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1 CFA > Ethics > Flashcards

Ethics Flashcards

1
Q

Ethics

A

A set of shared beliefs that define good and bad behaviour

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2
Q

Ethical conduct

A

Behaviour that follows moral principles and balances one’s self-interest with the self-interest of/impact to stake holders

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3
Q

Laws vs Legal Standards

A

Laws and regulations attempt to codify ethical actions in order to create a better outcome for society and stakeholders

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4
Q

Problems with regulations

A

Typically follow market practices
Take time to enact
Vary across jurisdiction
Can be vague conflicting and too narrow
Are subject to interpretation and compliance
Can create unethical opportunities elsewhere

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5
Q

Code of Ethics … Act

A

Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession and other participants in the global capital markets

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6
Q

Code of Ethics … Place

A

Place the integrity of the investment profession and the interests of clients above their own interests

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7
Q

Code of Ethics … Use

A

Use reasonable care and exercise independent professional judgement when conducting investment analysis, making investment recommendations, taking investment actions and engaging in other professional activities

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8
Q

Code of Ethics … Practice

A

Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession

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9
Q

Code of Ethics … Promote

A

Promote the integrity and viability of the global capital markets for the ultimate benefit of society

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10
Q

Code of Ethics … Maintain

A

Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals

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11
Q

Standard I.A. Knowledge of the Law

A

When a violation occurs:

  • Alert your supervisor or employer
  • Disassociate yourself from the activity
  • Seek advice of counsel
  • Consider whether you need to report the violation to law enforcement. NEVER YOUR DECISION seek counsel
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12
Q

Standard I.B. Independence and objectivity

A
  • IB pressure: should not change your opinion because of M&A department. Stick to original convictions, do not continue coverage and create restricted list
  • Corporate pressure: Do not let companies on which you provide research pay your expense. Should pay own accommodation/travel. Do not accept anything more than token gift
  • Buy-side pressure: Even clients can pressure to produce positive research as they want their portfolios.. be honest
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13
Q

Standard I.C. Misrepresentations

A
  • Do not overstate your competencies
  • Do not guarantee investment returns
  • Avoid plagiarism by acknowledging sources and quotations
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14
Q

Standard I.D. Misconduct

A

Wide ranging category referring to reflect adversely on the profession. Does not include civil disobedience

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15
Q

Standard II.A. Material non-public information

A

You should not deal, encourage others to deal, or disseminate non-public information.
Protected activities
-Not knowing the information was inside e.g. from an unreliable source (hairdresser)
-Mosaic theory: if you piece together information e.g. from analyzing the competition you may be able to get non-public information

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16
Q

Standard II.B. Market manipulation

A

Transaction-based manipulation: Intention is everything cannot trade to create false impression of volume
Information-based manipulation: Dissemination of lies and rumors, with the intention of manipulating prices

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17
Q

Standard III.A. Loyalty, Prudence and Care

A

Sets out the wide-ranging obligation owed to your client, essentially to act in their best interests.
Obligations are owed to beneficiaries under trusts or pensions, as well as to those whose money you manage directly.
Should disclose conflicts and compensation arrangements
Ensure soft dollars are fully disclose. Getting free services that do not benefit the client violates your duty to the client.

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18
Q

Standard III.B. Fair dealing

A

Favouritism: Should not favour one client above another. Needs to be formalised if done e.g. premium service
Investment recommendations: Should keep clients up to date. So should minimise time between making recommendation decision and telling clients and maintain a list of client holdings
Investment action: Have a fair allocation policy, allocate on a fair basis, pro rata for example rather than giving everything to the client who generates the most fees

19
Q

Standard III.C. Suitability

A

Understand clients’ requirements to enable you to provide appropriate advice in line with their stated objective and constraints
Things to look out for:
-Specific client statements or prohibitions
-Blanket allocations to client portfolios
-Changes in circumstances

20
Q

Standard III.D. Performance Presentation

A

Communication to clients or prospective clients must not be misleading
Claims of guaranteed performance
False claims of compliance with the GIPS
Portability of performance e.g. returns earned by manager when he was at a previous firm

21
Q

Standard III.E. Preservation of Confidentiality

A

Requirement for confidentiality except:
Client misconduct
Charities, matching charity to wealthy client

22
Q

Standard IV.A. Loyalty

A

Leaving your current employer to set up in competition
Protection of employer interests: must refrain from activities that would damage employer’s business, subject to placing client interests above those of your clients
Independent practice: If you wish to set up independent business need to seek permission from your employer but not prospective employer
Leaving employer:
-Reasonable to set up in advance such as renting office
-Best practice is not to tell clients your leaving or actively seek their business
-Cannot take anything from your employer without permission even if you created it

23
Q

Standard IV.B. Additional compensation arrangements

A

Nothing wrong with client paying you a bonus but would be a problem if you favoured them over other clients
If you receive permission from your employer to accept a gift it is not a breach of standard

24
Q

Standard IV.C. Responsibilities of Supervisors

A

Anyone who works beneath you is bound by the same rules as you.
Should establish systems and procedures to detect rule breaking is key. Should create ethical manual, educate and monitor employees.

25
Q

Standard V.A. Diligence and reasonable basis

A
  • Lack of time is never an excuse for sloppy research
  • Research produced by someone else in your firm is secondary, outside the firm is 3rd party. Before using must check it was up to date and independent
26
Q

Standard V.B. Communication with clients and prospective clients

A

Distinguish fact from opinion
Disclose investment process
Disclose analysis process
Communicate important factors

27
Q

Standard V.C. Record Retention

A

7 YEAR HOLDING PERIOD

Evidence for investment recommendations and actions

28
Q

Standard VI.A. Disclosure of conflicts

A

Disclose the nature of conflict to inform employer, client or prospective client in a CLEAR, OPEN and ACCESSIBLE way
Disclose if:
-Owning stock in a company on which you report
-Providing banking services on a company you report on
-Additional compensation arrangements that may cause you to favour client above another

29
Q

Standard VI.B Priority of transactions

A

Client and employer deals take precedence over your own.
Best practice not to participate in IPO/private placement you offer to clients. Participation removes opportunity from clients in event it is oversubscribed.
Restricted period: should not deal from your own account prior to trades you know client is making

30
Q

Standard VI.C. Referral fees

A

Disclose fees received or paid as a result of recommendations to clients, prospective clients and employers.
Discloser required because you are effectively being paid for by the client

31
Q

Standard VII.A. Conduct as members and candidates in the CFA program

A
  • Breaking exam rules
  • Compromising the exam integrity
  • Improperly exploiting your position
  • Misrepresenting information
32
Q

Standard VII.A. Reference CFA Institute, CFA designation, CFA Program

A 
Do say
■ I am a CFA charterholder.
■ Ed Smith, CFA.
■ I passed Level I, Level II and Level III in three consecutive years from 2011-2013.
■ Anne White, Chartered Financial Analyst.
Do not say
■ I am a CFA.
■ I am a Chartered Financial Analyst.
■ I expect to pass in 2015.
33
Q

Aim of GIPS

A

Ensure accurate and consistent data for reporting, marketing and record keeping purposes.
Fostering self-regulation of financing industry

34
Q

GIPS 0-4

A
  1. Fundamentals of Compliance
  2. Input Data
  3. Calculation Methodology
  4. Composite Construction
  5. Disclosures
35
Q

GIPS 5-8

A
  1. Presentation and Reporting
  2. Real Estate
  3. Private Equity
  4. Wrap Fees/Separately Managed Account Portfolios
36
Q

Who GIPS applies to

A

Applies to ‘firm’ any business or division operating as a distinct entity

37
Q

What portfolios are included under GIPS

A

All actual fee-paying discretionary portfolios must be included in a composite, managed with a similar objective. Composite portfolio gives an impression of the firm’s success from each of the different portfolio strategy

38
Q

Time period of presentation in GIPS

A

To present 10 years of compliant data, minimum of 5 years of compliant history required (or since inception)

39
Q

How to measure returns in GIPS

A

Time weighted returns required

40
Q

Benchmarking in GIPS

A

Benchmarks and composites should be created before performance is measured

41
Q

When rules conflict in GIPS

A

Local rules take precedence if a conflict occurs with local law or standards

42
Q

Independent verification under GIPS

A

Independent verification is NOT required

43
Q

Who can claim compliance with GIPS

A

Investment managers

44
Q

Who CANNOT claim compliance with GIPS

A

Trustees, software firms and plan sponsors cannot claim compliance as they do not manage assets

1 CFA (26 decks)

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