Chapter 2 - Ethics and WM

Question 1

what is the definition of ethics?

Answer 1

a set of consistent values that guide our individual behavior.

Question 2

What are values defined as?

Answer 2

may change over time, but the change is driven by accepted standards of right and wrong, and not by personal needs.

Question 3

What are the three distinct meanings of the study of ethics?

Answer 3

1. The standards governing the behaviour of a particular organization or profession
2. A set of moral principles or values
3. The study of the general nature of morals and the moral choices people make

Question 4

What is the definition of morals?

Answer 4

are the norms of an individual or society that are established according to standards of right and wrong.

Question 5

What are “moral standards”?

Answer 5

Moral standards guide our actions in situations where self-serving decisions may cause harm to others. These standards are based on reason; they cannot be established or changed by authoritative bodies, but they may underpin decisions made by those authorities.

Question 6

How does ethics impact the investment industry?

Answer 6

The industry has many rules and regulations, but following the rules is only the bare minimum required for ethical behavior. Ethics provides a more nuanced approach to dealing with the various stakeholders in the industry

Question 7

What are ethical principles? Who are they influenced by? How may this affect the industry?

Answer 7

help guide behavior in situations where no regulation specifically applies. These principles may be influenced by public opinion, consumer demand, or advocacy groups. Such influences may raise the level of ethical behavior above the minimum standards set out by the regulators

Question 8

Why are ethics important in the investment industry?

Answer 8

• ethical behaviour creates trust, and trust is essential to almost all business, professional, and personal relationships.
• The public’s willingness to invest their savings is tied to the reputation of financial institutions and their advisors, and its trust in the financial services industry. Investors must trust that their advisors will provide competent, fair, and unbiased advice

Question 9

What characteristics do values have in common?

Answer 9

• They are beliefs, not facts.
• They are long lasting, but not necessarily unchangeable.
• They guide individual and corporate behaviour and goals.

Question 10

What are the values that influence personal goals? and what are their definitions?

Answer 10

End goals
- Represent the goals toward which we strive and influence how we act today to achieve tomorrow’s goals.

Mean goals
- The actions we take I the present to achieve a future goal.

Question 11

What is a unified value system?

Answer 11

One which the means and ends (values) mutually reinforce and support each other. Individuals and corporations get into trouble when their means values do not support their end values.

Question 12

Why is it important for an advisor to have a strong value system?

Answer 12

• It influences your perception of situations and problems.
• It guides your decisions and solutions to problems.
• It restricts your actions within the bounds of ethical behaviour.
• It helps you resist pressure to do something that you believe to be wrong

Clearly articulated values help guide you in determining your priorities and goals when making those choices.

Question 13

How does ethical conduct help you?

Answer 13

The securities industry is subject to complex and extensive rules and regulations, which may not be clear and easy to apply in every situation. Ethical conduct comprises more than compliance with those rules. In assessing a situation, you must also be guided by the norms of ethical behavior.

Question 14

under the KYC rule, what must you and your firm adhere to? (3)

Answer 14

*Observe high standards of ethics and conduct in the transaction of business.
* Refrain from engaging in any business conduct or practice that is unbecoming or detrimental to the public interest.
* Be of a character and business repute and have experience and training that is consistent with ethical standards.

Question 15

What is the definition of integrity?

Answer 15

is measured by the extent to which a person’s ethical values consistently determine their behaviors and decision-making.

A reputation for integrity, demonstrated over time, leads others to place their trust in that person and the firm they work for.

Question 16

What is one of the most significant risks in the industry?

Answer 16

Reputation risk

Question 17

Right vs. wrong dilemmas. Definition? What grounds are decisions made on?

Answer 17

situations tend to be unambiguous, and the right choice is usually clear.

The decision can be made on any of the following grounds:
* One choice is clearly illegal.
* One choice lacks a basis in truth.
* The negative consequences of one choice will far outweigh any possible positive results.
* One choice does not conform to the fundamental, commonly held values that define the

Question 18

What are the four tests that can help you make a decision in a R VS. W situation?

Answer 18

1. Legal test
2. Smell test
3. Mom test
4. Front page test

Question 19

Right VS. Right dilemmas. Definition? What are the four types?

Answer 19

Pursuing any solution will satisfy one deeply held value but compromise another. Ethical dilemmas of this sort are more difficult to resolve than right-versus-wrong issues because two or more of the possible choices are right to some degree, and no choice appears to be clearly wrong.
1. integrity dilemma - truth v loyalty
2. societal dilemma - individual vs. group
3. goal-based dilemma - ST VS. LT
4. Fairness dilemma - Justice vs. mercy

Question 20

1. 1. Integrity dilemma – truth versus loyalty

Answer 20

With an integrity dilemma, the values of honesty or integrity clash with the values of commitment, personal responsibility, or promise-keeping.

Question 21

2. SOCIETAL DILEMMA—INDIVIDUAL VERSUS GROUP

Answer 21

With a societal dilemma, the rights or values of an individual conflict with those of the group. This dilemma can also be seen in terms of us versus them, self versus others, or the smaller group versus the larger group

Question 22

3. GOAL-BASED DILEMMA—SHORT-TERM VERSUS LONG-TERM GOALS

Answer 22

A goal-based dilemma exists when immediate needs or desires conflict with future goals, or when the means clash with the desired end.

Question 23

4. FAIRNESS DILEMMA—JUSTICE VERSUS MERCY

Answer 23

 With a fairness dilemma, the values of fairness, equity, and righteousness conflict with the values of compassion and empathy.

Question 24

What are the four principles for resolving ethical dilemmas?

Answer 24

1. ends-based principles
2. rules-based principles
3. social contract-based principles
4. personalistic principle

Question 25

The ends-based principle

Answer 25

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.

Question 26

rules-based principles

Answer 26

states that the action chosen should follow the rule that deals most effectively with the situation.

Question 27

social contract-based principles

Answer 27

principle views the action in terms of how it affects the well-being of the group. If followed, it would create harmonious relationships within the group.

Question 28

personalistic principle

Answer 28

supports the decision that is most authentic to the decision-maker as a person.

Question 29

The ethical decision making process. (8)

Answer 29

1. Identify the issue and determine whether it represents an ethical issue requiring further analysis.
2. Identify the person who must decide on a course of action. Gain that person’s acceptance of responsibility for the decision and their accountability for its consequences.
3. Gather the facts, identify potential courses of action, and identify the potential consequences of each action.
4. Test each course of action by applying the legal, smell, front page, and mom tests to determine whether the issue is a right-versus-wrong situation.
5. If all options pass the tests, analyze the situation to determine which ethical principles are in conflict. (If any course of action fails the tests, the right choice will be clear.)
6. Apply the four resolution principles to determine the best choice.
7. Make the decision.
8. Reflect on the process.

Question 30

What is a code of ethics? What does it represent?

Answer 30

set of rules, either written or unwritten, that specifies the rules of behaviour within a group.

it represents the norms that guide the behaviour of people working together for a purpose.

Question 31

What are the benefits for an organization with a code of ethics? (4)

Answer 31

• It confirms that the company is prepared to be explicit about ethics.
• It provides a clearly stated, formal, and updateable guide of what is considered to be appropriate behaviour. A well-written code may strengthen employee perception of the firm’s ground rules. It guides employees in judging right from wrong, as distinct from effective versus ineffective, when evaluating options.
• It provides a social contract for the workplace and a basis for working together in reciprocal dignity and fairness.
• It supports responsibility and accountability in employees and the firm. Without a code, a wrongdoer can claim (often with some justification) that there were never any rules or that the rules were not sufficiently explicit.

Question 32

What are the four elements of a code of ethics to be effective?

Answer 32

1. It must be supported by senior management
2. Employees at all levels must participate in its development
3. Implementation must include training and reinforcement among all employees
4. It must be reviewed periodically and updated when necessary

Question 33

1. It must be supported by senior management

Answer 33

 Employees are less likely to follow a code that their superiors do not follow.

Question 34

2. Employees at all levels must participate in its development

Answer 34

 By actively including employees in the process, the firm garners support for the project. The firm can show that the code of ethics is not simply a directive from management; it is a project that requires input from all levels.

Question 35

3. Implementation must include training and reinforcement among all employees

Answer 35

 Advisors should be trained upon entering the firm, and training should be repeated at regular intervals. The value of reinforcing mechanisms is two-fold:
i. First, they can give meaning to, and extend specific applications of, the values and rules that reflect expected standards of conduct.
ii. Second, they define how much freedom, responsibility, and trust are vested in staff and managers to apply these principles daily

Question 36

4. It must be reviewed periodically and updated when necessary

Answer 36

 Management and employees should reaffirm the existing code and amend it when necessary. The code of ethics will thus remain relevant in the current environment.

Question 37

What is trust defined as?

Answer 37

a belief that the people on whom we depend, either by choice or circumstance, will meet the expectations we have placed on them

Question 38

In the wealth management business, the law of agency often applies. What is agency defined as?

Answer 38

Agency 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.

Question 39

What is a client’s trust based on? (for an advisor)

Answer 39

reputation, which is acquired through consistent ethical behavior over time.

Question 40

What are three things that must be present in a trust-based relationship?

Answer 40

1. specialized knowledge
2. a well-regulated industry
3. a client-first approach

Question 41

1. specialized knowledge

Answer 41

Given the emphasis on proficiency requirements in the Canadian securities industry, all advisors can be assumed to have more knowledge about investing and securities in general than the average client.

Question 42

2. a well-regulated industry

Answer 42

All properly licensed advisors in Canada are subject to the rules, regulations, and ongoing scrutiny of at least one regulatory body. In many instances, there are multiple levels of regulatory oversight.

Question 43

3. a client-first approach

Answer 43

Ideally, all advisors will place the interests of their clients before their own. Unfortunately, failure to conform to this requirement is the source of most ethical dilemmas faced by today’s advisors

Question 44

What are two main qualities that advisors must nurture to build trustful relationships?

Answer 44

competence AND integrity

Question 45

Clients’ willingness to trust you depends on how you handle three elements in the relationship:

Answer 45

1. Disclosure of information
2. Influence over decisions
3. Share of control

Question 46

When does a COI occur? How can they negatively impact others?

Answer 46

A conflict of interest occurs when a duty owed to another person is compromised by either a personal interest or a conflicting duty owed to a third party.

Conflicts of interest can damage market efficiencies and distort market outcomes by interfering with the right of the public to rely on reasonable expectations in business relationships.

Question 47

What is a definition of agency? principal
? third party? how do these three interact?

Answer 47

Accordingly, agency may be defined as a relationship in which one party is authorized to bring another party into contractual relations with a third party. The agent is the person authorized to do certain things on behalf of another party. The principal is the other party on whose behalf the agent acts. And the third party is the person (or entity) who enters into a legal relationship with the principal by dealing with the agent.

Question 48

What is a POA?

Answer 48

Power of attorney.

Power of attorney may be specific, meaning that the agent has the authority to bind the principal to certain types of contracts only. It may also be general, in which case the agent has the authority to transact all types of business for the principal.

Question 49

What is a fiduciary duty?

Answer 49

a person in a position of trust concerning another person’s personal or financial affairs must act in that person’s best interests. As mentioned earlier, the law recognizes this duty as a fiduciary duty.

The fiduciary role carries with it the highest standard of care, and the fiduciary relationship is one of confidence and trust. The role may be in connection with the care of assets or with a position of responsibility for the personal affairs of others.

Question 50

What are the four stages of IIROC enforcement?

Answer 50

Case assessment
investigation
prosecution
disciplinary proceedings

Question 51

What is the case assessment?

Answer 51

an initial review to determine whether sufficient evidence exists warranting the opening of a formal investigation.

Question 52

What is an investigation?

Answer 52

If warranted, a collection and review of relevant evidence establishing a breach of IIROC’s rules is forwarded to Prosecutions. If there is evidence of criminal activity, a referral is made to appropriate securities commissions, regulators, or police.

Question 53

what is a prosecution?

Answer 53

involves formal disciplinary action against an advisor. The formal hearing will take place before an IIROC hearing panel consisting of an independent chair (usually a retired judge) and two independent industry members

Question 54

What is the disciplinary hearing? What are the two forms?

Answer 54

can take the form of either a settlement hearing or a contested hearing.

A settlement 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.

A contested hearing is when the advisor does not admit to the alleged violation of IIROC rules. Enforcement staff must prove the allegations set out in the Notice of Hearing and Statement of Allegation.

Question 55

What are the possible penalties they could impose?

Answer 55

• A reprimand
• Fines up to a maximum of $5 million per contravention, or an amount equal to three times the profit made or loss avoided
• Imposition of conditions of registration
• A period of suspension
• A permanent ban