1. Professional Standards & Ethics Flashcards
Standards of Professional Conduct
I. Professionalism II. Integrity of Capital Markets III. Duties to Clients IV. Duties to Employers V. Investment Analysis, Recommendations, Actions VI. Conflicts of Interest
I. Professionalism
A. Knowledge of the Law
B. Independence and Objectivity
C. Misrepresentation
D. Misconduct
II. Integrity of Capital Markets
A. Material Nonpublic Information
B. Market Manipulation
III. Duties to Clients
A. Loyalty, Prudence, and Care B. Fair Dealing C. Suitability D. Performance Presentation E. Preservation of Confidentiality
IV. Duties to Employers
A. Loyalty
B. Additional Compensation Arrangements
C. Responsibilities of Supervisors
V. Investment Analysis, Recommendations, Actions
A. Diligence and Reasonable Basis
B. Communication with Clients and Prospective Clients
C. Record Retention
VI. Conflicts of Interest
A. Disclosure of Conflicts
B. Priority of Transactions
C. Referral Fees
I(A) Knowledge of the Law: Guidance
- Always adhere to most strict set of rules
- Disassociate or separate one’s self from illegal or unethical behavior
- Inaction and continued association construed as knowing participant
I(A) Knowledge of the Law: Rec for Compliance
Member:
- have procedure to keep up with changes
- compliance reviewed ongoing basis
- maintain current reference materials
- seek legal or compliance when in doubt
- document & disassociate when in doubt
Firm:
- develop & adopt code of ethics
- make available materials on regulations& law
- establish written procedures for reporting
I(B) Independence & Objectivity_Guidance
- analysts should use variety of source
- buy side may try to pressure sell side analysts
- fund managers don’t accept gifts that effect you
- credit rating make sure plan prevent influence
- issuer paid research, ideally flat fee not tied result
- travel: best practice, pay for self
I(B) Independence & Objectivity_ Rec for Compliance
- create a restricted list
- restrict special cost arrangement
- limit gifts, tokens only, clear value limits
- restrict equity IPO and private placement
- require pre-approval for IPO
- formal written procedures, that are reviewed
- appoint compliance officer, and have clear procedures for reporting violations
I(C) Misrepresentation_Guidance
- do not make any misrepresentations or give false impressions in oral or electronic communications
- do not plagiarize, i.e. do not use someone else’s work without giving them credit
- do not knowingly omit information
**models developed by others are the firm are the firms property and can be used without attribution. However, a report written by one analyst may not be released under another name.
I(C) Misrepresentation_ Rec for Compliance
- firms should provide employees with list of services and firms qualifications
- maintain records of materials used to generate reports to avoid plagiarism
- members should encourage firms to have procedure for verifying marketing claims of third parties
- ** Information from recognized financial and statistical reporting services need not be cited
I(D) Misconduct_ Guidance
- CFA institute discourages unethical behavior in all aspects of life
- Do you abuse Professional Conduct Program to settle personal, political, or other disputes that are not related to professional ethics
I(D) Misconduct_ Rec for Compliance
- firms should develop code of ethics
- check references for potential employees
- give employees list of potential violations and sanctions
II(A) Material Nonpublic Information_ Guidance
- information is material if its disclosure would impact price of security
- nonpublic when not make available to the market
- prohibition to acting extends to all products
II(A) Material Nonpublic Information_ Rec for Compliance
- use firewalls within firms
- substantial control on interdepartmental communications
- review employee trades
- monitor or restrict prop trading when in possession of material nonpublic information
Mosaic Theory
There is no violation when an analyst reaches an investment conclusion through analysis of public information together with items of nonmaterial, nonpublic information.
***key_nonmaterial
II(B) Market Manipulation_ Guidance
- Applies to transactions that deceive the market by distorting the price-setting mechanisms of financial instruments or by securing a controlling position in order to manipulate the price or related derivative and/or the asset itself.
- Spreading false rumors also prohibited
III(A) Loyalty, Prudence and Care_ Guidance
- client interests always come first
- act as another in your place would
- manage pool of assets according to governing documents
- make investment decisions in the context of the total portfolio
- vote proxies informed, not necessary to vote all
- soft dollars or commissions must be used to benefit client
- client may be investment community instead of specific entity or person
III(A) Loyalty, Prudence and Care_ Rec for Compliance
- at least quarterly submit to clients itemized statements
- firms should have clear policies and procedures
III(B) Fair Dealing_Guidance
- do not discriminate against any clients when disseminating recommendations or taking investment action
- different service levels are ok, but can’t disadvantage any clients
- disclose and differentiate different levels, and make available to anyone willing to pay
III(B) Fair Dealing_ Rec for Compliance
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