Chapter 2 Flashcards
Ethics definition
Set of basic principles that ensure people behave for the benefit of all
Problems with regulations
Slow to implement so new products and tech can be used to exploit out of date regs
Ethical behaviour is important because (4)
Building public trust in markets
Promoting trust in financial professionals
Instilling trust in stakeholders
Earning trust of regulators
Two schools of thought for unethical behaviour
Caused by ….
Environment or situation person is in eg. Good person in bad environment may still end up being unethical
As a result of attitude or personality of the individual, environment is less important
What can lead to unethical behaviour
Pressure to perform
Ability to blame
Ability to rationalise - other parties also being unethical
Conflict sof interest
Lack of rigour
Disregard for clients
Failure to act
What must firms do with their clients
Put clients interest above its own
Act with loyalty
Deal fairly and objectively with all clients
Provide recommendations
Provide fair info
Preserve confidentiality
How does compliance differ to ethics
And example
Compliance is abiding to the law
Ethics is doing what’s right
Selling a product that a individual does not need is not illegal but not right either
What can happen if industry is found to be unethical (5)
Higher industry taxes
Increased regs
Breaking up business
Restrictions
Greater disclosure requirements
Punishment for unethical behaviour of a firm
Fines, loss of licence, compensation being paid, downgrade in esg rating.
Repetitional risk
Negative outcomes from investment managers due to (5)
Taking on too much risk
Purchasing inappropriate investments
Lack of investment diversification
Excessive trading = large transaction costs
Buying products with large fees
What is a vulnerable customer
More likely to suffer harm
Insistent customer?
Someone who doesn’t follow the managers advice and instead does something riskier
Six elements of the code of ethics
Act with integrity
Put clients above the investment managers
Reasonable care when doing investment analysis
Practice ethically
Promote integrity of capital market s
Maintain and improve professional competence
Standards of professional conduct (7)
Professionalism
Integrity of cap markets
Duties to client
Duties to employers
Investment analysis
Conflicts of interest
Responsibilities as CFA member
What must investment professionals do with laws and what happens if there is a conflicting law in different regions
Bust abide by all laws and regs set
Abide by the stricter law in conflicting circumstances
Professionalism can be split into 5 things
Knowledge of the law
Independence
Misrepresentation
Misconduct
Competence
What could compromise and persons independence and objectivity
Being given gifts/compensation by the client
What is the rule on gifting
They are allowed to receive gifts as long as it disclosed with the company
However they should refrain from accepting lavish gifts and pay for their own expenses
What else should firms disclose to ensure independence and objectivity
Corporate relationships
What is misrepresentation
Any untrue statement that is misleading
What are examples of misrepresentation
Their qualifications
Services provided
Performance record
Garaunteeing returns
Plagiarism
Examples of plagiarism
Basing report on another analyst report
Using excerpts from articles
Using information without referring to og source
How is integrity of capital markets upheld
Individuals must not act on material non public information
No Market manipulation
What is mosaic theory
Predicting events from public info and non material non public information
How is information prevented from getting to the wrong teams in same firms
Firewalls
What is market manipulation
Must not engage in practices that distort prices or artificially inflate trading volume which could mislead market participants
Examples of market manipulation
Transactions that artificially distort prices or volumes traded
Taking dominant position to manipulate price
Dissemination of false or misleading information
What are the duties to clients
Loyalty /care
Fair dealing
Suitability
Performance presentation
Confidentiality
What is fair dealing
Professional does not favour one client ahead of another
All changes must be announced to all clients at same time
What should be done if issue is over subscribed or is a block trade
It should be distributed on a pro rata basis
When you have an advisory client, you should…(3)
Determine risk and return objectives
Determines clients financial contraints and financial situation
Judge suitability of investment based on context of clients portfolio
What is a fact find and what does it establish (4)
Way to find out about their clients
Type of client and their attitude to risk
Risk and return objectives
Investment contraints (liquidity, time horizon, taxes)
Performance benchmarks
What has car created in regards to fiat and accurate performance representation
Global investment performance standards (GIPS) = common accepted set of standards
Rule on confidentiality
Must keep info on current, former and potential clients confidential unless:
- info involves illegal activities
- disclosure is required by law
- client permits disclosure of info
What are the principle of the duties to employers
Loyalty
Additional compensation arrangements
Responsibility of supervisors
What is the loyalty code for duties to employer
Must act for the benefit of the employer and not deprive their employer of their skills and abilities and not harm employer
Additional compensation arrangement rule
Must not accept gifts or benefits which create conflict with employer unless they have permission
Responsibilities of supervisor rule
Make reasonable efforts to ensure that anyone subject to their supervision complies with laws and regs
Compliance procedures should…. (8)
Clear and easy to understand
Outline permissible conduct
Outline scope of procedures
Implement check system
Compliance offer designated
Procedure for reporting
Procedures to document
Describe hierarchy of supervision
Principles of investment analysis and recommendations
Diligence and reasonable basis
Communication with clients
Record retention
When abiding to diligence and reasonbvale basis for investment analysis, members must :(2)
Exercise diligence in investment research
Have reasonable basis
Communication with clients, members must (5)
Disclose the nature of services provided
Disclose the format and general principles of investment processes
Limits and risk with investment
Determine factors that are important to investment process
Distinguish between fact and opinion?
Record retention rule
Must maintain records to support their investment analysis and recommendations
Principles of conflict of interest
Disclosure of conflicts
Priority of transactions
Referral fees
Why should people disclose their conflicts
Could impair their independence and objectivity
What is priority of transactions rule
Investment transactions for client must have priority over transactions in which member is a the beneficial owner
What is a beneficial owner
Owns the shares directly or has an indirect interest in security
What is referall fees rule
Members must disclose if they receive a fee in order to recommend another individual or firm
Principles of responsibilities of a CFA institute Member
Must not engage in activities that compromises integrity of cfa institute
Must not incorrectly refer to cfa institute
Who issues the IMC
CFA UK
Are investment professionals allowed to go into private practice
They can but must obtain prior permission from employer first
Front running violates what cfa standrd
Conflict of interest
