Chapter 2 Flashcards
_______ can be generally defined as a set of consistent values that guide individual behaviour.
Ethics
the study of ethics has three distinct meanings:
- The standards governing the behaviour of a particular organization or profession
- A set of moral principles or values
- The study of the general nature of morals and the moral choices people make
_______ _______ help guide behaviour in situations where no regulation specifically applies
Ethical Principles
Values have the following characteristics in common:
- They are beliefs, not facts.
- They are long lasting, but not necessarily unchangeable.
- They guide individual and corporate behaviour and goals.
What is a unified value system?
One in which the means and ends mutually reinforce and support each other.
Regarding Ethics
This is considered to be one of the most significant risks to the investment and financial services industry
Reputation Risk
It can take years or even decades of dedicated and consistent adherence to high standards of ethical business conduct to build your reputation, and even one lapse in judgement can harm an advisor’s public image and destroy the goodwill that has taken years to build.
Capital adequacy standards (often called _______ ________) exist to ensure that investment dealers maintain an appropriate level of capital and have prudent and appropriate internal controls.
prudential regulation
The core mandate of securities regulators is to ensure
full, true, and plain disclosure
These documents set out in specific detail the factors that IIROC considers relevant in assessing a range of violations. They also set out the appropriate penalties associated with specific types of violations.
IIROC Sanction Guidelines
These four tests can help you determine whether a decision under consideration is right or wrong:
Legal Test- does the decision break any laws or rules?
Smell Test- Does your intuition tell you the decision is wrong, even if you can’t pinpoint exactly what is wrong?
Front Page Test- Would your reputation be at risk if the decision were to be broadcasted on the front page of a newspaper?
Mom Test- Would you want your mother to know about your decision
With an ______ ________ the values of honesty or integrity clash with the values of commitment, personal responsibility or promise keeping.
Integrity Dilemma- Truth versus Loyalty
With a _______ ________, the rights or values of an individual conflict with those of the group.
Societal dilemma- Individual versus Group
A ______ _____ _______ exists when immediate needs or desires conflict with future goals, or when the means clashes with the desired end.
goal-based dilemma- Short Term versus Long Term Goals
With a _______ _______ the values of fairness, equity, and righteousness conflict with the values of compassion and empathy.
fairness dilemma- Justice vs Mercy
IIROC has published _______ ________that provide a framework to help financial institutions exercise discretion in determining sanctions when employees break industry rules.
Sanction Guidelines
Ethical dilemmas are typically resolved by applying four principles:
- The ends-based principle
- The rules-based principle
- The social contract-based principle
- The personalistic principle
This resolution principle states that the action chosen should result in the greatest good for the greatest number of people. It demands a kind of cost-benefit analysis, determining who will benefit and who will not.
Ends-Based Principle
This resolution principle states that the action chosen should follow the rule that deals most effectively with the situation.
Rules-Based Principle
This resolution principle views the action in terms of how it affects the wellbeing of the group.
If followed, it would create harmonious relationships within the group.
Social Contract-Based Principle
This resolution principle supports the decision that is most authentic to the decision-maker as a person.
Personalistic Principle
Name the 8 steps of the ethical decision-making process
- Identify the issue
- Identify whose ethical issue it is.
- Gather the facts
- Test for right-versus wrong issue using legal, smell, front page, and mom test.
- Test for right vs right issues (Truth vs Loyalty, Individual vs Group, Short-term vs Long-term, and Justice vs Mercy)
- Apply the four resolution principles to determine the best choice. (Ends-based, Rules-based, Social contract based, or Personalistic)
- Make the decision
- Reflect on the process
In this type of ethical dilemma, means values can clash with ends values.
Short term vs Long term
Within this dilemma type, the values of fairness, equity, and righteousness conflict with the values of compassion, empathy and love.
Justice vs Mercy
This type of dilemma can be understood as the values of honesty or integrity clashing with the values of commitment, personal responsibility or promise keeping.
Truth vs Loyalty
a set of rules, either written or unwritten, that specifies the rules of behavior within a group.
A code of ethics
For a code of ethics to be effective, four elements are necessary:
- It must be supported by senior management.
- Employees at all levels must participate in its development
- Implementation must include training and reinforcement among all employees.
- It must be reviewed periodically and updated when necessary.
A person who holds a position of trust with clients often has a legal duty to those clients. This duty is called a _______ ______, and the person in whom trust has been placed is called a _______
Fiduciary Duty
Fiduciary
In the wealth management business, the law of _______ gives wealth advisors and their firms the ability to enter trades on behalf of their clients. There is no need for the client to be in direct contact with the party on the other side of the trade.
Agency
The person to whom the fiduciary owes this duty is called
The Beneficiary
Three things must be present for trust-based relationships:
Specialized Knowledge
A well-regulated industry
A client-first approach
failure to conform to this requirement is the source of most ethical dilemmas faced by today’s advisors.
A client-first approach
Two qualities that advisors must nurture to build a trust relationship are
competence and integrity
clients’ willingness to trust you depends on how you handle three elements in the relationship:
Disclosure of information - the freer the flow of info between you and your clients, the more likely it is that a strong bond of trust will form.
Influence over decisions- Clients must know that info they share with you will influence the decisions you make
Share of control- Clients must feel that they have some control in their relationship with you; they must not feel manipulated or patronized
While rules provide a basic framework for operating in the industry, the financial services business is largely founded on _______ & ________.
trust and integrity
This type of relationship is at the heart of wealth management and the sale of financial products.
Agency
________ may be defined as a relationship in which one party is authorized to bring another party into contractual relations with a third party.
Agency
Think about being the agent in a trade where you match the buyers with sellers.
Regarding Agency, the ______ is the person authorized to do certain things on behalf of another party
Agent
Regarding Agency, the _________ is the other party on whose behalf the agent acts.
Principle
This is usually the client
Similar to agency, the Quebec Civil Code defines _________as a contract by which a principal empowers an agent to represent him or her in the performance of a juridical act with a third person.
Mandate
In Quebec, principals are also known as
Mandator
In Quebec, agents are also known as
Mandatary
With a properly signed _________ _________, advisors do not require written instructions from clients every time an order is placed. This agreement gives you authority to buy or sell products based on verbal instructions from your client.
account agreement
A general power of attorney is common in the securities industry, where it is sometimes known as _________ _________
Trading Authorization
What is required to constitute fiduciary duty?
Evidence of the mutual understanding that one party has relinquished its own self-interest and agreed to act solely on behalf of the other party.
EX: Advisor relinquishes their own interest and agrees to act solely on behalf of the client.
The IIROC Enforcement process consists of four stages:
case assessment
investigations
prosecutions
disciplinary hearings.
Who does IIROC’s hearing panel consist of?
An independent chair (usually a retired Judge) and two independent industry members.
Disciplinary proceedings can take the form of either a ___________ hearing or ___________ hearing
Settlement hearing or Contested hearing
This type of hearing is when enforcement staff and the advisor agree in writing on the rules violated by the advisor, as well as the underlying facts and the penalties for the agreed-upon violations.
Settlement Hearing
Are disciplinary proceedings available to the public?
Yes, in settlement hearings, the results are published on IIROC’s website.
Most hearings are open to the public with the exception of settlement hearings, which are open to the public when the panel accepts the settlement conditions.
How many days do respondents have to appeal a decision by the hearing panel?
30 days
This type of hearing is necessary when the advisor does not admit to the alleged violation of IIROC rules.
contested hearing
The formal documents initiating disciplinary action and stating the conclusions drawn by IIROC to support the allegations
Notice Of Hearing
Statement of Allegation
If an advisor is found to have violated IIROC rules, the following penalties may be imposed:
- A reprimand
- Fines up to a max of $5 million per contravention, or the amount equal to 3x the profit made or loss avoided
- Imposition of conditions of registration
- Suspension
- Permanent ban
IIROC may commence proceedings against advisors up to ______ years after the date of occurrence of the last event on which the proceedings are based
six
Under this type of edict, industry participants are expected to apply judgment and discretion in determining whether any given activity conforms to broadly defined values and standards.
principles-based regulation
A term for the capital adequacy standards that exist to ensure that investment dealers maintain an appropriate level of capital and have judicious and appropriate internal controls.
prudential regulation
A set of consistent values that guide individual behaviour.
Ethics
The person in whom trust has been placed. Vis-à-vis advisor and client, advisor would be that person.
Fiduciary
This type of edict is subject to prescriptive, detailed and technical standards.
rules-based regulation
What is often the starting point for client trust?
Capital and financial solvency
