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CFA Level III > Ethics > Flashcards

Flashcards in Ethics Deck (31):
1

CFA Institute Professional Conduct Program

1. Overseen by Disciplinary Review Committee

2. Professional Conducts Staff conducts inquires

2

Describe the Six Components of the Code of Ethics

i. Act in an ethical manner

ii. Integrity is paramount and clients always come first

iii. Use reasonable care; be independent

iv. Be a credit to the investment profession

v. Uphold capital market rules and regulations

vi. Be competent

3

The 7 Standard of Professional Conduct

1. Professionalism

2. Integrity of Capital Markets

3. Duties to Clients

4. Duties to employers

5. Investment Analysis, Recommendations

6. Conflicts of interests

7. Responsibility as a CFA member

4

Conduct Program

Inquiry can be prompted by:

1. Self disclosure
2. Written complaints
3. Evidence of misconduct
4. Report by a CFA exam proctor

Discipline

1. Cautionary letter
2. Sanctions; public sanction of suspension of CFA program

5

Knowledge of the Law

 

Requirements

Comply with more strict law

6

Knowledge of the Law

 

Guidance

1. First, notify supervisor or compliance

2. May confront wrongdoer directly

3. Dissociate if needed

4. No requirement to report to government

7

Knowledge of the Law

 

Recommended Procedures

1. Seek compliance/legal advice

2. Distribute laws and regs internally

3. No requirement to report wrongdoers

8

Independence and Objectivity

 

Guidance

1. Gifts from clients ok, must disclose

2. No gifts from vendors (modest gifts OK)

3. For issuer-paid research, flat fee is preferred; must disclose

4. Users must be aware of credit ratings conflict

9

Independence and Objectivity

 

Recommended Prodecures

1. Research is unbiased

2. Restricted list

3. Recommend but do not require travel expenses paid by employer

10

Misrepresentation 

 

Guidance

1. Do not guarantee a return

2. No plagiarism

11

Misrepresentation 

 

Recommended Procedures

1. Must maintain record used for research

2. Except for recognized places (e.g. bloomberg)

12

Midconduct

 

Recommended Procedures

1. Adopt a code of ethics

2. Provide a list of potential violations and punishments

13

Professionalism


Recommendations for Firms

1. Have a code of ethics

2. Provide employees info on laws, rules, and regs

3. Have procedures for reporting suspected violations

14

Independence and Objectivity

 

Recommendations for Firms

1. Research compensation aligns with unbiased opinions

2. Restricted securities list (no opinions only facts)

3. Limit and require prior approval for employee IPOs

4. Establish supervisory procedures for review of actions

5. Appoint a senior officer to oversee compliance and ethics

15

Integrity of Capital Markets

 

Guidance

1. cannot act or cause someone else to act

2. If an analyst knows information but the public doesn’t, still can't act

16

Integrity of Capital Markets

 

Recommendations for Firms

1. "Firewall" between departments

2. Develop procedures for each strategy

3. Review employee trades

4. Train and communicate rules

17

Fair Dealing

 

Guidance

1. Fair does not mean equal

2. Can have different level of service (must disclose)

3. All clients must have fair chance to act

4. Disclose written allocation procedures

18

Duties to Employers - Loyalty

 

Guidance

1. Encouraged to give employer code of ethics

2. With other work: disclose to employer time, services, compensation

3. Cannot solicit current clients prior to leaving

           Knowing client names etc. is ok

4. Whistleblowing; ok if benefits clients, NOT for personal gain

19

Duties to Employers - Responsibility of Supervisors

 

Guidance

1. must make an effort to ensure people under you follow all laws

2. Must try to detect violations

3. Obligation to indebntify compliance flaws (would decline role until they are good)

20

Duties to Employers - Responsibility of Supervisors

 

Recommendations

Compliance officer should:

    1. Distribute and update procedures

    2. Educate staff

    3. Review employee actions

    4. Limit the wrongdoer until investigation is done

21

Diligence and Reasonable Basis

 

Recommendations

1. Develop measurable criteria for assessing quality of research

2. Review/approve research reports prior to circulation

3. Procedure to evaluating outside information providers

4. Do not need to dissociate from group research for a disagreement

22

Communication with Clients and Prospective Clients

 

Guidance

1. Promptly disclose any changes that may affect research

2. Distinguish between fact and opinion

3. Disclose risks and limitations

4. Inform clients of changes in investment processes

23

Record Retention

1. If no regulatory or firm policy, CFA recommends 7 years

2. Cannot recreate record from memory. Must use public sources

24

Conflicts of Interest

 

Disclosure

Must disclose to employer;

   1. Ownership of stock

   2. Board participation

   3. special compensation or bonuses

25

Conflicts of Interests

 

Priority of Transactions

1. Family members that are clients are treated same

2. Limit participation in oversubscribed IPOs

3. Establish blackout/restricted periods

4. Disclose policies on personal investing to clients

26

AMC Components

A) Loyalty to Clients.

B) Investment Process and Actions.

C) Trading.

D) Risk Management, Compliance, and Support.

E) Performance and Valuation.

F) Disclosures.

27

AMC Details

1. For the firm and is voluntary (Code of Standards is for individuals and mandatory)

2. Can claim compliance with AMC 

28

AMC

Loyalty to Clients

Required:

1. Client's interest ahead of firm's

2. Maintain client confidentiality

Recommended: 

1. Align compensation  to avoid COI

29

AMC

Investment Process and Actions

For specific styles or strategies; do not have to evaluate the suitability to a given client

30

AMC

Disclosures

Make sure to disclose;

1. Regulatroy/disciplinary actions

2. Investment process (strategy, risk, etc)

3. Trade allocation

4. Signigicant personnel changes 

31

From Questions

1. Opinions with return is OK

2. Cannot trade until written approval

3. Must analyze trades on case by case basis

4. Subsciption clients and portfolio management clients should get reports at the same time

5. Compliance cannot be handed off, must be supervised by compliance officer