Chapter 2 - Ethics and Investment Professionalism

Question 1

What are ethics

Answer 1

• Set of principles that ensures people behave for the benefit of all.

They are hard to enforce because of the complexity of transactions and instruments in the industry and proving that rules have been broken is hard

Question 2

Why is there a need for ethics in the investment industry

Answer 2

• Builds public trust in financial markets that allow wider participation in them
• Promotes trust in investment professionals encouraging more people to use them
• Instils trust in stakeholders
• Earns trust of regulators

Question 3

What are some reasons why people act unethical

Answer 3

• Corporate and personal ethics - can be dictated by the environment someone is in or personallity or attitude of an indivdual.
• Work environemnt - Pressure to meet targets, disregard for the client so dont act in their best interest, ability to blame other when working in a team
• Cultural issues - Interpretation of ethical behaviour and what is seen as fair varies between countries e.g. in some countries giving a client a gift can be seen as hospitality, whreas in other countries it is seen as a bribe.

Question 4

What can ethical obligations to clients be known as

Answer 4

• Fidcuary duty - have to act in a way that puts clients needs above their own

Question 5

What responbilties do professionals have to perform in order to ensure they are following fidcuary duty

Answer 5

• Acting with loyalty and exercising prudent judgement
• Deal fairly and objectivley
• Provide suitable recommendations
• Protect confidently
• Provide all neccessary infomation
• Those working in the investment industry should lead by example and mangement should encourage employees to act in a similar way but still encorage the employee to take some degree of responsibility

Question 6

What is the difference between ethics and compliance

Answer 6

• Compliance is abiding by the law or regulations wheres ethics is doing whats morally right at all times

Question 7

What is the outcome on the indsutry from unethical behaviour

Answer 7

• When indivduals act unethically then the industry becomes subject to governemnt intervention, which leads to:
• Higher taxes have to be paid
• Increased regulation
• Restrictions on activities
• Requirements for further disclosure
• Central regulations tends to replace self regulation which risk stifle future activity.

Question 8

What is the outcome on a company from unethical behaviour

Answer 8

• Companies with a poor ethical stance face the possibility of poor reputation, prosecution, fines and loss of license
• Good reputation enhances future cash flow wheres poor reputation can lead to loss of value of which firms ability to attarct new clients and may lose existing ones
• Uses companies time and resources to respond to client complaints and queries from regulators
• Affects ‘G Rating’ of a firm and downgrades ESG ratings that can affect the visability of firms for investors

Question 9

What is the outcome on investment advisers and consumers from unethical behaviour

Answer 9

• Neglient advice can lead to lower rates of return, financial loss which can caue extreme stress
• Investment advisers should follow rules from the FCA when dealing with vunlerable or insistent clients to avoid acting unethically

Question 10

How do internal procedures help with rules and regulations

Answer 10

• They stop employees to break rules and act unethically
• Whilst breaking regulations can lead to an investigation, acting unethically can lead to displianary action such as: fired from job

Question 11

Section 2.2 - CFA Code of conduct and professional conduct

What are catogeries for the 6 code of ethics

Answer 11

• These standards promote fair and ethical behaviour and are organised into 7 groups:

1) Professionalism
2) Integrity of capital markets
3) Duties to clients
4) Duties to employers
5) Investment analysis and reccomendations
6) Conflicts of interest
7) Responsibilities of a CFA member

Question 12

Standard 1 - Professionalism

Answer 12

1) Knowledge of the Law
* If there is a conflict between rules professionals should follow the strictest one
* If investment professionals suspect a regulation or standard has been violated then they must report this to their supervisor or compliance department

2) Independence and Objectivity
* Must not accept gifts that could compromise their integrity - must pay costs at all times to avoid being indebt to client

3) Misrepresentation
* Misleading the client e.g telling a client that equties are guaranteed 10% return but not 100% sure about returns

4) Plagrism
* When conducting research analysts must keep copies of sources of infomation, cite sources and give credit

Question 13

What is considered as material infomation

Answer 13

• If its disclosure would affect the price of a secruity e.g earnings, mergers and acquistions etc
• Less relaible a source the less material it is

Question 14

What responsbilties do members and candidates hold

Answer 14

• Must be particularly aware of infomation that is selectivley disclosed by cooperations as they are open to invesitgation for insider trading
• Must not engage in practises that that distort prices with the intent to mislead market particpants - can result in lack of trust in market, higher risk premiums and lower investor participation

Question 15

What does sustaiability mean in terms of duties to clients

Answer 15

• Profesionals must ensure client portfolio matches the risk appetite, financial situation of client - can be done through fact find on client

Question 16

Duties to employers

Answer 16

• When a employer leaves their employee they must have their consent to avoid any conflcit on interest.
• Supervisors are responsible for subordiantes behaviour

Question 17

How can investment professionals exercise dilligence

Answer 17

• Through ensuring all research is adequate and reaonable to use for recommendations