ETHICS Flashcards

1
Q

What is Ethics

A

Ethics encompasses a set of moral principles and rules of conduct that provide
guidance for our behavior.

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2
Q

How does a standard of conduct serve

A

serve as
benchmarks for the minimally acceptable behavior of community members and can
help clarify the code of ethics.

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3
Q

Code of Ethics

A

Specific communities or societal groups in which we live and work sometimes codify their beliefs about obligatory and forbidden conduct in a written set of principles,

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4
Q

Profession

A

A profession is an occupational community that has specific education, expert
knowledge, and a framework of practice and behavior that underpins community
trust, respect, and recognition.

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5
Q

Professions normalize practitioner behavior.

A

Professionalism is underpinned by

codes and standards developed by professional bodies.

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6
Q

Professions provide a service to society

A

There is an obligation for professionals to go

beyond codes and standards.

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7
Q

Professions are client focused

A

An integral part of a profession’s mission is to develop

and administer codes, best practice guidelines, and standards that guide an industry

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8
Q

Professions have high entry standards

A

Membership in a profession is a signal to the
market that the professional will deliver high- quality service of a promised standard,
going beyond simply academic credentials.

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9
Q

Professions possess a body of expert knowledge.

A

A repository of knowledge,
developed by experienced and skilled practitioners, is made available to all members
of a profession

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10
Q

Professions encourage and facilitate continuing education.

A

Entry into a profession does not, on its own, guarantee that an individual will maintain competency and
continue to uphold professional standards. A

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11
Q

Professions monitor professional conduct.

A

Members of a profession must be held

accountable for their conduct to maintain the integrity and reputation of an industry

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12
Q

Professions are collegial.

A

Professionals should be respectful to each other, even

when they are competing.

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13
Q

A profession’s code of

ethics:

A

publicly communicates the shared principles and expected behaviors
of a profession’s members

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14
Q

Situational influences

A

External factors, such as environmental or cultural elements, that shape our thinking, decision making, and behavior.

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15
Q

What determines whether an individual will behave unethically

A

External factors, such as environmental or cultural elements

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16
Q

Types of Conduct

A

Legal,Legal & Ethical and Ethical

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17
Q

Judgement

A

the ability to make

considered decisions and reach sensible conclusions.

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18
Q

Strategy to build trust

A

increase the ability and motivation of market participants to act ethically
and help them minimize the likelihood of unethical actions.

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19
Q

ICDR

A

Identify,Consider,Decide,Reflect

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20
Q

Challenges to ethical behavior

A

being overconfident in our own morality,
underestimating the effect of situational influences, and focusing on the immediate rather than long- term outcomes or consequences of a decision.

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21
Q

The Standards of Practice Handbook

A

provides guidance to the people
who grapple with real ethical dilemmas in the investment profession on a daily basis;
the Handbook addresses the professional intersection where theory meets practice
and where the concept of ethical behavior crosses from the abstract to the concrete.

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22
Q

What does the handbook contains

A

contain practical ethical principles of conduct that members and candidates must follow to achieve the broader
industry expectations.

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23
Q

When does the code should be reviewed

A

must be regularly reviewed and updated if they are to
remain effective and continue to represent the highest ethical standards in the global
investment industry.

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24
Q

What does the CFA believes how the revisions should be

A

CFA Institute strongly believes that revisions of the Code and
Standards are not undertaken for cosmetic purposes but to add value by addressing
legitimate concerns and improving comprehension.

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25
What is required by the CFA members and candidates
CFA | Institute members and candidates are required to adhere to the Code and Standards.
26
What does the handbook seeks to do
The Handbook seeks to educate members and candidates on how to apply the Code and Standards to their professional lives and thereby benefit their clients, employers, and the investing public in general.
27
What is the CFA Institute Board of Governors
maintains oversight and responsibility for the Professional Conduct Program (PCP), which, in conjunction with the Disciplinary Review Committee (DRC), is responsible for enforcement of the Code and Standards.
28
What is the Disciplinary Review Committee
The DRC is a volunteer committee of CFA charterholders who serve on panels to review conduct and partner with Professional Conduct staff to establish and review professional conduct policies.
29
One source of Professional Conduct
members and candidates must self- disclose on the annual Professional Conduct Statement all matters that question their professional conduct, such as involvement in civil litigation or a criminal investigation or being the subject of a written complaint.
30
How does the CFA becomes aware of questionable conduct by a member
through the media, regulatory notices, or another public source.
31
What happens when an inquiry is initiated
When an inquiry is initiated, the Professional Conduct staff conducts an investigation that may include requesting a written explanation from the member or candidate; interviewing the member or candidate, complaining parties, and third parties; and collecting documents and records relevant to the investigation.
32
What happens after the review
Upon reviewing the material obtained during the investigation, the Professional Conduct staff may conclude the inquiry with no disciplinary sanction, issue a cautionary letter, or continue proceedings to discipline the member or candidate.
33
What are the sanctions imposed by the CFA
Sanctions imposed by CFA Institute may have significant consequences; they include public censure, suspension of membership and use of the CFA designation, and revocation of the CFA charter. Candidates enrolled in the CFA Program who have violated the Code and Standards or testing policies may be suspended or prohibited from further participation in the CFA Program.
34
Does the CFA welcomes public acknowledgment of compliance
Yes when appropiate and notify the CFA the adoption plans
35
What is The CFA Institute Standards of Practice Council (SPC),
a group consisting of CFA charterholder volunteers from many different countries, is charged with maintaining and interpreting the Code and Standards and ensuring that they are effective.
36
Whats the mission of the Code and Standards
lead the investment profession globally by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society.
37
The Code of Ethics
■ Act with integrity, competence, diligence, and 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
38
Standard I(Professionalism)
Knowledge of the Law,Independence and Objectivity,Misrepresentation,Misconduct
39
Standard II(Integrity of Capital Markets)
Material Nonpublic Information,Market Manipulation
40
Standard III(Duties to Clients)
Loyalty, Prudence, and Care,Fair Dealing,Suitability,Performance Presentation,Preservation of Confidentiality
41
Standard IV(Duties to Employers)
Loyalty,Additional Compensation Arrangements,Responsibilities of Supervisors
42
Standard V(Investment Analysis,Recommendations and Actions)
Diligence and Reasonable Basis,Communication with Clients and Prospective Clients,Record Retention
43
Standard VI(Conflicts of Interest)
Disclosure of Conflicts,Priority of Transactions,Referral Fees
44
Standard VII(Responsibilities as a CFA member or Candidates)
Conduct as Participants in CFA Institute Programs,Reference to CFA Institute, the CFA Designation, and the CFA Program
45
Standard IA 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 and must dissociate from any violation of such laws, rules, or regulations.
46
What does one do in the event you are doing business in a less strict country
When applicable law and the Code and Standards require different conduct, members and candidates must follow the more strict of the applicable law or the Code and Standards.
47
What principles does members and candidates must comply
■ Members and candidates must comply with applicable laws or regulations related to their professional activities. ■ Members and candidates must not engage in conduct that constitutes a violation of the Code and Standards, even though it may otherwise be legal. ■ In the absence of any applicable law or regulation or when the Code and Standards impose a higher degree of responsibility than applicable laws and regulations, members and candidates must adhere to the Code and Standards.
48
What are the CFA members obligated to
to abide by the CFA Institute Articles of Incorporation, Bylaws, Code of Ethics, Standards of Professional Conduct, Rules of Procedure, Membership Agreement, and other applicable rules promulgated by CFA Institute, all as amended periodically.
49
Steps to dissociate from ethical violations
The first step should be to attempt to stop the behavior by bringing it to the attention of the employer through a supervisor or the firm’s compliance department. If this attempt is unsuccessful, then members and candidates have a responsibility to step away and dissociate from the activity. Dissociation practices will differ on the basis of the member’s or candidate’s role in the investment industry. It may include removing one’s name from written reports or recommendations, asking for a different assignment, or refusing to accept a new client or continue to advise a current client. Inaction combined with continuing association with those involved in illegal or unethical conduct may be construed as participation or assistance in the illegal or unethical conduct
50
Methods of compliance
Stay informed: Members and candidates should establish or encourage their employers to establish a procedure by which employees are regularly informed about changes in applicable laws, rules, regulations, and case law. Review procedures: Members and candidates should review, or encourage their employers to review, the firm’s written compliance procedures on a regular basis to ensure that the procedures reflect current law and provide adequate guidance to employees about what is permissible conduct under the law and/ or the Code and Standards. Maintain current files: Members and candidates should maintain or encourage their employers to maintain readily accessible current reference copies of applicable statutes, rules, regulations, and important cases
51
Should you get legal council
Yes,When in doubt about the appropriate action to undertake, it is recommended that a member or candidate seek the advice of compliance personnel or legal counsel concerning legal requirements.
52
What policies or procedures members should encourage firms to consider
Develop and/or adopt a code of ethics,Provide information on applicable laws,Establish procedures for reporting violation
53
Standard I(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
54
Should you accept benefits from clients
When possible, prior to accepting “bonuses” or gifts from clients, members and candidates should disclose to their employers such benefits offered by clients. If notification is not possible prior to acceptance, members and candidates must disclose to their employer benefits previously accepted from clients. Disclosure allows the employer of a member or candidate to make an independent determination about the extent to which the gift may affect the member’s or candidate’s independence and objectivity
55
Recommendations
Recommendations must convey the member’s or candidate’s true opinions, free of bias from internal or external pressures, and be stated in clear and unambiguous language.
56
Source of Pressure
buy- side clients. Institutional clients are traditionally the primary users of sell- side research, either directly or with soft dollar brokerage. Portfolio managers may have significant positions in the security of a company under review. A rating downgrade may adversely affect the portfolio’s performance, particularly in the short term, because the sensitivity of stock prices to ratings changes has increased in recent years.
57
When is appropiate for research analysts to work with investment bankers
Having analysts work with investment bankers is appropriate only when the conflicts are adequately and effectively managed and disclosed. Firm managers have a responsibility to provide an environment in which analysts are neither coerced nor enticed into issuing research that does not reflect their true opinions. Firms should require public disclosure of actual conflicts of interest to investors
58
Analysts must distinguish fact from opinion
Yes,Conclusions must have a reasonable and adequate basis and must be supported by appropriate research
59
Recommendend Procedures for Compliance
■ Protect the integrity of opinions: Members, candidates, and their firms should establish policies stating that every research report concerning the securities of a corporate client should reflect the unbiased opinion of the analyst. ■ Create a restricted list: If the firm is unwilling to permit dissemination of adverse opinions about a corporate client, members and candidates should encourage the firm to remove the controversial company from the research universe and put it on a restricted ■ Restrict special cost arrangements: When attending meetings at an issuer’s headquarters, members and candidates should pay for commercial transportation and hotel charges. ■ Limit gifts: Members and candidates must limit the acceptance of gratuities and/or gifts to token items. Standard I(B) does not preclude customary, ordinary business- related entertainment as long as its purpose is not to influence or reward members or candidates. ■ Restrict investments: Members and candidates should encourage their investment firms to develop formal policies related to employee purchases of equity or equity- related IPOs. ■ Review procedures ■ Independence policy: Members, candidates, and their firms should establish a formal written policy on the independence and objectivity of research and implement reporting structures and review procedures to ensure that research analysts do not report to and are not supervised or controlled by any department of the firm that could compromise the independence of the analyst. ■ Appointed officer: Firms should appoint a senior officer with oversight responsibilities for compliance with the firm’s code of ethics and all regulations concerning its business
60
Standard I(C) Misrepresentation
Members and Candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities
61
What is misrepresentation
A misrepresentation is any untrue statement or omission of a fact or any statement that is otherwise false or misleading. A member or candidate must not knowingly omit or misrepresent information or give a false impression of a firm, organization, or security in the member’s or candidate’s oral representations, advertising (whether in the press or through brochures), electronic communications, or written materials (whether publicly disseminated or not)
62
What includes as written materials and internet communications
research reports, underwriting documents, company financial reports, market letters, newspaper columns, and books. Electronic communications include, but are not limited to, internet communications, webpages, mobile applications, and e- mails
63
What does Standard I C prohibits
prohibits members and candidates from guaranteeing clients any specific return on volatile investment
64
What do with third party information
Misrepresentations resulting from the use of the credit ratings, research, testimonials, or marketing materials of outside parties become the responsibility of the investment professional when it affects that professional’s business practices
65
Another form of misrepresentation
Members and candidates may misrepresent the success of their performance record through presenting benchmarks that are not comparable to their strategies
66
What bench mark should an investor use
Members and candidates should discuss with clients on a continuous basis the appropriate benchmark to be used for performance evaluations and related fee calculations
67
Does an omission of a fact or outcome can be misleading?
Yes,When inputs are knowingly omitted, the resulting outcomes may provide misleading information to those who rely on it for making investment decisions
68
Does Standard I(C) prohibits Plagiarism?
Yes,Members and candidates must not copy (or represent as their own) original ideas or material without permission and must acknowledge and identify the source of ideas or material that is not their own.
69
Can you use research conducted within the same firm?
Research and models developed while employed by a firm are the property of the firm. The firm retains the right to continue using the work completed after a member or candidate has left the organization. The firm may issue future reports without providing attribution to the prior analysts.
70
Recommended Procedures for compliance
Factual Presentations,Qualification Summary,Verify Outside Information,Maintain Webpages,Plagiarism Policy
71
Standard 1(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.
72
What does Standard 1 ( D) addresses
addresses all conduct that reflects poorly on the professional integrity, good reputation, or competence of members and candidates. Any act that involves lying, cheating, stealing, or other dishonest conduct is a violation of this standard if the offense reflects adversely on a member’s or candidate’s professional activities.
73
Can the absence of effort be in violation of Standard 1 (D)
In some cases, the absence of appropriate conduct or the lack of sufficient effort may be a violation of Standard I(D).
74
Recommended Procedures for Compliance
■ Code of ethics: Develop and/or adopt a code of ethics to which every employee must subscribe, and make clear that any personal behavior that reflects poorly on the individual involved, the institution as a whole, or the investment industry will not be tolerated. ■ List of violations: Disseminate to all employees a list of potential violations and associated disciplinary sanctions, up to and including dismissal from the firm. ■ Employee references: Check references of potential employees to ensure that they are of good character and not ineligible to work in the investment industry because of past infractions of the la
75
Does Standard I(d) covers civil disobedience
Yes Generally, Standard I(D) is not meant to cover legal transgressions resulting from
76
Standard II(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.
77
What is Material Information
Information is “material” if its disclosure would probably have an impact on the price of a security or if reasonable investors would want to know the information before making an investment decision. In other words, information is material if it would significantly alter the total mix of information currently available about a security in such a way that the price of the security would be affected
78
Does Factual infomation is material?
factual information from a corporate insider regarding a significant new contract for a company is likely to be material, whereas an assumption based on speculation by a competitor about the same contract is likely to be less reliable and, therefore, not material
79
When does information is nonpublic
Information is “nonpublic” until it has been disseminated or is available to the marketplace in general (as opposed to a select group of investors). “Disseminated” can be defined as “made known.” For example, a company report of profits that is posted on the internet and distributed widely through a press release or accompanied by a filing has been effectively disseminated to the marketplace
80
What activities is possible to use material nonpublic information
mergers, loan underwriting, credit ratings, and offering engagements. In such instances, the investment professional would not be considered in violation of Standard II(A) by using the material information
81
Whats a case when one is not in violation
Accordingly, violations of Standard II(A) will not result when a perceptive analyst reaches a conclusion about a corporate action or event through an analysis of public information and items of nonmaterial nonpublic information
82
Recommended Procedures for Compliance
Achieve Public Dissemination If a member or candidate determines that information is material, the member or candidate should make reasonable efforts to achieve public dissemination of the information. These efforts usually entail encouraging the issuing company to make the information public. Adopt Disclosure Procedures Members and candidates should encourage their firms to develop and follow disclosure policies designed to ensure that information is disseminated to the marketplace in an equitable manner Issue Press Releases Companies should consider issuing press releases prior to analyst meetings and conference calls and scripting those meetings and calls to decrease the chance that further information will be disclosed. If material nonpublic information is disclosed for the first time in an analyst meeting or call, the company should promptly issue a press release or otherwise make the information publicly available Firewall Elements An information barrier commonly referred to as a “firewall” is the most widely used approach for preventing the communication of material nonpublic information within firms. It restricts the flow of confidential information to those who need to know the information to perform their jobs effectively. Appropriate Interdepartmental Communications Although documentation requirements must, for practical reasons, take into account the differences between the activities of small firms and those of large, multiservice firms, firms of all sizes and types benefit by improving the documentation of their internal enforcement of firewall procedures. Prevention of Personnel Overlap There should be no overlap of personnel between the investment banking and corporate finance areas of a brokerage firm and the sales and research departments or between a bank’s commercial lending department and its trust and research departments. A Reporting System A primary objective of an effective firewall procedure is to establish a reporting system in which authorized people review and approve communications between departments. If an employee behind a firewall believes that he or she needs to share confidential information with someone on the other side of the wall, the employee should consult a designated compliance officer to determine whether sharing the information is necessary and how much information should be shared. Personal Trading Limitations Firms should consider restrictions or prohibitions on personal trading by employees and should carefully monitor both proprietary trading and personal trading by employees. Firms should require employees to make periodic reports (to the extent that such reporting is not already required by securities laws) of their own transactions and transactions made for the benefit of family member
83
Standard II(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.
84
What includes Market Manipulation
Market manipulation includes (1) the dissemination of false or misleading information and (2) transactions that deceive or would be likely to mislead market participants by distorting the price- setting mechanism of financial instruments.
85
Information Based Manipulation
Information- based manipulation includes, but is not limited to, spreading false rumors to induce trading by others.
86
Standard III(A) Loyalty, Prudence, and Care
embers 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.
87
What's paramount to Standard III(A)
clarifies that client interests are paramount. A member’s or candidate’s responsibility to a client includes a duty of loyalty and a duty to exercise reasonable care.
88
What does it establishes the standard III(A)
Standard III(A) establishes a minimum benchmark for the duties of loyalty, prudence, and care that are required of all members and candidates regardless of whether a legal fiduciary duty applies.
89
Who is due the loyalty
The duty of loyalty is owed | to the ultimate beneficiaries.
90
What a member and candidate do
Members and candidates must follow any guidelines set by their clients for the management of their assets. Some clients, such as charitable organizations and pension plans, have strict investment policies that limit investment options to certain types or classes of investment or prohibit investment in certain securities. Other organizations have aggressive policies that do not prohibit investments by type but, instead, set criteria on the basis of the portfolio’s total risk and return
91
What is soft commissions
An investment manager often has discretion over the selection of brokers executing transactions. Conflicts may arise when an investment manager uses client brokerage to purchase research services
92
Recommended Procedures for Compliance
Regular Account Information Members and candidates with control of client assets (1) should submit to each client, at least quarterly, an itemized statement showing the funds and securities in the custody or possession of the member or candidate plus all debits, credits, and transactions that occurred during the period, (2) should disclose to the client where the assets are to be maintained, as well as where or when they are moved, and (3) should separate the client’s assets from any other party’s assets, including the member’s or candidate’s own assets Client Approval If a member or candidate is uncertain about the appropriate course of action with respect to a client, the member or candidate should consider what he or she would expect or demand if the member or candidate were the client. If in doubt, a member or candidate should disclose the questionable matter in writing to the client and obtain client approval Firm Policies Members and candidates should address and encourage their firms to address the following topics when drafting the statements or manuals containing their policies and procedures regarding responsibilities to clients.
93
Standard III(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.
94
What does the Standard III(B) doesnt states
Standard III(B) does not state “equally” because members and candidates could not possibly reach all clients at exactly the same time.Each client has unique needs, investment criteria, and investment objectives, so not all investment opportunities are suitable for all client.
95
Investment Recommendations
An investment recommendation is any opinion expressed by a member or candidate in regard to purchasing, selling, or holding a given security or other investment. The opinion may be disseminated to customers or clients through an initial detailed research report, through a brief update report, by addition to or deletion from a list of recommended securities, or simply by oral communication. . Each member or candidate is obligated to ensure that information is disseminated in such a manner that all clients have a fair opportunity to act on every recommendation.
96
Investment Action
members and candidates whose primary function is taking investment action (portfolio management) on the basis of recommendations prepared internally or received from external sources. Investment action, like investment recommendations, can affect market value. Consequently, Standard III(B) requires that members or candidates treat all clients fairly in light of their investment objectives and circumstance.
97
What do in new offerings or secondary
members and candidates should distribute the issues to all customers for whom the investments are appropriate in a manner consistent with the policies of the firm for allocating blocks of stock.
98
Recommended Procedures for Compliance
Develop Firm Policies Although Standard III(B) refers to a member’s or candidate’s responsibility to deal fairly and objectively with clients, members and candidates should also encourage their firms to establish compliance procedures requiring all employees who disseminate investment recommendations or take investment actions to treat customers and clients fairly. Disclose Trade Allocation Procedures Members and candidates should disclose to clients and prospective clients how they select accounts to participate in an order and how they determine the amount of securities each account will buy or sell. Establish Systematic Account Review Member and candidate supervisors should review each account on a regular basis to ensure that no client or customer is being given preferential treatment and that the investment actions taken for each account are suitable for each account’s objectives. Disclose Levels of Service Members and candidates should disclose to all clients whether the organization offers different levels of service to clients for the same fee or different fees. Different levels of service should not be offered to clients selectively
99
Standard III(C) Suitability
1 When Members and Candidates are in an advisory relationship with a client, they must: a 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. b 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. c 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
100
What does Standard III (C) requires
Standard III(C) requires that members and candidates who are in an investment advisory relationship with clients consider carefully the needs, circumstances, and objectives of the clients when determining the appropriateness and suitability of a given investment or course of investment action.
101
Whats the responsibility of members and candidates
The responsibilities of members and candidates to gather information and make a suitability analysis prior to making a recommendation or taking investment action fall on those members and candidates who provide investment advice in the course of an advisory relationship with a client.
102
Developing an Investment Policy
When an advisory relationship exists, members and candidates must gather client information at the inception of the relationship. Such information includes the client’s financial circumstances, personal data (such as age and occupation) that are relevant to investment decisions, attitudes toward risk, and objectives in investing. This information should be incorporated into a written investment policy statement (IPS) that addresses the client’s risk tolerance, return requirements, and all investment constraints (including time horizon, liquidity needs, tax concerns, legal and regulatory factors, and unique circumstances).
103
Important Factors to be considered
measuring that client’s tolerance for risk. The investment professional must consider the possibilities of rapidly changing investment environments and their likely impact on a client’s holdings, both individual securities and the collective portfolio. The risk of many investment strategies can and should be analyzed and quantified in advance.
104
When to update the IPS
Updating the IPS should be repeated at least annually and also prior to material changes to any specific investment recommendations or decisions on behalf of the client. The effort to determine the needs and circumstances of each client is not a one- time occurrence.
105
What happens if a client witholds information
If clients withhold information about their financial portfolios, the suitability analysis conducted by members and candidates cannot be expected to be complete; it must be based on the information provided
106
Addressing Unsolicited Trading Requests
members and candidates will need to make reasonable efforts to balance their clients’ trading requests with their responsibilities to follow the agreed- on investment policy statement.
107
What to do if a client declines to update IPS
Members and candidates may have some clients who decline to modify their policy statements while insisting an unsolicited trade be made. In such instances, members or candidates will need to evaluate the effectiveness of their services to the client
108
Managing to an Index or Mandate
The responsibility for determining the suitability of an investment for clients can be conferred only on members and candidates who have an advisory relationship with clients.
109
Recommended Procedures for Compliance
Investment Policy Statement To fulfill the basic provisions of Standard III(C), a member or candidate should put the needs and circumstances of each client and the client’s investment objectives into a written investment policy statement. Regular Updates The investor’s objectives and constraints should be maintained and reviewed periodically to reflect any changes in the client’s circumstances. Members and candidates should regularly compare client constraints with capital market expectations to arrive at an appropriate asset allocation Suitability Test Policies With the increase in regulatory required suitability tests, members and candidates should encourage their firms to develop related policies and procedures. The procedures will differ according to the size of the firm and the scope of the services offered to its clients
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Standard III(D) Performance Presentation
When communicating investment performance information, Members and Candidates must make reasonable efforts to ensure that it is fair, accurate, and complete
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What does Standard III(D) requires
Standard III(D) requires members and candidates to provide credible performance information to clients and prospective clients and to avoid misstating performance or misleading clients and prospective clients about the investment performance of members or candidates or their firms.
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What should be avoided
members and candidates should not state or imply that clients will obtain or benefit from a rate of return that was generated in the past
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Recommended Procedures for Compliance
Apply the GIPS Standards For members and candidates who are showing the performance history of the assets they manage, compliance with the GIPS standards is the best method to meet their obligations under Standard III(D). Members and candidates should encourage their firms to comply with the GIPS standards.
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Compliance without GIPS STANDARDS
Compliance without Applying GIPS Standards Members and candidates can also meet their obligations under Standard III(D) by ■ considering the knowledge and sophistication of the audience to whom a performance presentation is addressed, ■ presenting the performance of the weighted composite of similar portfolios rather than using a single representative account, ■ including terminated accounts as part of performance history with a clear indication of when the accounts were terminated, ■ including disclosures that fully explain the performance results being reported (for example, stating, when appropriate, that results are simulated when model results are used, clearly indicating when the performance record is that of a prior entity, or disclosing whether the performance is gross of fees, net of fees, or after tax), and ■ maintaining the data and records used to calculate the performance being presented.
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What do if claiming compliance of GIPS standards
When claiming compliance with the GIPS standards, firms must meet all of the requirements, make mandatory disclosures, and meet any other requirements that apply to that firm’s specific situation.
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Standard III(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; 2 Disclosure is required by law; or 3 The client or prospective client permits disclosure of the information
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What does Standard III(E) Preservation of Confidentiality
Standard III(E) requires that members and candidates preserve the confidentiality of information communicated to them by their clients, prospective clients, and former clients.
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Status of Client
This standard protects the confidentiality of client information even if the person or entity is no longer a client of the member or candidate. Therefore, members and candidates must continue to maintain the confidentiality of client records even after the client relationship has ended.
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Compliance with Laws
As a general matter, members and candidates must comply with applicable law. If applicable law requires disclosure of client information in certain circumstances, members and candidates must comply with the law. Similarly, if applicable law requires members and candidates to maintain confidentiality,
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Recommended Procedures for Compliance
The simplest, most conservative, and most effective way to comply with Standard III(E) is to avoid disclosing any information received from a client except to authorized fellow employees who are also working for the client.
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Standard IV(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.
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What does Standard IV(A) Loyalty
Standard IV(A) requires members and candidates to protect the interests of their firm by refraining from any conduct that would injure the firm, deprive it of profit, or deprive it of the member’s or candidate’s skills and ability
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Employer Responsibilities
Members and candidates are encouraged to provide their employer with a copy of the Code and Standards.mployers are not obligated to adhere to the Code and Standards. In expecting to retain competent employees who are members and candidates, however, they should not develop conflicting policies and procedures.
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Independent Practice
Included in Standard IV(A) is the requirement that members and candidates abstain from independent competitive activity that could conflict with the interests of their employer. Although Standard IV(A) does not preclude members or candidates from entering into an independent business while still employed, members and candidates who plan to engage in independent practice for compensation must notify their employer and describe the types of services they will render to prospective independent clients, the expected duration of the services, and the compensation for the services.
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Leaving an Employer
Activities that might constitute a violation, especially in combination, include the following: ■ misappropriation of trade secrets, ■ misuse of confidential information, ■ solicitation of the employer’s clients prior to cessation of employment, ■ self- dealing (appropriating for one’s own property a business opportunity or information belonging to one’s employer), and ■ misappropriation of clients or client lists.
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Can members and candidates contact former clients
The standard does not prohibit former employees from contacting clients of their previous firm as long as the contact information does not come from the records of the former employer or violate an applicable “noncompete agreement.” Members and candidates are free to use public information after departing to contact former clients without violating Standard IV(A) as long as there is no specific agreement not to do so.
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Whistleblowing
Such action would be permitted only if the intent is clearly aimed at protecting clients or the integrity of the market, not for personal gain.
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Recommended Procedures for Compliance
Competition Policy A member or candidate must understand any restrictions placed by the employer on offering similar services outside the firm while employed by the firm. The policy may outline the procedures for requesting approval to undertake the outside service or may be a strict prohibition of such service. Termination Policy Members and candidates should clearly understand the termination policies of their employer. Incident- Reporting Procedures Members and candidates should be aware of their firm’s policies related to whistleblowing and encourage their firm to adopt industry best practices in this area. Many firms are required by regulatory mandates to establish confidential and anonymous reporting procedures that allow employees to report potentially unethical and illegal activities in the firm.
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Standard IV(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
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What does Standard IV(B) Additional Compensation Arrangements
Standard IV(B) requires members and candidates to obtain permission from their employer before accepting compensation or other benefits from third parties for the services rendered to the employer or for any services that might create a conflict with their employer’s interest. Compensation and benefits include direct compensation by the client and any indirect compensation or other benefits received from third parties.
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What includes as written consent
“Written consent” includes any form of communication that can be documented (for example, communication via e- mail that can be retrieved and documented).
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Recommended Procedures of Compliance
Members and candidates should make an immediate written report to their supervisor and compliance officer specifying any compensation they propose to receive for services in addition to the compensation or benefits received from their employer. The details of the report should be confirmed by the party offering the additional compensation, including performance incentives offered by clients. This written report should state the terms of any agreement under which a member or candidate will receive additional compensation; “terms” include the nature of the compensation, the approximate amount of compensation, and the duration of the agreement
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Standard IV(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.
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What does Standard IV(C) Responsibilities of Supervisors
Standard IV(C) states that members and candidates must promote actions by all employees under their supervision and authority to comply with applicable laws, rules, regulations, and firm policies and the Code and Standards.
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What is a must as a member or candidate
Members and candidates acting as supervisors must also have in- depth knowledge of the Code and Standards so that they can apply this knowledge in discharging their supervisory responsibilities.
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What can a member do
These members and candidates may delegate supervisory duties to subordinates who directly oversee the other employees
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Members or candidates responsibilities
member’s or candidate’s responsibilities under Standard IV(C) include instructing those subordinates to whom supervision is delegated about methods to promote compliance, including preventing and detecting violations of laws, rules, regulations, firm policies, and the Code and Standards.
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If a member or candidates knows the procedures are not being followed are they violating the Standard IV(C)
A member or candidate may be in violation of Standard IV(C) if he or she knows or should know that the procedures designed to promote compliance, including detecting and preventing violations, are not being followed
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Recommended Procedures for Compliance
Codes of Ethics or Compliance Procedures, Members and candidates are encouraged to recommend that their employers adopt a code of ethics. Adoption of a code of ethics is critical to establishing a strong ethical foundation for investment advisory firms and their employees. Adequate Compliance Procedures A supervisor complies with Standard IV(C) by identifying situations in which legal violations or violations of the Code and Standards are likely to occur and by establishing and enforcing compliance procedures to prevent such violations. Implementation of Compliance Education and Training Regular ethics and compliance training, in conjunction with adoption of a code of ethics, is critical to investment firms seeking to establish a strong culture of integrity and to provide an environment in which employees routinely engage in ethical conduct in compliance with the law. Training and education assist individuals in both recognizing areas that are prone to ethical and legal pitfalls and identifying those circumstances and influences that can impair ethical judgment. Establish an Appropriate Incentive Structure Supervisors can reinforce an individual’s natural desire to “do the right thing” by building a culture of integrity in the workplace
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Standard V(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
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Defining Diligence and Reasonable Basis
This information and knowledge is the basis from which members and candidates apply their professional judgment in taking investment actions and making recommendations.
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Can a member or candidate rely on secondary o third party research
If members and candidates rely on secondary or third- party research, they must make reasonable and diligent efforts to determine whether such research is sound.
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What a candidate should do
Members and candidates should make reasonable enquiries into the source and accuracy of all data used in completing their investment analysis and recommendations. T
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Do members or candidate need to know quantitatively oriented research
Members and candidates need to have an understanding of the parameters used in models and quantitative research that are incorporated into their investment recommendations. Although they are not required to become experts in every technical aspect of the models, they must understand the assumptions and limitations inherent in any model and how the results were used in the decision- making process
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What do members or candidates need to understand as developing quantitatively oriented research
Members and candidates need to consider the source and time horizon of the data used as inputs in financial models.
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Does Standard V(A) applies to selecting External Advisers and Subadvisers
Standard V(A) applies to the level of review necessary in selecting an external adviser or subadviser to manage a specifically mandated allocation. Members and candidates must review managers as diligently as they review individual funds and securities
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What to do if a member or candidate doesnt agrees to the consensus
If, however, the member or candidate believes that the consensus opinion has a reasonable and adequate basis and is independent and objective, the member or candidate need not decline to be identified with the report.
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Recommended Procedures for Compliance
■ Establish a policy requiring that research reports, credit ratings, and investment recommendations have a basis that can be substantiated as reasonable and adequate. An individual employee (a supervisory analyst) or a group of employees (a review committee) should be appointed to review and approve such items prior to external circulation to determine whether the criteria established in the policy have been met. ■ Develop detailed, written guidance for analysts (research, investment, or credit), supervisory analysts, and review committees that establishes the due diligence procedures for judging whether a particular recommendation has a reasonable and adequate basis. ■ Develop measurable criteria for assessing the quality of research, the reasonableness and adequacy of the basis for any recommendation or rating, and the accuracy of recommendations over time. In some cases, firms may consider implementing compensation arrangements that depend on these measurable criteria and that are applied consistently to all related analysts. ■ Develop detailed, written guidance that establishes minimum levels of scenario testing of all computer- based models used in developing, rating, and evaluating financial instruments. The policy should contain criteria related to the breadth of the scenarios tested, the accuracy of the output over time, and the analysis of cash flow sensitivity to inputs. ■ Develop measurable criteria for assessing outside providers, including the quality of information being provided, the reasonableness and adequacy of the provider’s collection practices, and the accuracy of the information over time. The established policy should outline how often the provider’s products are reviewed. ■ Adopt a standardized set of criteria for evaluating the adequacy of external advisers. The policy should include how often and on what basis the allocation of funds to the adviser will be reviewed.
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Standard V(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 analyses and recommendations.
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What does Standard V(B) Communication with Clients and Prospective Clients addresses
Standard V(B) addresses member and candidate conduct with respect to communicating with clients. Developing and maintaining clear, frequent, and thorough communication practices is critical to providing high- quality financial services to clients.
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What are the different forms of communication
communication is not confined to a written report of the type traditionally generated by an analyst researching a security, company, or industry. A presentation of information can be made via any means of communication, including in- person recommendation or description, telephone conversation, media broadcast, or transmission by computer
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Can you use social media to communicate business information
Members and candidates using any social media service to communicate business information must be diligent in their efforts to avoid unintended problems because these services may not be available to all clients.
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Should a member outline risks and limitations of the analysis
Members and candidates must outline to clients and prospective clients significant risks and limitations of the analysis contained in their investment products or recommendations
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Report Presentation
Report Presentation Once the analytical process has been completed, the member or candidate who prepares the report must include those elements that are important to the analysis and conclusions of the report so that the reader can follow and challenge the report’s reasoning. Investment advice based on quantitative research and analysis must be supported by readily available reference material and should be applied in a manner consistent with previously applied methodology. If changes in methodology are made, they should be highlighted
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Distinction between Facts and Opinions in Reports
Standard V(B) requires that opinion be separated from fact. Violations often occur when reports fail to separate the past from the future by not indicating that earnings estimates, changes in the outlook for dividends, or future market price information are opinions subject to future circumstances.
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Standard V(C) Record Retention
Members and Candidates must develop and maintain appropriate records to support their investment analyses, recommendations, actions, and other investment- related communications with clients and prospective clients
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What is a must
Members and candidates must retain records that substantiate the scope of their research and reasons for their actions or conclusions. The retention requirement applies to decisions to buy or sell a security as well as reviews undertaken that do not lead to a change in position
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Examples of supporting documentation
■ personal notes from meetings with the covered company, ■ press releases or presentations issued by the covered company, ■ computer- based model outputs and analyses, ■ computer- based model input parameters, ■ risk analyses of securities’ impacts on a portfolio, ■ selection criteria for external advisers,
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How can records be mainained
Records may be maintained either in hard copy | or electronic form
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Others media records
■ e- mails, ■ text messages, ■ blog posts, and ■ Twitter posts
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Who are propietaries of the records
, records created as part of a member’s or candidate’s professional activity on behalf of his or her employer are the property of the firm. When a member or candidate leaves a firm to seek other employment, the member or candidate cannot take the property of the firm,
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Who are propietaries of the records
, records created as part of a member’s or candidate’s professional activity on behalf of his or her employer are the property of the firm. When a member or candidate leaves a firm to seek other employment, the member or candidate cannot take the property of the firm,
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Standard VI(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
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Common sources of conflict
Common sources for conflict are compensation structures, especially incentive and bonus structures that provide immediate returns for members and candidates with little or no consideration of long- term value creation.
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What classifies as reportable situations
Ownership of stocks analyzed or recommended, participation on outside boards, and financial or other pressures
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Should you disclose fee arrangementes
disclosures should be made to clients regarding fee arrangements, subadvisory agreements, or other situations involving nonstandard fee structures.
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Does an cross departamental conflicts exists
Yes
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What are some conflicts as a director
First, a conflict may exist between the duties owed to clients and the duties owed to shareholders of the company. Second, investment personnel who serve as directors may receive the securities or options to purchase securities of the company as compensation for serving on the board, which could raise questions about trading actions that might increase the value of those securities. Third, board service creates the opportunity to receive material nonpublic information involving the company.
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Standard VI(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.
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Objective of the standard
The objective of the standard is to prevent personal transactions from adversely affecting the interests of clients or employers
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Does having the same investment positions with clients create conflict of interest
A member or candidate having the same investment positions or being co- invested with clients does not always create a conflict. Some clients in certain investment situations require members or candidates to have aligned interests
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Standards for Nonpublic Information
Standard VI(B) covers the activities of members and candidates who have knowledge of pending transactions that may be made on behalf of their clients or employers, who have access to nonpublic information during the normal preparation of research recommendations, or who take investment actions
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Can a member or candidate be in an oversuscribed IPO
No
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Recommended Procedures for Compliance
Limited participation in equity IPOs.Need clearence Restrictions on private placements: Strict limits should be placed on investment personnel acquiring securities in private placements, and appropriate supervisory(Venture Capital) Establish blackout/restricted periods: Investment personnel involved in the investment decision- making process should establish blackout periods prior to trades for clients so that managers cannot take advantage of their knowledge Reporting requirements: Supervisors should establish reporting procedures for investment personnel, including disclosure of personal holdings/beneficial ownerships, confirmations of trades to the firm and the employee, and preclearance procedures.
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Standard VI(C) Referral Fees
Members and Candidates 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
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What does Standard VI(C) states
``` Standard VI(C) states the responsibility of members and candidates to inform their employer, clients, and prospective clients of any benefit received for referrals of customers and clients ```
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Do you need to disclose the nature of the profit
Yes,flat fee or percentage basis, one- time or continuing benefit, based on performance, benefit in the form of provision of research or other noncash benefit—together with the estimated dollar value. Consideration includes all fees, whether paid in cash, in soft dollars, or in kind.
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``` Standard VII(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.
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``` Standard VII(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.
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Conduct covered
■ giving or receiving assistance (cheating) on any CFA Institute examinations; ■ violating the rules, regulations, and testing policies of CFA Institute programs; ■ providing confidential program or exam information to candidates or the public; ■ disregarding or attempting to circumvent security measures established for any CFA Institute examinations; ■ improperly using an association with CFA Institute to further personal or professional goals; and ■ misrepresenting information on the Professional Conduct Statement or in the CFA Institute Continuing Education Program.
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Does the CFA actively policies
Yes,CFA Institute actively polices blogs, forums, and related social networking groups for information considered confidential
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Does the standard VII(A) covers opinions
Standard VII(A) does not cover expressing opinions regarding CFA Institute, the CFA Program, or other CFA Institute programs. Members and candidates are free to disagree and express their disagreement with CFA Institute on its policies, its procedures, or any advocacy positions taken by the organization.
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``` Standard VII(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
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Intention of Standard VII(B)
Individuals must not exaggerate the meaning or implications of membership in CFA Institute, holding the CFA designation, or candidacy in the CFA Program
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Does Standard VI(B) applies to any form of communication
Standard VII(B) applies to any form of communication, including but not limited to communications made in electronic or written form (such as on firm letterhead, business cards, professional biographies, directory listings, printed advertising, firm brochures, or personal resumes) and oral statements made to the public, clients, or prospects
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Who does it refers when mentioning CFA Institute member
refers to “regular” and “affiliate” members of CFA Institute who have met the membership requirements as defined in the CFA Institute Bylaws.
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What requierements do you need to satisfy your membership
■ remit annually to CFA Institute a completed Professional Conduct Statement, which renews the commitment to abide by the requirements of the Code and Standards and the CFA Institute Professional Conduct Program, and ■ pay applicable CFA Institute membership dues on an annual basis.
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Can you state you were a charterholder in the past
Yes
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How a person is considered a candidate
■ the person’s application for registration in the CFA Program has been accepted by CFA Institute, as evidenced by issuance of a notice of acceptance, and the person is enrolled to sit for a specified examination or ■ the registered person has sat for a specified examination but exam results have not yet been received.
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If you are registered but decline to sit to the exam are you an active candidate
No
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Can you state you passed each level of the exam in consecutive years
Yes
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Can a member have an retired status
Yes
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What are some misleading practices
■ 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.
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What is the GIPS
The GIPS standards are a practitioner- driven set of ethical principles that establish a standardized, industry- wide approach for investment firms to follow in calculating and presenting their historical investment results to prospective clients.
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Who can claim compliance
any investment management firm may choose to comply with the GIPS standards. Complying with the GIPS standards is voluntary but only investment management firms that actually manage assets can claim compliance with the Standards.
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Who cant claim compliance
Plan sponsors and consultants cannot make a claim of compliance unless they actually manage assets for which they are making a claim of compliance.
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Options to claim compliance
A firm has only two options with regard to compliance with the GIPS standards: fully comply with all requirements of the GIPS standards and claim compliance through the use of the GIPS Compliance Statement; or not comply with all requirements of the GIPS standards and not claim compliance with, or make any reference to, the GIPS standards.
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WHO BENEFITS FROM COMPLIANCE?
investment management firms and prospective clients.
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Composites
A composite is an aggregation of one or more portfolios managed according to a similar investment mandate, objective, or strategy. A composite must include all actual, feepaying, discretionary portfolios managed in accordance with the same investment mandate, objective, or strategy.
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Can verification be respect to specific composites
No, It must be about the entire firm
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Who can perform verification tests
Verification must be performed by an independent third party. A firm cannot perform its own verification.
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Types of verification tests
■ whether the investment firm has complied with all the composite construction requirements of the GIPS standards on a firm- wide basis, and ■ whether the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards.
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What is the structure of the GIPS Standards
The provisions within the 2010 edition of the GIPS standards are divided into nine sections: Fundamentals of Compliance, Input Data, Calculation Methodology, Composite Construction, Disclosure, Presentation and Reporting, Real Estate, Private Equity, and Wrap Fee/Separately Managed Account (SMA) Portfolios.
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Why is a GIPS needed
Standardized Investment Performance,Global Passport ,Investor Confidence
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Mention some goals of the GIPS Executive Committee
■ To establish investment industry best practices for calculating and presenting investment performance that promote investor interests and instill investor confidence; ■ To obtain worldwide acceptance of a single standard for the calculation and presentation of investment performance based on the principles of fair representation and full disclosure; ■ To promote the use of accurate and consistent investment performance data; ■ To encourage fair, global competition among investment firms without creating barriers to entry; and ■ To foster the notion of industry “self- regulation” on a global basis.
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Whats the minimum of years of performance a firm must present to comply with GIPS
■ A firm is required to initially present, at a minimum, five years of annual investment performance that is compliant with the GIPS standards
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What if the firm has less than five years of existence
If the firm or the composite has been in existence less than five years, the firm must present performance since the firm’s inception or the composite inception date.
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What to do after the firm presents historical performance data
the firm must present an additional year of performance each year, building up to a minimum of 10 years of GIPS- compliant performance
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Can firms link non GIPS compliance data
Firms may link non- GIPS- compliant performance to their GIPS- compliant performance provided that only GIPS- compliant performance is presented for periods after 1 January 2000 and the firm discloses the periods of non-compliance
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What is it that firms must not do
Firms must not link non- GIPS- compliant performance for periods beginning on or after 1 January 2000 to their GIPS- compliant performance
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What is the effective date for the GIPS standards
The effective date for the 2010 edition of the GIPS standards is 1 January 2011. Compliant presentations that include performance for periods that begin on or after 1 January 2011 must be prepared in accordance with the 2010 edition of the GIPS standards.
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Fundamentals of Compliance
Two important issues that a firm must consider when becoming compliant with the GIPS standards are the definition of the firm and the firm’s definition of discretion. The definition of the firm is the foundation for firm- wide compliance and creates defined boundaries whereby total firm assets can be determined. The firm’s definition of discretion establishes criteria to judge which portfolios must be included in a composite and is based on the firm’s ability to implement its investment strategy.
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Input Data
Consistency of input data used to calculate performance is critical to effective compliance with the GIPS standards and establishes the foundation for full, fair, and comparable investment performance presentations. For periods beginning on or after 1 January 2011, all portfolios must be valued in accordance with the definition of fair value and the GIPS Valuation Principles.
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Calculation Methodology
The GIPS standards mandate the use of certain calculation | methodologies to facilitate comparability.
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Composite Construction
The composite return is the asset- weighted average of the performance of all portfolios in the composite
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Disclosure
To comply with the GIPS standards, firms must disclose certain information in all compliant presentations regarding their performance and the policies adopted by the firm. One of the essential disclosures for every firm is the claim of compliance
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Presentation and Reporting
the firm must incorporate this information in presentations based on the requirements in the GIPS standards for presenting investment performance. No finite set of requirements can cover all potential situations or anticipate future developments in investment industry structure, technology, products, or practices.
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Wrap Fee/Separately Managed Account (SMA) Portfolios
..
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Can firms present false or misleading information
Firms must not present performance or performance- related information that is false or misleading
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What statements are prohibited
Statements referring to the calculation methodology as being “in accordance,” “in compliance,” or “consistent” with the Global Investment Performance Standards, or similar statements, are prohibited.
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What statement is prohibited using in a single client portfolio
“calculated in accordance with the Global Investment Performance Standards”
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Can firms choose to whom they present a compliant presentation
No,Firms must make every reasonable effort to provide a compliant presentation to all prospective clients. Firms must not choose to whom they present a compliant presentation. As long as a prospective client has received a compliant presentation within the previous 12 months, the firm has met this requirement
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Can a client request a list of composite descriptions
Yes,Firms must provide a complete list of composite descriptions to any prospective client that makes such a request. Firms must include terminated composites on the firm’s list of composite descriptions for at least five years after the composite termination date.
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How a firm must be defined to clients or prospective clients
distinct business entity
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Does total firm assets must include assets assigned to a sub advisor
YES
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Can changes in the firms organization change historical composite performance
No
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Fundamentals of Compliance—Recommendations
0.B.1 Firms should comply with the recommendations of the GIPS standards, including recommendations in any updates 0.B.2 Firms should be verified. 0.B.3 Firms should adopt the broadest, most meaningful definition of the firm. The scope of this definition should include all geographical (country, regional, etc.) offices operating under the same brand name regardless of the actual name of the individual investment management company. 0.B.4 Firms should provide to each existing client, on an annual basis, a compliant presentation of the composite in which the client’s portfolio is included
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Discretionary Fund
Discretionary Fund Management is when an investment professional known as a Discretionary Fund Manager (DFM) builds and manages a portfolio of investments on your behalf.