Chapter 10.3 Standard V, VI, and VII Flashcards
Standard V(B): Communication with Clients and Prospective Clients
Members and Candidates must:
Disclose to clients and prospective clients the basic format and general principles of the investment processes they use to analyze investments, select securities, and construct portfolios and must promptly disclose any changes that might materially affect those processes.
Disclose to clients and prospective clients significant limitations and risks associated with the investment process.
Use reasonable judgment in identifying which factors are important to their investment analyses, recommendations, or actions and include those factors in communications with clients and prospective clients.
Distinguish between fact and opinion in the presentation of investment analyses and recommendations.
Standard V(A): Diligence and Reasonable Basis
Members and Candidates must:
Exercise diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions.
Have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action
Standard V(C): Record Retention
Members and Candidates must develop and maintain appropriate records to support their investment analyses, recommendations, actions, and other investment-related communications with clients and prospective clients.
Standard VI(A): Disclosure of Conflicts
Members and Candidates must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients, and employer. Members and Candidates must ensure that such disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively.
Standard VI(B): Priority of Transactions
Investment transactions for clients and employers must have priority over investment transactions in which a Member or Candidate is the beneficial owner.
Standard VI(B): Priority of Transactions
Recommended Procedures for Compliance
Participation in equity IPOs should be limited because it could appear to take away opportunities from clients.
Members should get the firm’s approval in advance to participate in IPOs.
Limits should be placed on private placement investments. These are not often used for clients due to the high risk, but members could receive opportunities to invest in them as a reward from the broker. Also, there is an incentive to recommend the security when private placement goes public.
Investment personnel should not be allowed to “front-run” client trades. This can be prevented by blackout periods that prevent managers from trading. The firm must decide who must comply with restriction and what trading is precluded.
Reporting procedures should be established for investment personnel. The reporting requirements include disclosure of holdings at least annually, duplicate confirmations of transactions, and preclearance procedures.
Members should disclose personal trading policies to investors. This will reduce the concern of conflicts of interest.
Standard VI(C): Referral Fees
Members and Candidates must disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services.
Employers should develop procedures related to referral fees. Referral fees could be completely restricted or require appropriate steps for approval.
Investment professionals should report to their employer at least quarterly to disclose the amount and nature of compensation received.
Standard VII(A): Conduct as Members and Candidates in the CFA Program
Members and Candidates must not engage in any conduct that compromises the reputation or integrity of CFA Institute or the CFA designation or the integrity, validity, or security of CFA Institute programs.
Standard VII(B): Reference to CFA Institute, the CFA Designation, and the CFA Program
When referring to CFA Institute, CFA Institute membership, the CFA designation, or candidacy in the CFA Program, Members and Candidates must not misrepresent or exaggerate the meaning or implications of membership in CFA Institute, holding the CFA designation, or candidacy in the CFA Program.
