Cheat Sheet Ethics Flashcards
6 Code of Ethics
- Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets.
- Place the integrity of the investment profession and the interests of clients above their own personal interests.
- Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.
- Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.
- Promote the integrity and viability of the global capital markets for the ultimate benefit of society.
- Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.
7 Standards of Professional Conduct
Professionalism (Knowledge of the Law)
Understand and comply with all applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and Standards) of any government, regulatory organization, licensing agency, or professional association governing their professional activities.
Note that:
– In the event of conflict, comply with the strictest, applicable law to the situation.
– Basically do not associate yourself with law-breakers.
– You must be aware of the all laws where you conduct business. Stating that you’re not aware of the law, hence a violation, is not an acceptable excuse.
7 Standards of Professional Conduct
Professionalism (Independence and Objectivity)
Use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities.
Must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another’s independence and objectivity.
7 Standards of Professional Conduct
Professionalism (Misrepresentation)
Must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities.
For example, if an external source is used in a report, please cite it.
7 Standards of Professional Conduct
Professionalism (Misconduct)
Must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence.
Note that if a member/candidate declares personal bankruptcy, it is NOT a misconduct per se. However if the reason of bankruptcy was due to deceit or fraud, that would be a violation and deemed as a misconduct.
Personal issues that reflect poorly on professional reputation/competence is deemed a misconduct.
7 Standards of Professional Conduct
Integrity of Capital Markets (Material Nonpublic Information)
Mitglieder und Kandidaten, die über wesentliche, nicht-öffentliche Informationen (material, nonpublic information) verfügen, die den Wert einer Investition beeinflussen könnten, dürfen weder selbst auf Grundlage dieser Informationen handeln noch andere dazu veranlassen.
Wesentliche Informationen (Material Information):
Informationen, die den Preis eines Wertpapiers beeinflussen können oder die ein Anleger vor einer Investitionsentscheidung wissen möchte.
Nicht-öffentliche Informationen (Nonpublic Information): Informationen, die noch nicht öffentlich zugänglich gemacht wurden.
Analysten dürfen jedoch auf öffentliche Informationen (public information) sowie auf nicht-wesentliche, nicht-öffentliche Informationen (non-material, nonpublic information) handeln, ohne gegen Vorschriften zu verstoßen (Mosaic Theory).
7 Standards of Professional Conduct
Integrity of Capital Markets ( Market Manipulation)
Must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.
Misleading investors by distorting prices (transaction based manipulation) or with false information (information-based manipulation) are not allowed.
7 Standards of Professional Conduct
Duties to Clients (Loyalty, Prudence, and Care)
Members/candidates have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment.
Must act for the benefit of their clients and place their clients’ interests before their employer’s or their own interests. Clients come first!
7 Standards of Professional Conduct
Duties to Clients (Fair Dealing)
Members and candidates must deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities.
Communicate investment recommendations and changes simultaneously.
7 Standards of Professional Conduct
Duties to Clients (Suitability)
1) When members and candidates are in an advisory relationship with a client, they must:
- Make a reasonable inquiry into a client’s or prospective client’s investment experience, risk and return objectives, and financial constraints prior to making any investment recommendation or taking investment action and must reassess and update this information regularly.
- Determine that an investment is suitable to the client’s financial situation and consistent with the client’s written objectives, mandates, and constraints before making an investment recommendation or taking investment action.
- Judge the suitability of investments in the context of the client’s total portfolio.
2) When members and candidates are responsible for managing a portfolio to a specific mandate, strategy, or style, they must only make investment recommendations or take investment actions that are consistent with the stated objectives and constraints of that portfolio.
Remember it is not the responsibility of the sell-side analyst (who make recommendations) to determine suitability of investments for your client.
Use regularly updated IPS (updated at least once a year) when making investment decisions.
7 Standards of Professional Conduct
Duties to Clients (Performance Presentation)
When communicating investment performance information, members or candidates must make reasonable efforts to ensure that it is fair, accurate, and complete.
The key here is not to misrepresent past performance, nor promise any future performances.
7 Standards of Professional Conduct
Duties to Clients (Preservation of Confidentiality)
Members and candidates must keep information about current, former, and prospective clients confidential unless:
– The information concerns illegal activities on the part of the client or prospective client,
– Disclosure is required by law, or
– The client or prospective client permits disclosure of the information.
7 Standards of Professional Conduct
Duties to Employers (Loyalty)
In matters related to their employment, members and candidates must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer.
Understand what you can or cannot do once leaving (or after leaving) an employer. For example, knowing the names of former clients is not confidential, but one must not use any records or work stored in paper/electronic format from previous firm.
7 Standards of Professional Conduct
Duties to Employers (Additional Compensation Arrangements)
Must not accept gifts, benefits, compensation, or consideration that competes with, or might reasonably be expected to create a conflict of interest with, their employer’s interests unless they obtain written consent from all parties involved.
Best to obtain employer’s permission before accepting cash or significant perks. Token gifts (of not significant value) such as a pen does not need permission.
7 Standards of Professional Conduct
Duties to Employers (Responsibilities of Supervisors)
Must make reasonable efforts to detect and prevent violations of applicable laws, rules, regulations, and the Code and Standards by anyone subject to their supervision or authority.
That said, supervisors’ are not responsible for their subordinates’ behavior.
7 Standards of Professional Conduct
Conflicts of Interest (Disclosure of Conflicts)
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.
Must ensure that such disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively.
7 Standards of Professional Conduct
Conflicts of Interest (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.
7 Standards of Professional Conduct
Conflicts of Interest (Referral Fees)
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.
7 Standards of Professional Conduct
Investment Analysis, Recommendations and Actions (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.
7 Standards of Professional Conduct
Investment Analysis, Recommendations and Actions (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 used to analyze investments, select securities, and construct portfolios, and must promptly disclose any changes that might materially affect those processes.
- 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 analysis and recommendations.
7 Standards of Professional Conduct
Investment Analysis, Recommendations and Actions (Record Retention)
Must develop and maintain appropriate records to support their investment analysis, recommendations, actions, and other investment-related communications with clients and prospective clients (minimum 7 years - or more if law requirement).
7 Standards of Professional Conduct
Responsibilities as a CFA Institute Member, or CFA Candidate (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 the CFA examinations.
Basically do not discuss/share confidential questions tested in the actual exams.
7 Standards of Professional Conduct
Responsibilities as a CFA Institute Member, or CFA Candidate (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.
Introduction to the Global Investment Performance Standards (GIPS)
Why was GIPS created?
GIPS was created to make it easier to compare historical performances between different investment firms, to ensure fair representation and full disclosure of investment performance.
In absence of GIPS, these misleading practices are more likely to occur:
- Representative accounts: Selecting a top-performing portfolio to represent the firm’s overall investment results for a specific mandate.
- Survivorship bias: Presenting an “average” performance history that excludes portfolios whose poor performance was weak enough to result in termination of the firm.
- Varying time periods: Presenting performance for a selected time period during which the mandate produced excellent returns or out-performed its benchmark—making comparison with other firms’ results difficult or impossible.
Introduction to the Global Investment Performance Standards (GIPS)
Who can claim compliance?
- Any firm that actually manages assets may choose to comply with the GIPS standards. That said, firms that compete for business must comply with the GIPS Standards for Firms.
- Consultants cannot make a claim of compliance unless they actually manage assets for which they are making a claim of compliance.
- Similarly, software (and the vendors who supply software) cannot be “compliant.” Only a firm managing assets can claim compliance once the firm has satisfied all requirements of the standards.
- Asset owners may comply with the GIPS standards in the same way as firms if they compete for business.
To claim GIPS compliance, a firm must fully comply with all GIPS requirements at a firm-wide basis, not a single product or composite level. - Complying with the GIPS standards is voluntary.
Introduction to the Global Investment Performance Standards (GIPS)
Composites
- A composite must include all actual fee-paying, discretionary portfolios managed according to the same mandate, objective or strategy.
- Fee paying means you should exclude clients (e.g. charity) which pays no fees.
- Discretionary means the investment management firm has the power to determine and purchase suitable securities for the portfolio, not client-directed.
- A claim of compliance requires that all fee-paying discretionary accounts managed by the firm be included in at least one composite.
Introduction to the Global Investment Performance Standards (GIPS)
Verification
Selbstregulierung (Self-Regulating):
Unternehmen, die angeben, die GIPS-Standards (Global Investment Performance Standards) einzuhalten, sind selbst dafür verantwortlich, die Einhaltung zu gewährleisten und zu dokumentieren. Es handelt sich um ein selbstregulierendes System, bei dem das Unternehmen die Compliance eigenständig sicherstellt.
Verifizierung (Verification):
Die Verifizierung bezieht sich immer auf das gesamte Unternehmen, nicht auf einzelne Composites (Leistungszusammenstellungen bestimmter Portfolios). Ziel ist es, sicherzustellen, dass die Prozesse und Daten konsistent mit den GIPS-Standards sind.
Optionale Verifizierung durch Dritte:
Eine Verifizierung durch einen unabhängigen Dritten ist freiwillig.
Diese Verifizierung kann jedoch die Glaubwürdigkeit des Unternehmens und seiner Einhaltung der GIPS-Standards deutlich erhöhen.
7 Standards of Professional Conduct
Professionalism
Integrität, Unabhängigkeit und ethisches Verhalten.
Integrity of Capital Markets
Verbot von Insiderhandel und Marktmanipulation.
Duties to Clients
Pflicht zur Loyalität, Fairness und Angemessenheit gegenüber den Kunden.
Duties to Employers
Loyalität und Integrität gegenüber dem Arbeitgeber.
Investment Analysis, Recommendations, and Actions
Sorgfaltspflicht und Grundlage für Entscheidungen.
Conflicts of Interest
Offenlegung und Handhabung von Interessenkonflikten.
Responsibilities as a CFA Institute Member or CFA Candidate
Einhaltung von Regeln und ethischen Standards.
Asset managers are most likely required to do which of the following as part of their adherence to the GIPS standards?
GIPS standards are ethical standards for investment performance presentation to ensure fair representation and full disclosure of investment performance.
The GIPS standards require firms to create and maintain composites for all strategies for which the firm manages segregated accounts or markets to segregated accounts. Firms must include all actual, fee-paying, discretionary segregated accounts in at least one composite defined by investment mandate, objective, or strategy. Non-discretionary accounts must not be included in composites.
According to the GIPS standards, a claim of compliance requires that all fee-paying discretionary accounts managed by the firm be included in at least one composite. Non-discretionary portfolios must not be included in a firm’s composites. Fee-paying non-discretionary portfolios do not have to be included.
Because a composite must include all actual, fee-paying, discretionary portfolios managed in accordance with the same investment mandate, objective, or strategy. It does not include non-discretionary accounts.
A firm has been in existence for seven years. In order to comply with the GIPS standards, the minimum number of years of GIPS-compliant performance data the firm is initially required to present is:
initially 5 years
then 10 years
The GIPS standards state that a firm is required to initially present, at a minimum, five years of annual investment performance that is compliant with the GIPS standards.
If the composite or pooled fund has been in existence less than five years, the firm must present performance since the composite or pooled fund inception date.
Prospectively, the firm must present an additional year of performance each year, building up to a minimum of 10 years of GIPS-compliant performance.
The GIPS standards state that a firm is required to initially present, at a minimum, five years of annual investment performance that is compliant with the GIPS standards.
If the composite or pooled fund has been in existence less than five years, the firm must present performance since the composite or pooled fund inception date. Prospectively, the firm must present an additional year of performance each year, building up to a minimum of ten years of GIPS-compliant performance.
Verification provides assurance that which of the following have been designed in compliance with the GIPS standards?
Verification provides assurance on whether the firm’s policies and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been designed in compliance with the GIPS standards and have been implemented on a firm-wide basis.
the Fundamentals of Compliance of the GIPS standards state that the FIRM MUST document its policies and procedures used in establishing and maintaining compliance with the REQUIREMENTS of the GIPS standards, as well as any RECOMMENDATIONS it has chosen to adopt, and apply them consistently.
unsolicited trade requests
Unsolicited Trade Requests (deutsch: unaufgeforderte Handelsaufträge) sind Handelsanweisungen oder Kauf-/Verkaufsaufträge, die auf Initiative des Kunden (Anlegers) erfolgen, ohne dass ein Broker, Finanzberater oder eine Bank diese Transaktion aktiv vorgeschlagen oder empfohlen hat.
Suitability, in cases of unsolicited trade requests that a member or candidate knows are unsuitable for a client, the member or candidate should refrain from making the trade until he or she discusses the concerns with the client. Following the discussion, the member or candidate may follow his or her firm’s policies regarding the necessary client approval for executing unsuitable trades. At a minimum, the client should acknowledge the discussion and accept the conditions that make the recommendation unsuitable. Should the unsolicited request be expected to have a material impact on the portfolio, the member or candidate should use this opportunity to update the investment policy statement.
key concepts Global Investment Performance Standards (GIPS)
Standard III (C), Suitability
Suitability, requires members to make a reasonable inquiry into a client’s or prospective client’s investment experience, risk and return objectives, and financial constraints prior to making any investment recommendation or taking investment action and must reassess and update this information regularly. Also, members must determine that an investment is suitable to the client’s financial situation and consistent with the client’s written objectives, mandates, and constraints before making an investment recommendation or taking investment action.
Standard III (D), Performance Presentation
Members and candidates can also meet their obligations under Standard III (D) by including disclosures that fully explain the performance results being reported (for example, disclosing whether the performance is gross of fees, net of fees, or after tax). Therefore, Standard III (D) recommends that members encourage their firms to disclose whether the performance results are before or after tax.
**If the presentation (investment performance summary) is brief, the member or candidate must make available to clients and prospects, on request, the detailed information supporting that communication. **
Standard V (C), Record Retention
Standard V (C), Record Retention, states that the member or candidate must re-create the supporting records at the new firm with information gathered through public sources or directly from the covered company and not from memory or sources obtained at the previous employer.
Standard I (A), Knowledge of the Law
“distribute summaries of applicable security laws to employees at least annually.”
Standard I (A), Knowledge of the Law, state that pertinent information that highlights applicable laws and regulations might be distributed to employees or made available in a central location. Thus, the recommended procedure is to provide such information to employees and not to clients.
Recommended procedures for compliance with Standard I (A), Knowledge of the Law, state:
Establish procedures for reporting violations: Firms might provide written protocols for reporting suspected violations of laws, regulations, or company policies.
if a potential violation is being committed by a fellow employee, it may also be prudent for the member or candidate to seek the advice of the firm’s compliance department or legal counsel.
Standard I(C), Misrepresentation (Capsule Form)
Das Versenden von Anlageempfehlungen in einer sogenannten Capsule Form (komprimierter Form, z. B. eine Liste empfohlener Aktien) ist kein Verstoß gegen die Standards, sofern:
Kunden darauf hingewiesen werden, dass zusätzliche Informationen und Analysen auf Anfrage verfügbar sind.
