Vol. 6 LM6 Ethics and Trust

Question 1

Concept

encompasses a set of moral principles and rules of conduct that provide guidance for our behavior

p 265

Answer 1

ethics

Question 2

Describe

ethics

p 265

Answer 2

encompasses a set of moral principles and rules of conduct that provide guidance for our behavior

Question 3

Describe

ethical principles

p 265

Answer 3

are beliefs regarding what is good, acceptable, or obligatory behavior and what is bad, unacceptable, or forbidden behavior.

Question 4

Concept

are beliefs regarding what is good, acceptable, or obligatory behavior and what is bad, unacceptable, or forbidden behavior.

p 265

Answer 4

ethical principles

Question 5

Concpet

examines the role of consequences and personal character in defining what is considered good, or ethical, conduct

p 265

Answer 5

study of ethics

Question 6

Concept

behavior that follows moral principles and balances self-interest with both the direct and the indirect consequences of the behavior on others

p 265

Answer 6

ethical conduct

Question 7

Describe

code of ethics

p 266

Answer 7

codified beliefs about obligatory and forbidden conduct in a written set of principles

Question 8

purpose

code of ethics

p 266

Answer 8

to communicate the organization’s values and overall expectations regarding member behavior

Question 9

Concept

serve as benchmarks for the minimally acceptable behavior of community members and can help clarify the code of ethics

p 266

Answer 9

standards of conduct

Question 10

Describe

profession

p 268

Answer 10

is an occupational community that has specific education, expert knowledge, and a framework of practice and behavior that underpins community trust, respect, and recognition.

Question 11

Fill in the blank

____ is underpinned by codes and standards developed by professional bodies

p 268

Answer 11

professionalism

Question 12

Concept

Most professional bodies make it a condition of membership that a specific amount of new learning is undertaken each year

p 269

Answer 12

continuing professional development

Question 13

Concept

The publication of this in 1934 was an important step in establishing a body of knowledge for investment

p 270

Answer 13

Graham and Dodd’s Security Analysis

Question 14

Concept

The CFA Institute Global Body of Investment Knowledge (GBIK) and Candidate Body of Knowledge (CBOK) are updated on an ongoing basis through a process known as

p 272

Answer 14

practice analysis

Question 15

which of the following statements is most accurate? Investment professionals have a special responsibility to act ethically because

A. the industry is heavily regulated.
B. they are entrusted to protect clients’ assets.
C. the profession requires compliance with its code of ethics.

p 272

Answer 15

B. they are entrusted to protect client’s assets

Question 16

Which of the following statements is most accurate? A profession’s code of ethics:

A. includes standards of conduct or specific benchmarks for behavior.
B. ensures that all members of a profession will act ethically at all times.
C. publicly communicates the shared principles and expected behaviors
of a profession’s members.

Answer 16

C. publicly communicates the shared principles and expected behaviors
of a profession’s members.

Question 17

Define

situational influences

p 274

Answer 17

are external factors, such as environmental or cultural elements, that shape our thinking, decision making, and behavior

Question 18

Experiments have shown that even people who consider themselves strong, independent, free thinkers will do this in most situations

p 274

Answer 18

conform to social pressures in many situations

Question 19

list examples

situational influences

p 274

Answer 19

• bonuses
• promotions
• prestige
• loyalty to employer and colleagues

Question 20

Which of the following will most likely determine whether an individual will behave unethically?

A. The person’s character
B. The person’s internal traits and intrinsic motivation
C. External factors, such as environmental or cultural elements

p 275

Answer 20

C. External factors, such as environmental or cultural elements

Question 21

Which of the following statements is most accurate?

A. Large financial rewards, such as bonuses, are the most powerful situational influences.
B. When decision making focuses on short-term factors, the likelihood of
ethical conduct increases.
C. Situational influences can motivate individuals to act in their short-term self-interests without recognizing the long-term risks or consequences for themselves and others.

Answer 21

C is correct. Situational influences can motivate individuals to act in their
short-term self-interests without recognizing the long-term risks or consequences for themselves and others. Large financial rewards are powerful situational influences, but in some situations, other situational influences, such as loyalty to colleagues, may be even more powerful.

Question 22

Concept

complying with specific written disclosures in marketing and other materials

p 276

Answer 22

ethical action

Question 23

Concept

goes beyond what is legally required and encompasses what different societal groups or communities, including professional associations, consider to be correct behavior

p 277

Answer 23

ethical conduct

Question 24

which of the following statements is most accurate

A. All legal behavior is ethical behavior.
B. Some ethical behavior may be illegal.
C. Legal standards represent the highest standard.

p 278

Answer 24

B is correct. Some ethical behavior may be illegal. Civil disobedience is an
example of what may be illegal behavior that some consider to be ethical.
Legal and ethical behavior often coincide but not always. Standards of conduct based on ethical principles may represent a higher standard of behavior than the behavior required by law.

Question 25

Which of the following statements is most accurate?

A. Increased regulations are the most useful means to reduce unethical
behavior by market participants.
B. Regulators quickly design and implement laws and regulations to
address practices that adversely affect the fairness and efficiency of
markets.
C. New laws designed to reduce or eliminate conduct that adversely
affects the markets can create opportunities for different, but similarly
problematic, conduct.

Answer 25

C is correct. New laws designed to reduce or eliminate conduct that adversely affects the markets can create opportunities for different, but similarly problematic, conduct.

Question 26

List steps

Ethical Decision-Making Framework

p 280

Answer 26

• Identify: relevant facts, stakeholders and duties owed
• Consider: situational influences, additional guidance
• Decide and act
• Reflect: was the outcome as anticipated?

Question 27

Which of the following situational influences is likely to have the most effect on the financial adviser’s efforts to get new clients to invest in the funds? His relationship with his:
A. client.
B. employer.
C. teammates.

p 285

Answer 27

C is correct. The financial adviser’s relationship with his teammates is likely to have the most effect on the financial adviser’s efforts. The teammates share in earning the bonus from the employer. In addition, the team works with each other on a regular basis where there is a likelihood that social influences of working together play a role in decision making and effort.

Question 28

Which of the following statements is most accurate? An ethical
decision-making framework:
A. is only beneficial when a firm lacks a code of ethics.
B. is used to improve compliance with laws and regulations.
C. is a tool for analyzing the potential alternative actions and conse-
quences of a decision.

p 285

Answer 28

C is correct. An ethical decision-making framework is a tool for analyzing
the potential alternative actions and consequences of a decision.

Question 29

Which of the following is most accurate? Ethical decision-making frame-
works:

A. raise awareness of different perspectives.
B. focus attention on short-term consequences.
C. allocate more weight to those who will directly benefit from the
decision.

p 285

Answer 29

A is correct. Ethical decision-making frameworks raise awareness of different perspectives. The framework should consider short-term consequences, but they are not the focus of the framework. Similarly, the framework may allocate more weight to those who directly benefit from decision

Question 30

Which of the following is most accurate? Ethical decision-making frameworks:

A. are not needed if behavior is legal.
B. identify who gains the most from a decision.
C. can help reduce unanticipated ethical lapses and unexpected
consequences.

p 286

Answer 30

C is correct. Ethical decision-making frameworks can help avoid unanticipated ethical consequences. As it relates to A, ethics standards are often higher than legal standards so an ethical decision-making framework would be needed. Although B is accurate, identifying who gains most from the decision is a small component of the framework.

Question 31

Using an ethical decision-making framework, which of the following duties would most likely take precedence in the scenario described? The financial adviser’s duty to his:

A. client.
B. employer.
C. colleagues.

p 286

Answer 31

A is correct. Using an ethical decision-making framework, the financial adviser’s relationship with his client would most likely take precedence in this scenario. The adviser should put his client’s interests first. The exception to client interests taking precedence occurs when market integrity effects take precedence.

Question 32

Using an ethical decision-making framework, the financial adviser would
most likely:

A. recommend that the elderly client invest at least some of his assets in
the highly rated fund.
B. research other investments that can provide steady income before
making a recommendation to his elderly client.
C. disclose the commission he would earn before recommending that the elderly client invest at least some of his assets in the highly rated fund.

p 286

Answer 32

B is correct. Using an ethical decision-making framework, the financial
adviser would identify the relevant facts, stakeholders, duties owed, and
potential conflicts. In this scenario, the financial adviser owes a duty to his
client as well as his employer. His client’s interests take precedence over all other interests. The bonus and his colleague’s desire to help his mother are situational influences. To navigate this situation, the financial adviser should seek additional information; he should research the risk and return parameters and fee structures of other investments that can provide steady income before making a recommendation to his client.

Question 33

Concept

helps foster public confidence that members of the profession will use their specialized skills and knowledge to serve their clients and others

p 287

Answer 33

code of ethics

Question 34

Concept

is an occupational group that has specific education, expert
knowledge, and a framework of practice and behavior that underpins community trust, respect, and recognition.

p 287

Answer 34

profession

Question 35

Describe

a primary goal of professions is to …

p 287

Answer 35

primary goal of professions

Question 36

potential issues

excessive focus on compliance

p 275

Answer 36

• may not encourage decision makers to consider the larger picture
• can oversimplify decision making

Question 37

List reason

the law is not always the best mechanism to reduce unethical behavior

p 277

Answer 37

1. laws typically follow market practices
2. regulators may proactively design laws and regulations to address existing practices, which may adversely affect the fairness and efficiency of markets
3. regulators’ responses typically take significant time

Question 38

explain

ethical conduct vs legal conduct

p 277

Answer 38

ethical conduct goes beyond what is legally required and encompasses what different societal groups or communities