Ethics Flashcards
In what way should M&Cs disseminate MNPI about Company A.
Encourage Company A to make a public announcement.
What should M&Cs do if public dissemination of MNPI is not possible
Provide the information to the supervisory and compliance department of his firm
What three criterions affect materiality?
- The source of information (reliability) - connections to insiders
- Anticipated effect on stock price etc.(ambiguity)
- Must stand on its own - not through mosaic theory
What must you not act on to maintain standard 2, integrity
Material non public information
When can material information be acted on
If its public
When can non public information be used
When it is not material
What must M&Cs do when compiling mosaic theory
Document and save all records
Give five procedures for compliance with standard 2, Integrity of Capital markets
- Achieve public dissemination
- Adopt reporting and disclosure policies
- Monitor interdepartmental communication and limit personal and proprietary trading
- Separate departments with Firewall and physical separation
- Written Policies and Guidance.
Give 4 elements of a firewall for Standard 2, Integrity of capital markets
- Review of employee and proprietary trading
- Control flow of information between departments through a clearance area
- Maintain lists to watch, restricted and rumour
- Documentation of procedures
Give 3 points that describe the standard for market manipulation
- Do not engage in practices that indirectly mislead participants (not misrep)
- Do not distort prices
- Do not distort volumes
Gives X points that distinguish information based manipulation from transaction based manipulation
- Spreading information that may induce trading by other (rumours etc)
- Manipulating prices by trading in ways that affect market for a security
Define ethics in two points
- Moral principles or rules.
2. Guide behaviour that affects others.
Describe the 6 components of the code of ethics
Mnemonic
Describe 7 components of sopc
Mnemonic
Give 4 components of professionalism
KIMM
- Knowledge of law
- Independence & objectivity
- Misrepresentation
- Misconduct
What are the two components of integrity of capital markets
- Material non public information
2. Market manipulation
What are the 5 components of duties to clients
Loyalty, prudence and care Fair dealing Suitability Performance presentation Confidentiality
What are 3 components of duties to employer
Compensate LARS
- Loyalty
- Additional (compensation arrangements)
- Responsibility of Supervisors
What are the 3 components of Investment Analysis, Recommendations and Actions
- Diligence and reasonable basis
- Communications with clients and prospects
- Record retention
Identify the 3 components of conflicts of Interest standard
- Disclose conflicts
- Priority of transactions (clients first)
- Referral fees
Name the five principles of Professionslism (standard 1)
LIMMO
- LAW -Knowledge of the LAW
- Independence
- Misrepresentation
- Misconduct
- Objectivity
Independence & Objevtivity go together
Explain 5 issues of “Knowledge of the Law” standard
- Know laws, rules, regulations
- Stricter law or rule applies
- Violations -Do not participate or knowingly assist a violation
- Dissociate from violation
- Unless mandated no need to report to authorities
Give 4 points of guidance for M&Cs for knowledge of the law
FUCK
- Firm policies and procedures
- Understand laws & rules
- Comply will all laws
- Knowledge - maintain knowledge of all laws, rules, procedures for professional activities
policies
How do we know what law is applicable?
If it governs a M&C conduct
Give 2 steps to dissociate
Why is inaction risky?
- Persuade person to end intention to violate
- Bring to attention of supervisor or compliance department
- Inaction cannot be construed as participation or assistance
Give 3 elements of maintaining knowledge of the law
- Review the procedures
- Stay informed
- Maintain files of current laws and regulations etc.
Give 3 things M&Cs should do to support their firms for the Knowledge of Law Standard
- Develop or adopt a code of ethics
- Provide information about applicable laws
- Establish reporting procedures
Describe the Standard of Independence and Objectivity
- Reasonable care and judgement
2. Do not offer or accept compromising gifts, benefits, compensation.
Give 3 elements of enhanced firewall
- Separate reporting for research.
- Seperate reporting for investment banking.
- Compensation must not cause perverse incentives.
Describe due diligence in two points
- Information from a wide variety of sources.
2. Sufficient for an unbiased and informed conclusion.
Whp is the Duty of Loyalty owed to
1 Ultimate beneficiary and dependents.
- For a pension fund it is not the fund manager but the plan beneficiaries
To who is the Duty of loyalty owed in a takeover bid
The beneficiaries of the target firms pensuon plan
Not the target firms trustee or management
Give 3 issues raised by soft dollars
- Must benefit the client
- A higher brokerage commission must benefit the client
- Selection of broker must benefit the client
Use of Client brokerage has two other names, what are they?
Soft dollars
Soft commissions
List four procedures for compliance of the Independence and Objectivity standard
Protect the integrity of opinions
- Restricted list
- Restrict Gifts and special costs
- Independence Policy
- Have review procedures and review compliance issues
Describe 3 things not to misrepresent within the Standard of Misrepresentation
RAP
Do not misrepresent:
- Recommendations
- Analysis
- Professional activities
Describe 3 characteristics of “knowingly” in the standard of misrepresentation
- An action would have been different except for:
- There was a misrep they did or should have known
- There was an omission
Describe 4 characteristics of plagiarism
- Copying or using materials
- Not acknowledging the source (reference)
- Not acknowledging the author and publisher
- Passing it off.
List four procedures to comply with the Independence and Objectivity standard.
- Check external information
- Factual presentations
- Plagiarism policy
- Qualification summary
Explain 4 steps to avoid plagiarism
- Copy all materials relied on.
- Credit the source of quotes, paraphrases
- Credit the source of methods and models
- Credit the source of projections, tables, statistics.
Which 7 issues are within standard of Misconduct
- No professional misconduct involving
- Deceit
- Dishonesty
- Disrepute
- Fraud
- Lack of integrity
- Lack of competence
Give four procedures to comply with standard of misconduct
- Adopt a code of ethics
- Disseminate a list of potential violations
- And associated disciplinary sanctions, including dismissal.
- Check references of potential employees
Give 5 points that describe the Duty of Loyalty in Standard 3(A)
- Reasonable Care
- Prudent judgment
- Act for the benefit of their clients
- Place their clients’ interests before own interests
- Place their clients’ interests before their employers interests
Explain directed brokerage
The client instructs manager to use client brokerage (soft dollars, soft commission) to purchase goods and services for the client
Give 3 points that describe best execution
- A trading process that seeks to maximize the value of the client’s portfolio.
- Within the client’s stated investment objectives
- Within the client’s stated constraints.
List 4 compliance procedures for the Loyalty, Prudence, and Care standard.
- Periodic performance reporting
- Periodic account information
- Seek client approval
- Follow firm policies
Give 4 recommendations for how to report regular account information.
- At least quarterly, an itemized statement showing the client’s funds and securities in custody or possession and
- All the transactions that occurred during the period.
- State where assets are kept or moved to
- Keep client assets segregated
Give 5 criteria for the standard of fair dealing
- Deal fairly
- Deal objectively
When providing:
- Investment analysis,
- Investment recommendations,
- Investment action and other professional activities.
List 3 compliance procedures for the Fair Dealing standard
Disclose:
- Trade allocation procedures
- Service levels
And
3. Establish systematic account review
List 5 compliance procedures for fair dealing
- Develop and document trade allocation procedures.
Publish guidelines for:
- Predissemination behavior and
- Simultaneous dissemination.
- Shorten the time frame between decision and dissemination.
- Maintain a list of clients and their holdings.
- Limit the number of people involved.
Give 2 criteria for disclosing service levels
- Disclose different service levels and fee levels to all clients.
- Do not selectively disclose
Give 3 reasons where client confidentiality does not need to be preserved
- The information concerns illegal activities on the part of the client;
- Disclosure is required by law; or
- The former client, client or prospective client permits disclosure of the information.
What is the recommended frequency for reviewing investors objectives and constraints
Annually
Give 7 reasons for triggering a review of an individuals IPS
Changes in the following:
- Number of dependents,
- Personal tax status,
- Health,
- Liquidity needs,
- Risk tolerance,
- Additional wealth beyond the portfolio
- Current income needs
Give 3 reasons for triggering a review of an institution IPS
- Size of unfunded liabilities in a pension fund
2. Withdrawal privileges in an employee savings plan, 3. Distribution requirements of a charitable foundation.
When must a candidate refuse to provide client information to the PCP
If the law requires confidentiality be maintained at all times (irrespective of consent)
Who is the client of a sub manager of managed accounts?
The fund manager that gave the sub-manager the mandates
Who is the client of a sub manager for a fund? Why?
The subscribers to the fund
The fund mandate is the “client”.
What is primary research
Research carried out by yourself
What is secondary research
Research by someone else but at your own firm
What is 3rd party research
Research by someone external of the firm you work for
What two standards must research meet
Objectivity
Reasonable basis
What four things must you disclose to clients and prospects about your investment decisions
- Basic process
- Principles of investment
- Limitations
- Inherent risks
When communicating external expert opinion that has a reasonable basis what other rule may be breached.
Why?
V(b) communication with clients
Failure to distinguish fact from opinion.
Expert opinion is not fact
Give one step for compliance with ensuring secondary and third party research
- Develop policies ensuring adequate and reasonable basis forvresearch.
- Adopt standardized criteria for review and evaluation of external advisors
What two broad class of confluct must be disclosed
Actual
Potential
What 3 types of conflict is often created by sitting on a board
- Stocks, options
- Duties to clients vis a vis duties to shareholders of the company
- Receipt of MNPI (material non public information)
What type of conlict is created by an underwriter
If it publishes research on the company it is an underwrite for
What 3 types of family relationships constitute Material Beneficial Ownership
- Spouse
- Children
- Immediate family member that is dependent
What is a “family account”
Tier 1 Relatives not living with you or otherwise dependent
Not material beneficial interest
They should not be advantaged or disadvantaged. Should be Tier 1 and allocated a pro rata amount
What two classes of referral fees must be disclosed?
Internal (e.g. bonuses)
External
What two groups must referral fees be disclosed to
Clients
Employer
Give three ways a referral fee confers a benefit
- Cash
- Benefit in kind, quid pro quo
- Relationship (e.g. future or past business)
Give 4 compluance procedures in addition to disclosure of policies for standard 6, disclosure of conflicts of interest
- Encourage employers to develop procedures for referral fees. Including:
(A) Restrictions
(B) Disclosure of fees to clients - Disclose special arrangements as a Director
- Or departmental conflicts
- Restrictions and blackout periods for material beneficial ownership
Give 4 examples of duty of loyalty to employer
HSBC
- Not cause Harm
- Not deprive the employer of their Skills
- Act for the Benefit of the employer
- Not divulge Confidential information
What two should M&Cs tell employers about the C&S?
- It does not apply to enployers
2. Firm policies that do not conflict with the C&S increase workforce productivity
What 3 activities are a violation when leaving or planning to leavecan employer
- Solicitation of clients
- Taking confidential information or trade secrets or research
- re-creating customer lists or using knowledge gained while at the employer if specifically prohibited by an agreement.
What are the two main principles limiting additional compensation
- Must not compete with the employers interests
2. Must be agreed in advance with the employer
What 2 actions are required for compliance with additional compensation arrangements
- Report to enployer everything expected to be received and for how long.
- The paying party confirms this to the employer in a way the employer can understand potential conflicts.
What 3 things must supervisors make reasonable efforts to ensure conpliance with;
- Laws
- Rules & Regulations
- Code & Standards
What 4 things should adequate procedures address
- Industry standards
- Regulatory requiremenrs
- Code & Standards
- Firms circumstances
Give 5 goals for adequate employers compliance procedures
- Clear, easily understood procedures
- Easily accessible
- Designated compliance officer with authority and resources
- Describe supervision hierarchy and assignments
- Delineate reporting of violations.
Give 5 goals for adequate employers compliance procedures
- Clear, easily understood procedures
- Easily accessible and Disseminated
- Designated compliance officer with authority and resources
- Describe supervision hierarchy and assignments
- Delineate reporting of violations.
What 3 things should a supervisor do when discovering a violation
- Conduct an investigation
- Increase supervision / limitations on potential wrongdoer
- Make new procedures to prevent the violation in the future
What must supervisors and managers disseminate to staff
Compliance policies
What is the test for being a supervisor? What is not required?
- Control and influence
2. Formal appointment as supervisor
Give 4 duties of supervisors concerning violations
Prevent
Monitor
Detect
Enforce
