Ethical and Professional Standards Flashcards
What are the 7 Pillars of the CFA Standards of Professional Conduct?
I. Professionalism
II. Integrity of Capital Markets
III. Duties to Clients
IV. Duties to Employers
V. Investment Analysis, Recommendations, and Actions
VI. Conflicts of Interest
VII. Responsibilities as a CFA Institute Member or CFA Candidate
What are the sub-Pillars of the CFA Standards of Professional Conduct: Professionalism?
A. Knowledge of the Law. Members and Candidates must understand and comply with all applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct) of any government, regulatory organization, licensing agency, or professional association governing their professional activities. In the event of conflict, Members and Candidates must comply with the more strict law, rule, or regulation. Members and Candidates must not knowingly participate or assist in any violation of laws, rules, or regulations and must dissociate themselves from any such violation.
B. Independence and Objectivity. Members and Candidates must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities. Members and Candidates 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.
C. Misrepresentation. Members and Candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities.
D. Misconduct. Members and Candidates 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.
What are the sub-Pillars of the CFA Standards of Professional Conduct: Integrity of Capital Markets?
A. Material Nonpublic Information. Members and Candidates who possess material nonpublic information that could affect the value of an investment must not act or cause others to act on the information.
B. Market Manipulation. Members and Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.
What are the sub-Pillars of the CFA Standards of Professional Conduct: Duties to Clients?
A. Loyalty, Prudence, and Care. Members and Candidates have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment. Members and Candidates must act for the benefit of their clients and place their clients’ interests before their employer’s or their own interests.
B. 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.
C. 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 clients’ 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 make only investment recommendations or take only investment actions that are consistent with the stated objectives and constraints of the portfolio.
D. Performance Presentation. When communicating investment performance information, Members or Candidates must make reasonable efforts to ensure that it is fair, accurate, and complete.
E. Preservation of Confidentiality. Members and Candidates must keep information about current, former, and prospective clients confidential unless:
1. The information concerns illegal activities on the part of the client or prospective client,
2. Disclosure is required by law, or
3. The client or prospective client permits disclosure of the information.
What are the sub-Pillars of the CFA Standards of Professional Conduct: Duties to Employers?
A. 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.
B. Additional Compensation Arrangements. Members and Candidates 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 interest unless they obtain written consent from all parties involved.
C. Responsibilities of Supervisors. Members and Candidates must make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations, and the Code and Standards.
What are the sub-Pillars of the CFA Standards of Professional Conduct: Investment Analysis, Recommendations, and Actions?
A. Diligence and Reasonable Basis. Members and Candidates must:
1. Exercise diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions.
2. Have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action.
B. Communication with Clients and Prospective Clients. Members and Candidates must:
1. Disclose to clients and prospective clients the basic format and general principles of the investment processes they use to analyze investments, select securities, and construct portfolios and must promptly disclose any changes that might materially affect those processes.
2. Disclose to clients and prospective clients significant limitations and risks associated with the investment process.
3. 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.
4. Distinguish between fact and opinion in the presentation of investment analysis and recommendations.
C. Record Retention. Members and Candidates must develop and maintain appropriate records to support their investment analysis, recommendations, actions, and other investment related communications with clients and prospective clients.
What are the sub-Pillars of the CFA Standards of Professional Conduct: Conflics of Interst?
A. Disclosure of Conflicts. Members and Candidates 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. Members and Candidates must ensure that such disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively.
B. 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.
C. Referral Fees. Members and Candidates must disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received by, or paid to, others for the recommendation of products or services.
What are the sub-Pillars of the CFA Standards of Professional Conduct: Responsibilities of a CFA Institute Member or CFA Candidate?
A. Conduct as Participants in CFA Institute Programs. 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 CFA Institute programs.
B. 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.
What is the Global Investment Performnance Standards (GIPS)
GIPS is a standardized methodology for performance reporting that makes comparison of performance across firms meaningful, provides specific information that is useful to current clients, prospective clients, and investors, and avoids misrepresentation of performance.
GIPS only apply to firms that manage assets for others. Presenting performance information compliant with GIPS is voluntary for such firms, and they may only claim compliance with GIPS if they comply fully and on a firmwide basis.
Firms related to the asset management business, such as software developers, may state that they endorse GIPS but may not claim compliance with GIPS.
GIPS defenition of a firm
Corporation, subsidiary, or division held out to clients as a business entity.
Example: Blackstone Germany GmbH, and Blackstone Corp Inc, would both fall under ‘Blackstone’ for GIPS purposes and both would need to be GIPS compiant to claim compliance.
Describe Composites for GIPS
A composite is a grouping of individual discretionary portfolios representing a similar investment strategy, objective, or mandate.
Examples: Large capitalization stocks, investment-grade domestic bonds, and accounts managed to match the performance of a specific securities index.
All fee-paying discressionary portfolios (current and past) must be included in at least one composite.
Describe GIPS verififcation
Verification is encouraged but optinal; however, firms claiming to be verified must have the verification carried out by an indipendent thrid party (not the audit client).
The indipendent third party must attest:
1. the firm has complied with all GIPS requirements for composite construction on a
firmwide basis
2. the firm’s processes and procedures are established to present performance in accordance with the calculation methodology required by GIPS, the data requirements of GIPS, and in the format required by GIPS
What are the 8 GIPS standards for firms?
1. Fundamentals of Compliance. The fundamental issues involved in complying with GIPS are (a) defining the firm, (b) providing GIPS-compliant reports to all clients
and prospects, (c) complying with applicable regulations and laws, and (d) presenting information that is neither false nor misleading.
2. Input Data and Calculation Methodology. Input data should be consistent in order to establish full, fair, and comparable investment performance presentations.
Certain methodologies are required for portfolio return calculations, and certain other methodologies are required for composite return calculations. Uniformity in methods across firms is required so that their results are comparable.
3. Composite and Pooled Fund Maintenance. Creation of meaningful, asset-weighted composites is important to achieve a fair presentation. Composite performance is based on the performance of one or more portfolios that have the same investment strategy or investment objective. Composite returns are the assetweighted average (not a simple average) of the returns on the portfolios that are included in each composite. Pooled funds must be included in a composite if they
fit its definition.
4. Composite Time-Weighted Return Report.
5. Composite Money-Weighted Return Report.
6. Pooled Fund Time-Weighted Return Report.
7. Pooled Fund Money-Weighted Return Report.
Sections 4 through 7 contain required and recommended procedures for reporting the performance of composites and pooled funds, as well as the necessary disclosures. There are some disclosures that all firms must make, but
some disclosures may not apply to all firms. If a disclosure is not applicable to a specific firm, the firm is not required to include any statement regarding it. A firm that has met all the requirements of GIPS may include an appropriate claim of compliance.
8. GIPS Advertising Guidelines. If an advertisement includes a claim of compliance with GIPS, the advertisement must comply with these guidelines. The guidelines do not apply to advertisements that do not reference the firm’s GIPS compliance.
