2. Ethics Flashcards
Ethics (definition)
- Shared beliefs on what is good / acceptable
Code of Ethics (definition)
- Written set of moral principals that can guide behavior by describing what is considered acceptable
Suitability v. Fiduciary Responsibility (concept)
- Fiduciary is stronger (to act in client’s best interest)
- Suitability is to offer adequate products (return v. risk)
Deteminant of behavior
- Circumstances / external / situational influences are more important
Ethical v. Legal Standards
- Not all unethical actions are illegal
- Not all illegal actions are not ethical
- You should consider the most strict rule
Ethical Decision Making Framework
- Identify (facts, duties, ethical principals, conflicts of interest)
- Consider (influences, alternative actions)
- Decide (to act)
- Reflect
Code of Ethics Components
There are 6 (APUPPM)
- Act with integrity
- Place the integrity above all; client above personal interests
- Use reasnable care and exercise independent judgment
- Practice and encourage others to act based in ethics and profession
- Promote integrity of the capital markets
- Maintain and improve professional competence
Standards of Professional Conduct
There are 7 (PIDDIRC) = PDD Cruz Vermelha
- Professionalism
- Integrity of Capital Markets
- Duties to Clients
- Duties to Employers
- Investment Analysis, Recomend and Act
- Conflicts of Interest
- Responsibilities as a CFA Institute Member
Standard I (Professionalism)
- KIMM Kardashian
- Knowledge of the Law
- Independence / Objectivity
- Misrepresentation (misleading data)
- Misconduct (dishonesty, fraud)
Standard II (Integrity of Capital Markets)
M&Ms
- MNPI
- Market Manipulation
Standard III (Duties to Clients)
Lefosse PREP
- Loyalty, Prudence and Care
- Fair Dealing
- Suitability
- Performance Presentation (fair, accurate and complete)
- Preservation of Confidentiality
Standard IV (Duties to Employers)
LAR
- Loyalty
- Additional Compensation Arrangements
- Responsibility of Supervisors
Standard V (Investment Analysis, Recommendations, Actions)
Dacar
- Diligence and Reasonable Basis
- Communication with Clients
- Record Retentions
Standard VI (Conflicts of Interest)
Dopar
- Disclosure of conflicts
- Priority of Transactions
- Referral fees
Standard VII (Responsibilities as a CFA Candidate/Member)
- Do not engage in any actions that compromises CFA Inst. reputation
- Reference to the membership should be accurate
Token gift
Business dinner is ok; SuperBowl tickets are not
Motivations matter?
They don’t. If you are prohibited from some action, they do not matter.
Standard I (Professionalism) - A
- Knowledge of the Law
- Violations always violate Standard I (A)
- CFA “strongly encourages” you to report, dissociate or resign from the firm if previous options are not taken
Standard I (Professionalism) - B
- Independence & Objectivity
Dont’s:
- Do not accept gifts that compromise your independence
- Disclose everything to the employer
- Do not receive compensation that compromises your behavior
- Pay your own travel unless it is in the middle of nada
Standard I (Professionalism) - C
- Misrepresentation
Dont’s:
- Plagiarize
- Omit accounts or relevant info
- Present the wrong benchmark
- Guarantee a specific return
Standard I (Professionalism) - D
- Misconduct
Dont’s:
- Fraud
- Commit anything that compromises reputation, integrity or competence
Standard II (Integrity of Capital Markets) - A
MNPI: info that affects price OR if a reasonable investor wants it prior to making decisions
Mosaic Theory
Standard II A
- Usage of Non-Material Private Info + Perception based in public info does not violate MNPI Standard II - A.
Standard II (Integrity of Capital Markets) - B
Market Manipulation
- If there is the intent to mislead, then the standard is violated
Standard III (Duties to Clients) - A
Loyalty, Prudence and Care
- Soft dollars (from brokerage) should only be used to benefit the brokerage house’s clients
- Inform clients of any limitations
- Does not input fiduciary duty over the client
Standard III (Duties to Clients) - B
Fair Dealing
- Client first
- Fair does not mean equal, if there are different levels of services given proper disclosure
- Give the chance for all to act
- Time differences are not a violation, per se
Standard III (Duties to Clients) - C
Suitability
- Match risk and return via
1. Inquiry
2. Determine that the investment is suitable
3. Judge by context
Unsolicited Trade Request
Suitability (Standard III - C)
- Speaks to client
- Checks effect in portfolio’s risk
- Check the firm’s policy and procedures
- Update IPS and Execute or
- Follows firm’s policies, if client does not accept the update
Standard III (Duties to Clients) - D
Performance Presentation
- Use the right benchmark
- Record Retention
- Encourage GIPS
- Terminated accounts should be included in the historical performance
Standard III (Duties to Clients) - E
Preservation of confidentiality
- Keep info confidential, unless required by the law or if client is involved in illegal actions
Standard IV (Duties to Employers) - A
- LAR
- Loyalty until leaves the firm effectively
- It may be broken to preserve clients or the integrity of the market
- No need to put the firm’s interests ahead of personal interests
Standard IV (Duties to Employers) - B
- LAR
- Additional compensation arrangement
- Additional compensation that creates a conflict of interest requires written consent from all parties involved
Standard IV (Duties to Employers) - C
- LAR
- Responsibility of Supervisors
- The boss have an obligation to report inadequate compliance and suggest corrective action
Standard V (Investment Analysis) - A
- Diligence and Reasonable Basis (DaCaR)
- Exercise diligence and independence
- Have reasonable and adequate basis
Standard V (Investment Analysis) - B
- Communication with Clients (DaCaR)
- Disclose general principles of investment process
- Disclose associated risks
- Judge which factors are important
- Distinguish facts and opinions in the presentation
- Expectations are not facts
Standard V (Investment Analysis) - C
- Record Retention (DaCaR)
- Maintain for 7 years
Standard VI (Conflicts of Interest) - A
- Disclosure (DoPaR)
- Give fully disclosure to the client
Standard VI (Conflicts of Interest) - B
- Priority of Transactions (DoPaR)
- Clients > Employer > My own account
- Family members who are clients should be treated in the same way as other clients
Standard VI (Conflicts of Interest) - C
- Referal Fees (DoPaR)
- Disclose all referal fees to allow stakeholders to judge the full cost of the service and potential partiality.
Standard VII (CFA Member) - A
- Do not engage in any action that compromises the CFA Institute reputation
Standard VII (CFA Member) - B
- Refer properly to the CFA charterholder
- Active members are allowed to mention
- Pay fees, ok to mention (active members)
- If you did not pay, do not mention for the period you were not part of the Institute, or give a full disclosure on what happened
GIPs compliance level
It is given atthe firm-wide level, only
GIPS Composite (concept)
- Group of individual discretionary portfolios representing a similar strategy or mandate
- It must include all fee paying, current and past portfolios for a given “subject”
9 sections of GIPS standard
- Fundamentals of Compliance
- Input data
- Calculation methodology
- Composite Construction
- Disclosures
- Presentation and Reporting
- Real Estate (specific provisions)
- Private Equity (specific principles, unless open-ended funds)
- Wrap Fee / SMA portfolios (separate accounts)
