Ethics Flashcards
What is the difference between the Professional Conduct Program & the Disciplinary Review Committee?
Both are responsible for the enforcement of the Codes and Standards. However, DRC is a volunteer committee of working professionals. The DRC is the panel that you would appeal to if you don’t like the proposed sanctions from the PCP
What are the 6 sections of the code of ethics?
- Act with integrity, competence, respect to public, clients, employers, etc.
- Place integrity and interest of the client before our own
- Reasonable care and professional judgement when conducting analysis, making recommendations, taking actions
- Practice and encourage others to act ethicially
- Promote the integrity and viability of global markets to benefit society
- Maintain and improve competence
What are the sub-sections of Section 1 (Professionalism)?
- Knowledge of the Law
- Independence and Objectivity
- Misrepresentation
- Misconduct
What are the sub-sections of Section 2 (Integrity of Capital Markets)?
- Material nonpublic information
2. Market Manipulation
What are the sub-sections of Section 3 (Duties to Clients)?
- Loyalty, Prudence, Care
- Fair Dealing
- Suitability
- Performance Presentation
- Confidentiality
What are the sub-sections of Section 4 (Duties to Employers)?
- Loyalty
- Additional Compensation Agreements
- Responsibilities of Supervisors
What are the sub-sections of Section 5 (Investment Analysis, Rec, Action)?
- Diligence and Reasonable Basis
- Communication with Clients and Prospective Clients
- Record Retention
What are the sub-sections of Section 6 (Conflicts of Interest)?
- Disclosure
- Priority of transactions
- Referral Fees
What are the sub-sections of Section 7 (Responsibilities as CFA)?
- Don’t compromise reputation
2. Do not misrepresent or exaggerate
According to I(A), what steps should you take if there is a violation (legal or unethical) taking place?
- Bring it to employers attention through supervisor or compliance
- IF that does not work, must step away or dissociate
Dissociating could be as big as quitting
What are the recommended steps to take to maintain compliance with I(A)?
- Stay informed of laws, etc
- Review procedures
- Maintain current files
How is I(1) applicable to product distribution?
You must consider and make reasonable efforts to understand laws where your product will be distributed.
What are some common gifts that are governed under I(B)?
Placement in oversubscribed IPOs
Gifts, bonuses, functions, favours, job referrals
What does I(B) say about travel funding?
- Use commerical transportation
2. if you must accept, make sure it is modest
What are the recommend steps to take to maintain compliance with I(B)?
- Protect integrity of opinions
- Create a restricted list
- Restrict special cost arrangements
- Limit gifts
- Restrict investments
- Review procedures
- Independence Policy
- Appointed officer
What is the purpose of the Asset Manage Code?
The purpose is to specifically address managers on funds. It is the minimum ethical standards for asset management. The goal is to help act in a professional and fair manner.
What are the six responsibilities of the AM code?
- Professional and Ethical at all times
- Act for the benefit of clients
- Act with independence and objectivity
- Act with skill, competence, and diligence
- Communicate with clients in a timely and accurate manner.
- Uphold the applicable rules governing capital markets
What is covered under Client Loyalty in the AM Code?
- Place client interest before own
- Preserve confidentiality
- Refuse gifts that compromise objectivity
What is covered under Investment Process and Actions in the AM Code?
- Reasonable care and prudent judgement
- Don’t distort the market
- Deal fairly and objectively
- Reasonable and adequate basis for decisions
- Must be consistent to objectives and disclose changes
What is covered under Trading in the AM Code?
- Develop and maintain policies
- Appoint compliance officers
- Ensure portfolio information is accurate
- Maintain records
- Employ qualified staff to monitor
- Establish business continuity plans
- Establish firmwide risk management process
What is covered under Performance in the AM Code?
- Present fair, accurate, timely, complete information
2. Use fair market prices
What is covered under Disclosures in the AM Code?
- Communicate with clients
- Disclosure are true, accurate, timely
- Include all material facts
- Disclose conflicts, investment process, shareholder voting, trade allocation, fees, commissions
How do you calculate composites for several portfolios?
- Beg Balance weighted returns
2. Beg balance + weighted CF returns
What qualifies a portfolio to be part of a composite portfolio?
- Discretionary
If there are restrictions on buys and sells, the portfolio is not discretionary in this context. If the restrictions impede the investment process. This could include large withdrawals/liquidity restrictions. - Fee paying (unless exception)
All fee paying discretionary portfolios must be included
If includes non fee paying, must show the %
What is the policy (GIPS) on when a new portfolio must be included in the composite? When must it be excluded (termination)?
Firms have discretion as securities may come in kind. If its cash, generally the next reporting period.
As soon as you lose discretion, you must eliminate. For example, if you lose discretion on May 20, you can only include up to the end of April
What are the two conditions in which a portfolio can switch composites?
- Client revises strategy.
2. Original Composite is redefined - highly unusual.
How should firms treat large cash deposits for existing clients when calculating composite performance?
include new funds in a temporary account until invested, then include as a cash flow when fully invested
Can you carve out sections of a portfolio for composites?
Generally no as cash is a part of portfolio management, but if the section already has a cash weighting independently, it can be done
What should you do when a portfolio falls below the minimum asset threshold for composites?
exclude until its back
What are some common disclosures you must make about significant events for composites?
- PM leaving
- Firm changing (invest/divest)
- Subadvisors
Is it possible to report composite returns since inception if you were non compliant?
Yes, if it was before Jan 1 2000 and you disclose
Under GIPS, what must you disclose about leverage, derivatives, shorting, etc?
- Presence
- Use
- Extent
- Characteristics (frequency, risks)
What is the GIPS policy on custom benchmarks for composites?
You must disclose components, weights, rebalancing process, and display its total return
When must performance be ported to the new composite?
- Same people making decisions
- Same process
- Record to support
What are the minimum and maximum number of portfolios in a composite? Must a firm disclose the number?
No min or max, must disclose the number unless less than 5
What is the minimum number of GIPS compliant performance?
Must be at least 5 years (or since inception), then must build up to 10 years before you can start dropping years off
Could a manager for a firms investment mandate also bring the mandate to another firm and use the existing composite numbers?
Yes it must if
- Same team
- Same Process
- Has the data
How is performance calculated for PE under GIPS?
since inception IRR, cash flow calculated at least monthly, daily after 2011, net of transaction fees, expenses, and carried interest, must be valued at least annually but recommended quarterly
What specific disclosure are required for PE under GIPS?
- Vintage and final liquidation date
- Valuation policies
- Periods of noncompliance
- Benchmark dislosures
- Underlying return if fund of funds
- Committed capital, paid in capital, distributions, TVPI, DPI
How does GIPS address fees in SMA/Wraps?
If you cannot separate out trading expenses, you must deduct the total management fee.
Any client performance must show the entire wrap fee
What is the valuation heirarchy for GIPS?
- Active Prices
- quoted prices for identical or similar
- Market based inputs
- Subjective, unobservable inputs
What must be included in an advertisment to be GIPS complaint?
1, Definition of the firm
- Currency, net/gross
- Must have 1-3-5, or period to date with 5 years of composite returns
- Benchmark discription
- Disclose leverage, shorts, etc
