2 Flashcards
What is ethics generally viewed as
A set of basic principles that ensure people behave for the benefit of all
Why is ethics important?
- Building trust in markets
- Promoting trust in investment professionals
- Instilling trust in other stakeholders
- Earning the trust of regulators
When does the industry become vulnerable to government intervention?
When practitioners in an industry are seen to be behaving unethically and putting their own interests ahead of those of their clients and in some cases ahead of taxpayers’ interests
What are the main risks when a firm behaves unethically?
It risks prosecution and payment of compensation to clients. However one of the main risks of unethical behaviour is reputational risk
Consequences of unethical conduct
- Disciplinary action from a professional body
- Disapproval from clients, colleagues and the industry peer group
- Negative publicity and loss of job
What is the CFA code of ethics
It sets out the ethical standards that all CFA Institute Members and CFA Candidates who are registered to take CFA exams must follows
How many elements are there to the CFA Code of Ethics?
6
What do the Standards of Professional Conduct promote?
Promote fair and ethical behaviour and are organised into seven broad categories
What are the seven categories of the Standards of Professional Conduct?
- Professionalism
- Integrity of capital markets
- Duties to clients
- Duties to employers
- Investment analysis, recommendations and actions
- Conflics of interest
- Responsibilities as a CFA Institute Member or CFA Candidate
I Professionalism
A Knowledge of the law
B Independence and objectivity
C Misrepresentation
D Misconduct
II Integrity of capital markets
A Material non-public 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 Additonal compensation arrangements
C Responsibilities of supervisors
V Investment analysis, recommendations and actions
A Diligence and reasonable basis
B Communication with clients and prospective clients
C Record retention
VII Responsibilities as a CFA Institute Member or CFA Candidate
A Conduct as participants in CFA Institute Programs
B Reference to CFA Institute, the CFA designation and the CFA program
Motivations for unethical behaviour
- Undue pressure or incentives to perform
- Ability to blame others
- Ability to rationalise unethical behaviour
- Conflicts of interest skewing judgment
- Lack of rigour due to overcapacity
- Disregard for clients
- Failure to act
What can negative investment outcomes be attributed to?
- Taking on too much risk
- Purchasing inappropriate investments
- Lack of diversification
- Excessive trading that incurs unjustified transaction costs
- Purchasing products that charge fees not commensurate with performance
6 elements in the code of ethics
- Act with integrity, competence, diligence and respect
- Place of the integrity of investment profession and interest of clients above own personal interests
- Use reasonable care and exercise independent professional judgment
- Practice, and encourage others to practice in a professional manner
- Promote the integrity of capital markets for the benefit of society
- Maintain and improve professional competence and of others
