequate research. Hedge fund incurs heavy loss & closes operations.
Not a violation
95
Communication with clients and prospective clients
5B - disclose basic format and general principles used to analyse, select and construct portfolios
- promptly disclose any changes that might materially affect these processes
- use reasonable judgment in identifying important factors
- Distinguish between fact and opinion in the presentation
96
Violation or not: not include all relevant factors behind investment advice in the newsletter
5B Violation
97
Violation or not: Member estimates gold reserves of 500000 ounces in a company's property & makes report -"based on the fact that it has gold reserves, stock is a buy"
5B Violation
98
Violation or not: Due to poor results of benchmark, member decides to structure portfolios passively to track benchmark but does not inform clients.
5B Violation
99
Violation or not: Firm changes advisor and discloses in annual report and not immediately to clients.
5B Violation
100
Violation or not: Portfolio manager used to do stock selection, now senior manager will; client not informed.
5B Violation
101
Violation or not: Analyst discussed how her strategy will perform if euro appreciates as expected but does not mention the scenario where it depreciates.
5B Violation
102
Violation or not: Giving guarantee of improved results.
5B Violation, 1C Violation
103
Violation or not: Stating expected improvement as a fact.
5B Violation, 1C Violation
104
Record Retention
5C - must develop and maintain appropriate records to support their investment analysis, recommendations, actions, and other investment-related communications with clients and prospective clients.
105
Violation or not: Shredding of records after preparing reports.
5C Violation
106
Disclosure of Conflict of Interest
6A - must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties
- must ensure that such disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively.
107
Violation or not: Member replaces external manager which has average results with a friend's firm without telling clients.
6A - Violation: Even if friends firm is better, there is a conflict which must be disclosed.
108
Violation or not: Member, a portfolio manager, takes job as a trustee of a fund without informing employer
6A Violation - should not only inform but discuss before appointment.
109
Violation or not: Member sits on client's BOD, member writes a report on client's stock. She does not disclose the fact of her sitting on the board.
6A Violation
110
Violation or not: Member writes an issuer pay research report and does not disclose the same in the report which was published on his website.
6A Violation
111
Violation or not: Non-disclosure to employer or all clients on matters including beneficial ownership.
6A Violation
112
Violation or not: Member recommends stock of a company that his wife inherits in large amount but he discloses the fact to clients & employer.
Not a violation - as along as based on proper research
113
Priority of Transactions
Investment transactions for clients and employers must have priority oven investment transactions in which a Member or Candidate is the beneficial owner
114
Violation or not: Not executing client sell order prior to selling own shares.
6B Violation
115
Violation or not: Employee purchases stock before client or for his personal A/C.
6B Violation
116
Violation or not: Parents are clients. Member purchases shares in client A/C before parents A/C to prevent violation.
3B Violation
117
Violation or not: Not giving client an adequate opportunity to act on a recommendation before trading for personal accounts
6B Violation, 3B Violation
118
Referral Fees
6C - must disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received from, or paid to, others for the recommendation of products or services.
- must disclose if received for past performance
- must obtain written consent for future compensation for future performance
119
Violation or not: Member advises client to use services of someone else without disclosing that he is being compensated for the same.
6C Violation
120
Violation or not: X is a portfolio manager and Y is a recruiter. X lets Y play golf at his club & Y refers to X's firm any high level executive recruited without disclosure.
6C Violation
121
Violation or not: Member works in trust department of a bank. He receives compensation for referral made to bank's brokerage and personal finance management department. Member does not disclose the referral fee to his clients
6C Violation
122
Conduct as Participants in CFA Institute Programs
7A - must not engage in any conduct that compromises the reputation for integrity of CFA Institute or the CFA designation or the integrity, validity, or security of CFA Institute programs.
123
Violation or not: Passing CFA exam papers to friends
7A Violation
124
Violation or not: Planning to use CFA exam questions to gain advantage over other candidates
7A Violation
125
Violation or not: Member uses CFA Committee position to benefit her clients or herself.
7A Violation
126
Violation or not: Candidates discussing formulas/weightages/topics that came or did not come in the exam.
7A Violation
127
Violation or not: Expressing frustration on a particular topic not being tested in the exam
7A Violation - can express frustration but not disclose the topic that was not tested
128
Violation or not: Disagree with CFA institute policies procedures etc.
Not a violation
129
Violation or not: Expressing negative opinion about CFA program or institute.
Not a violation
130
Reference to CFA institute, the CFA designation, and the CFA program
7B - must not misrepresent or exaggerate the meaning or implications of membership in CFA institute, holding the CFA designation, or candidacy in the CFA program.
131
Violation or not: Superior performance statement given as a result of being CF A charter holder
7B Violation
132
Violation or not: Use of CFA as a noun
7B Violation
133
Violation or not: Member uses CFA designation even when he fails to file his professional conduct statement & stops paying his dues.
7B Violation
134
Violation or not: Uses CFA after his name even though his membership has been suspended.
7B Violation
135
Violation or not: Put 'CFA' logo on company's letterhead.
7B Violation
136
Violation or not: Member stating or implying that he is an active charter holder.
7B Violation
137
Violation or not: Statement - "I shall receive my charter this fall "
7B Violation
138
Violation or not: Stating that one has cleared all 3 levels consecutively in first attempt.
Not a violation
139
Violation or not: Writing after your name - CFA,2013, CFA Society of India
7B Violation
140
Violation or not: Giving details of subjects studied and knowledge gained during the course.
Not a violation
141
Violation or not: Reference their candidacy if they are enrolled or waiting for their exam results.
Not a violation
142
Violation or not: Seminole Equity Fund has been in existence for eight years. In a brief presentation to
potential investors, the fund's manager reports its performance history for the most recent five years, and notes that more detailed information is available on request.
Not a Violation
143
Use of Soft Dollars
Using soft dollars for benefit of client is not a violation. Purchasing research reports with soft dollars is not a violation, but the advisor
should ensure that research purchased with client brokerage will benefit her clients. The purchase of office furniture does not benefit clients and is a violation.
144
Violation or not: Not give equal
emphasis to all areas but emphasize certain areas, touch briefly on others, and omit
certain aspects deemed unimportant.
Not a Violation
145
If Additional compensation creates conflict, one should (decline it/seek permission from employer)
seek permission from employer
146
To have a reasonable basis for selecting a subadviser, criteria should include
- code of ethics
- its compliance procedures
- internal controls
- investment processes
- adherence to its stated strategies
- quality of its published information (not quantum necessarily)
