CAIA - Ethics - Standards I, II, and III Flashcards
1
Q
What is standard 1 of the CFA Standards of Practice Handbook?
A
Professionalism
2
Q
What 4 areas does Standard 1 of the CFA Standards of Practice Handbook cover?
A
Knowledge of the Law
Independence and Objectivity
Misrepresentation
Misconduct
3
Q
What is the purpose and scope of Standard 1 “Knowledge of the Law”?
A
- To understand and comply with the laws and rules of all applicable organizations
- In the event of conflict, Members and Canidates must comply with more strict rule
- Members and Candidates must not participate or assist in and must dissociate from any violations
4
Q
Can members and candidates take action that exceed laws and regulations?
A
Yes - members are encouraged to exceed minimal requirements.
5
Q
Are members and candidates expected to become legal experts?
A
No, but Standard 1 requires that members/candidates not intentionally violate laws and regulations.
6
Q
If illegal or unethical conduct is perceived by an employee, what should the employee do?
A
- Separate from the conduct
- Confront the violator directly
- Inform a supervisor or compliance officer
- If all of the above fails, dissociate completely.
7
Q
Do the code of standards require violations to be reported to a regulatory agency?
A
No, but members are urged to report violations and seek guidance from legal/compliance officers.
8
Q
When selling investment products to another country, should supervisors be aware of applicable laws?
A
Yes
9
Q
If another firm is distributing products made by a member’s firm in different countries, does the member need to know laws and regulations of foreign country?
A
Members should attempt to assess whether or not 3rd party firms are adhering to applicable laws
10
Q
What are the member procedures for Standard I(A), knowledge of the law?
A
- Acquire and maintain understanding of laws
- Know laws in distribution areas
- Seek legal advice
- Dissociate from violations
11
Q
What are the firm procedures for Standard I(A), knowledge of the law?
A
- Establish a code of ethics, which may be based on “Asset Manager Code of Professional Conduct” from the CFA
- Provide employees with materials on applicable laws/regulations
- Provide written procedures for reporting violations
12
Q
What are the 2 purposes of Standard I(B) Independence and Objectivity?
A
- Members and candidates must use reasonable care and judgment to achieve and maintain independence and objectivity.
- Members and Candidates must not offer, solicit or accept any gift, benefit or compensation that could be expected to compromise their own or another’s independence and objectivity.
13
Q
Under Standard I(B), can recommendations can be made implicitely?
A
No, recommendations should be made explicitly without the use of nebulous language.
14
Q
Are modest gifts and entertainment acceptable under the Code and Standards of Conduct?
A
Yes, but members are encouraged to decline any gift that may influence them to act in a manner contrary to the best interests of their clients.
15
Q
Can an investment manager accept shares of an oversubscribed IPO for their personal accounts?
A
No. Since the IPO is oversubscribed, the investment is not available to their clients and is prohibited.
16
Q
Can members and candidates accept gifts from clients?
A
Yes, but members/candidates must inform their employers so that potential conflicts of interest can be evaluated.
17
Q
How can conflicts of interest between the research team of a sell-side firm and the investment banking branch be avoided?
A
A firewall should be established. Examples include: compensation not being tied to invstment banking projects, separate reporting and no changing of recommendations. Sometimes all communication is prohibited.
18
Q
Regarding compensation, what is the best practice for issuer-paid research?
A
A flat fee should be charged and should not be based on the report’s recommendations.
19
Q
Can members and candidates accept paid travel arrangements from outside companies?
A
Yes, but only if the travel arrangements are modest and other means of transportation are unavailable. Transportation should be limited to information-gathering.
20
Q
What are the procedures for complying with Standard I(B), Independence and Objectivity?
- Protect the ___ of ___ ___
- Create ___ ___
- Restrict ___ ___
- Limit ___ and ___
- Restrict ___
- Establish ___ ___ for ___ ___
- Develop ___ ___
- Appoint ___ ___ for ___ ___
A
What are the procedures for complying with Standard I(B), Independence and Objectivity?
- Protect the integrity of analyst opinions
- Create restricted list
- Restrict cost arrangements
- Limit gifts and gratuities
- Restrict investments
- Establish review procedures for personal investments
- Develop formal policy
- Appoint senior officer for ethical compliance
21
Q
What is the purpose and scope of Standard I(C), MISREPRESENTATION?
A
Members and candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions or other professional activities.
22
Q
Do members and candidates need to ensure they don’t misrepresent 3rd party information?
A
Yes
23
Q
Does the use of outside managers need to be disclosed?
A
Yes
24
Q
Is incorrectly using benchmarks a form of misrepresentation covered by Standard 1(C)?
A
Yes
25
Should a benchmark always be provided?
No - some investments do not have a suitable benchmark.
26
When using outsourced research reports, must members assume responsibility from any misreprentations in the report?
Yes - members are encouraged to only use research reports that contain proper documentation.
27
Members/candidates must cite the original author of research, unless:
The original author is a present or past employee of the firm since the work is the property of the employer.
28
What are the procedures for complying with Standard I(C), MISREPRESENTATIONS?
1. Make ___ \_\_\_
2. Provide ___ \_\_\_
3. Verify ___ \_\_\_
4. Maintain \_\_\_
5. Establish ___ \_\_\_
What are the procedures for complying with Standard I(C), MISREPRESENTATIONS?
1. Make **accurate presentations**
2. Provide **qualification summary**
3. Verify **outside information**
4. Maintain **webpages**
5. Establish **plagiarism policy**
29
Does standard I(D), MISCONDUCT only cover illegal activities?
No - Standard I(D), MISCONDUCT mandates that members and candidates must avoid engaging in any activities that may reflect badly on their professional conduct.
30
What are the 3 procedures for complying with Standard I(D), MISCONDUCT?
What are 3 the procedures for complying with Standard I(D), MISCONDUCT?
1. Establish and/or implement a **code of ethics**
2. Provide employees with a **list** of **potential breaches**
3. Check **references** of **prospective employees**
31
What is Standard II of the CFA Standards of Practice Handbook?
Integrity of Capital Markets
32
Standard II (Integrity of Capital Markets) covers what 2 areas?
1. Material Non-Public Information
2. Market Manipulation
33
What is the purpose and scope of Standard II(A), MATERIAL AND NON-PUBLIC INFORMATION?
Members and candidates who possess material, non-public information that could affect the value of an investment must not act or cause others to act on the information.
34
Information is material if:
Information is material if disclosure would probably affect the price of a security or if rational investors would want the information before making an investment decision.
35
Does trustworthiness of the source contribute to whether information is material?
Yes
36
Does disclosure to a group of analysts constitute making information public?
No - it must be distributed to the general marketplace
37
Can material non-public information be used for conducting due diligence for activities such as mergers, loans underwriting and credit ratings?
Yes
38
Is all social media considered public?
No - if the site requires membership it is not public
39
Does the use of social media to disclose information violate standard II(A), MATERIAL NON-PUBLIC INFORMATION?
No - using social media does not violate the standard if it reaches all clients or is open to the public.
40
Is using outside industry experts a violation of Standard II(A), MATERIAL NON-PUBLIC INFORMATION?
No - but members/candidates cannot use or request information that is material non-public information.
41
Do 3rd party analysts have to make reports that are material public?
No - if the information was derived from publicly available information, they do not.
42
What are the 13 procedures for compliance with Standard II(A) - Material Non-Public Information?
1. Distribute \_\_\_
2. Adopt ___ \_\_\_
3. Adopt ___ \_\_\_
4. Issue ___ \_\_\_
5. Establish \_\_\_
6. Formalize ___ \_\_\_
7. Physically ___ \_\_\_
8. Prevent ___ of \_\_\_
9. Establish a ___ \_\_\_
10. Limit or prohibit ____ \_\_\_\_
11. Maintain \_\_\_\_
12. Establish ___ \_\_\_\_ \_\_\_
13. ____ with employees
What are the 13 procedures for compliance with Standard II(A) - Material Non-Public Information?
1. Distribute **publicly**
2. Adopt **compliance procedures**
3. Adopt **disclosure procedures**
4. Issue **press releases**
5. Establish **firewalls**
6. Formalize **interdepartmental communications**
7. Physically **separate departments**
8. Prevent **overlap** of **staff**
9. Establish a **reporting system**
10. Limit or prohibit **personal trading**
11. Maintain **records**
12. Establish **proprietary trading procedures**
13. **Communicate** with employees
43
What should be done if material non-public information cannot be distributed publicly?
The information should be given to designated supervisors and compliance personnel
44
Why should firms establish disclosure procedures?
To make sure the information is disclosed in an equitable way
45
If material non-public information is disclosed at a meeting or with analysts, what should a firm do?
Disclose the information publicly as quickly as possible (e.g. press release). If possible, the information should be released before such meetings.
46
What are the 4 minimimum components of an effective firewall?
1. Control relevant interdepartmental \_\_\_
2. Maintain restricted ___ and ___ lists
3. ____ the process and how it will be implemented
4. Increase ____ when the the firm has material, non-public information
What are the 4 minimimum components of an effective firewall?
1. Control relevant interdepartmental **communication**
2. Maintain restricted **rumor** and **watch** lists
3. **Document** the process and how it will be implemented
4. Increase **oversight** when the the firm has material, non-public information
47
A ___ or ___ \_\_\_ should be designated to determine whether information is material or not and whether it can be used to make investment recommendations and decisions or shared with someone "\_\_\_ the ___ ". Analysts should consult this individual if they need to share such information, and, if sharing is permitted, the compliance officer should oversee the ___ of \_\_\_.
A **supervisor** or **compliance officer** should be designated to determine whether information is material or not and whether it can be used to make investment recommmendations and decisions or shared with someone "**over** the **wall**". Analysts should consult this individual if they need to share such information, and, if sharing is permitted, the compliance officer should oversee the **exchange** of **information**.
48
Employees should periodically report on their ___ transactions and transactions made for ___ \_\_\_
Employees should periodically report on their **own** transactions and transactions made for **family members**
49
A ___ list should be used together with a ___ list to control personal trading. The ___ list should include securities about which the firm has or may have material, non-public information. It (should/should not) be broadly distributed.
A **watch** list should be used together with a **restricted** list to control personal trading. The **restricted** list should include securities about which the firm has or may have material, non-public information. It **should not** be broadly distributed. **Instead, the watch list is provided to the few people responsible for compliance and used to monitor transactions in specific securities.**
50
Market manipulation can be \_\_\_-based or \_\_\_-based
Market manipulation can be **information**-based or **transaction**-based
51
What type of manipulation includes distributing false information to stimulate trading by other market participants?
Information based manipulation
52
What type of manipulation includes distorting market prices to imply trading activity in securities or gaining a controlling position in a security for the purpose of manipulating the security or an associated derivative security?
Transaction based manipulation
53
What are the 5 areas that Standard III: Duties to Clients covers?
1. Loyalty, Prudence, and Care
2. Fair Dealing
3. Suitability
4. Performance Presentation
5. Preservation of Confidentiality
54
Standard III (A), Loyalty, Prudence and Care states that members and candidates must act with ___ care and exercise ___ judgment. They must also act for the benefit of their ___ and place their ___ interest before their ___ or their ___ .
Standard III (A), Loyalty, Prudence and Care states that members and candidates must act with **reasonable** care and exercise **prudent** judgment. They must also act for the benefit of their **clients** and place their **clients** interest before their **own** or their **employer's**.
55
Standard III(A), Loyalty Prudence and Care (does /does not) replace legal, regulatory, or fiduciary obligations by which members and candidates are bound.
Standard III(A), Loyalty Prudence and Care **does not** replace legal, regulatory, or fiduciary obligations by which members and candidates are bound.
56
Members and candidates who have direct or indirect access to a client's funds are said to have ___ of client assets and assume additional \_\_\_. Those with ___ of client assets must manage the assets in their control according to the terms of the ___ \_\_\_\_.
Members and candidates who have direct or indirect access to a client's funds are said to have **custody** of client assets and assume additional **responsibility**. Those with **custody** of client assets must manage the assets in their control according to the terms of the **governing documents**.
57
Fiduciary duties typically (do/do not) exceed Standard III(A), Loyalty, Prudence and Care.
Fiduciary duties typically **do** exceed Standard III(A), Loyalty, Prudence and Care.
58
Standard III(A), Loyalty, Prudence and Care (does/does not) technically make members and candidates fiduciaries.
Standard III(A), Loyalty, Prudence and Care **does not** technically make members and candidates fiduciaries.
59
Members and candidates who serve as trade execution professionals (do/do not) have to act in a client's best interests when completing trades.
Members and candidates who serve as trade execution professionals **do** have to act in a client's best interests when completing trades.
60
For those managing portfolios for trusts or pension plans, who are the clients?
The beneficiaries, not the entity who hired the manager.
61
Managers with no client or beneficiary have a duty to invest how?
In a way that is consistent with stated mandates
62
Members and candidates (do/do not) breach the duty of loyalty to clients if they pay a higher than normal brokerage commission to enable the purchase of goods or services.
Members and candidates **do** breach the duty of loyalty to clients if they pay a higher than normal brokerage commission to enable the purchase of goods or services.
63
Standard III(B), Fair Dealing, states that "Members and Candidates must deal \_\_\_and \_\_\_with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities."
Standard III(B), Fair Dealing, states that "Members and Candidates must deal **fairly** and **objectively** with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities."
64
Differing levels of service (may/may not) be provided to clients, as long as they are \_\_\_, \_\_\_to everyone, and do not \_\_\_affect any clients.
Differing levels of service **may** be provided to clients, as long as they are **disclosed**, **offered** to everyone, and do not **adversely** affect any clients.
65
Standard III(B), Fair Dealing, addresses two general types of invesment professional's conduct, both of which can affect market value: investment ___ and investment ___ .
Standard III(B), Fair Dealing, addresses two general types of invesment professional's conduct, both of which can affect market value: investment **recommendations** and investment **action**.
66
If clients submit orders that differ from a changed recommendation, members (should/should not) inform them of the change before accepting and placing the order.
If clients submit orders that differ from a changed recommendation, members **should** inform them of the change before accepting and placing the order.
67
Issues should be distributed to clients in a way that follows the firm's \_\_\_-allocation policy.
Issues should be distributed to clients in a way that follows the firm's **block**-allocation policy.
68
Oversubscribed issues should be \_\_\_on a \_\_\_-lot basis.
Oversubscribed issues should be **prorated** on a **round**-lot basis.
69
What is a round lot basis?
The standard unit of trading of the security on an exchange
70
Family members (should/should not) be able to purchase oversubscribed issues.
Family members **should** be able to purchase oversubscribed issues, **provided that they are handled in the same way as those of the firm's other clients.**
71
Members and candidates (can/can not) purchase oversubscribed issues for themselves
Members and candidates **can not** purchase oversubscribed issues for themselves
72
If a client endorses an unfair allocation procedure, members and candidates (can/cannot ) use this to override their responsibility of fair dealings
If a client endorses an unfair allocation procedure, members and candidates **cannot** use this to override their responsibility of fair dealings
73
Orders should be processed \_\_\_-in-\_\_\_-out (\_\_\_) system
Orders should be processed **first**-in-**first**-out (**FIFO**) system, with the ability to combine orders for efficiency.
74
If an entire block order cannot be executed, ___ the execution among the participating accounts based on the size of the order, while heeding any minimum lot size requirements.
If an entire block order cannot be executed, **prorate** the execution among the participating accounts based on the size of the order, while heeding any minimum lot size requirements.
75
When allocating trades for new issues, determine indications of interest ___ \_\_\_ , allocate securities by ___ (rather than ___ \_\_\_ ), and use a process to calculate the allocations that avoids ___ .
When allocating trades for new issues, determine indications of interest **in advance**, allocate securities by **client** (rather than **portfolio manager**), and use a process to calculate the allocations that avoids **favoritism**.
76
Standard III(C), Suitability states that when members and candidates are in an advisory relationship, they must:
a. Make a reasonable inquiry into a client's or prospective client's investment \_\_\_, \_\_\_and \_\_\_objectives, and \_\_\_constraints prior to making any investment recommendation or taking investment action and must reassess and update this information \_\_\_
b. Determine that an investment is \_\_\_to the client's financial situation and consistent with the client's written \_\_\_, \_\_\_, and \_\_\_before making an investment recommendation or taking investment action.
c. Judge the \_\_\_of investment in the context of the client's ___ \_\_\_.
Standard III(C), Suitability states that when members and candidates are in an advisory relationship, they must:
a. Make a reasonable inquiry into a client's or prospective client's investment **experience**, **risk** and **return** objectives, and **financial** constraints prior to making any investment recommendation or taking investment action and must reassess and update this information **regularly**
b. Determine that an investment is **suitable** to the client's financial situation and consistent with the client's written **objectives**, **mandates**, and **constraints** before making an investment recommendation or taking investment action.
c. Judge the **suitability** of investment in the context of the client's **total portfolio**.
77
Key components of Standard III(C), suitability include:
1. Developing an ___ \_\_\_
2. Understanding the client's ___ \_\_\_
3. Updating an ___ \_\_\_
4. Need for \_\_\_
5. Addressing ___ \_\_\_ requests
6. Managing to an \_\_\_or \_\_\_
Key components of Standard III(C), suitability include:
1. Developing an **investment policy**
2. Understanding the client's **risk profile**
3. Updating an **investment policy**
4. Need for **diversification**
5. Addressing **unsolicited trading** requests
6. Managing to an **index** or **mandate**
78
Updates to the IPS should be made at least ___ \_\_\_ \_\_\_and before any material change to an investment recommendation or decision for a client.
Updates to the IPS should be made at least **once per year** and before any material change to an investment recommendation or decision for a client.
79
Members and candidates that receive unsolicited trading requests from clients that are not consistent with the risk and return objectives in the clients' IPS (do/do not) have to make reasonable efforts to balance these requests with their duties to adhere to the clients' IPS.
Members and candidates that receive unsolicited trading requests from clients that are not consistent with the risk and return objectives in the clients' IPS **do** have to make reasonable efforts to balance these requests with their duties to adhere to the clients' IPS.
80
If an unsolicited trade request is outside the risk and return objectives in a client's IPS, but the impact is small, what should a member/candidate do?
They can make the trade, but the client should acknowledge it is outside risk/return objectives and accept circumstances that render trades unsuitable.
81
If an unsolicited trade request is outside the risk and return objectives in a client's IPS, and the impact is large, what should a member/candidate do?
The IPS should be updated. If the client doesn't want their IPS updated, the member/candidate should assess remaining an advisor to that client.
82
The factors that should be considered in designing an IPS are:
1. Client \_\_\_
2. Client \_\_\_
3. Client \_\_\_
4. ___ \_\_\_ \_\_\_
The factors that should be considered in designing an IPS are:
1. Client **identification**
2. Client **objectives**
3. Client **constraints**
4. **Performance measurement benchmarks**
83
Procedures for compliance with Standard III(C), suitability are:
1. Develop an ___ \_\_\_ \_\_\_
2. Make ___ \_\_\_
3. Develop ___ test policies
Procedures for compliance with Standard III(C), suitability are:
1. Develop an **investment policy statement**
2. Make **regular updates**
3. Develop **suitability** test policies
84
A suitability test should assess the fitness of an investment for a client based on the following factors:
1. Effect on \_\_\_
2. Comparison of the client's ___ \_\_\_ with the investment ___ \_\_\_
3. Comparison of the client's ___ \_\_\_ with the investment
A suitability test should assess the fitness of an investment for a client based on the following factors:
1. Effect on **diversification**
2. Comparison of the client's **risk tolerance** with the investment **risk tolerance**
3. Comparison of the client's **investment strategy** with the investment
85
Standard III(D), PERFORMANCE PRESENTATION, states that "when communicating investment performance information, members and candidates must make reasonable efforts to ensure that it is \_\_\_, \_\_\_, and \_\_\_.
Standard III(D), PERFORMANCE PRESENTATION, states that "when communicating investment performance information, members and candidates must make reasonable efforts to ensure that it is **fair**, **accurate**, and **complete**.
86
Standard III(D), PERFORMANCE PRESENTATION, indicates that members should comply with and encourage their firms to comply with the ___ \_\_\_ ___ \_\_\_ (\_\_\_ ).
Standard III(D), PERFORMANCE PRESENTATION, indicates that members should comply with and encourage their firms to comply with the **Global Investment** **Performance** **Standards** (**GIPS**).
87
In addition to GIPS, other methods of complying with Standard III(D), PERFORMANCE PRESENTATION, include the following:
1. Taking into account the ___ of the audience.
2. Using the performance of the ___ \_\_\_ , rather than ___ \_\_\_ portfolio
3. Keeping the data on ___ accounts
4. Incorporating all information needed to provide a ___ and ___ representation
In addition to GIPS, other methods of complying with Standard III(D), PERFORMANCE PRESENTATION, include the following:
1. Taking into account the **knowledge** of the audience.
2. Using the performance of the **weighted composite**, rather than **one representative** portfolio
3. Keeping the data on **terminated** accounts
4. Incorporating all information needed to provide a **fair** and **accurate** representation
88
Standard III(E), PRESERVATION OF CONFIDENTIALITY, states that "Members and Candidates must keep information about current, former, and prospective clients confidential unless:
1. The information concerns ___ activities on the part of the client;
2. Disclosure is required by ___ ; or
3. The client or prospective client ___ disclosure of the information."
Standard III(E), PRESERVATION OF CONFIDENTIALITY, states that "Members and Candidates must keep information about current, former, and prospective clients confidential unless:
1. The information concerns **illegal** activities on the part of the client;
2. Disclosure is required by **law**; or
3. The client or prospective client **permits** disclosure of the information."
89
Can members and candidates provide confidential information to assist professional conduct investigations (e.g. those carried out by CFA Institute?)
Yes
90
To ensure confidentiality of information, firms should
1. Establish regular reviews of ___ \_\_\_ measures
2. Discuss with ___ appropriate ways for providing confidential information, and should explain that all firm-sponsored resources (may/may not) be appropriate sources of communication.
To ensure confidentiality of information, firms should
1. Establish regular reviews of **privacy protection** measures
2. Discuss with **clients** appropriate ways for providing confidential information, and should explain that all firm-sponsored resources **may not** be appropriate sources of communication.
