Ethics Flashcards
Ethics
A set of shared beliefs that define good and bad behaviour
Ethical conduct
Behaviour that follows moral principles and balances one’s self-interest with the self-interest of/impact to stake holders
Laws vs Legal Standards
Laws and regulations attempt to codify ethical actions in order to create a better outcome for society and stakeholders
Problems with regulations
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
Code of Ethics … Act
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
Code of Ethics … Place
Place the integrity of the investment profession and the interests of clients above their own interests
Code of Ethics … Use
Use reasonable care and exercise independent professional judgement when conducting investment analysis, making investment recommendations, taking investment actions and engaging in other professional activities
Code of Ethics … Practice
Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession
Code of Ethics … Promote
Promote the integrity and viability of the global capital markets for the ultimate benefit of society
Code of Ethics … Maintain
Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals
Standard I.A. Knowledge of the Law
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
Standard I.B. Independence and objectivity
- 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
Standard I.C. Misrepresentations
- Do not overstate your competencies
- Do not guarantee investment returns
- Avoid plagiarism by acknowledging sources and quotations
Standard I.D. Misconduct
Wide ranging category referring to reflect adversely on the profession. Does not include civil disobedience
Standard II.A. Material non-public information
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
Standard II.B. Market manipulation
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
Standard III.A. Loyalty, Prudence and Care
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.
Standard III.B. Fair dealing
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
Standard III.C. Suitability
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
Standard III.D. Performance Presentation
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
Standard III.E. Preservation of Confidentiality
Requirement for confidentiality except:
Client misconduct
Charities, matching charity to wealthy client
Standard IV.A. Loyalty
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
Standard IV.B. Additional compensation arrangements
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
Standard IV.C. Responsibilities of Supervisors
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.
Standard V.A. Diligence and reasonable basis
- 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
Standard V.B. Communication with clients and prospective clients
Distinguish fact from opinion
Disclose investment process
Disclose analysis process
Communicate important factors
Standard V.C. Record Retention
7 YEAR HOLDING PERIOD
Evidence for investment recommendations and actions
Standard VI.A. Disclosure of conflicts
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
Standard VI.B Priority of transactions
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
Standard VI.C. Referral fees
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
Standard VII.A. Conduct as members and candidates in the CFA program
- Breaking exam rules
- Compromising the exam integrity
- Improperly exploiting your position
- Misrepresenting information
Standard VII.A. Reference CFA Institute, CFA designation, CFA Program
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.
Aim of GIPS
Ensure accurate and consistent data for reporting, marketing and record keeping purposes.
Fostering self-regulation of financing industry
GIPS 0-4
- Fundamentals of Compliance
- Input Data
- Calculation Methodology
- Composite Construction
- Disclosures
GIPS 5-8
- Presentation and Reporting
- Real Estate
- Private Equity
- Wrap Fees/Separately Managed Account Portfolios
Who GIPS applies to
Applies to ‘firm’ any business or division operating as a distinct entity
What portfolios are included under GIPS
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
Time period of presentation in GIPS
To present 10 years of compliant data, minimum of 5 years of compliant history required (or since inception)
How to measure returns in GIPS
Time weighted returns required
Benchmarking in GIPS
Benchmarks and composites should be created before performance is measured
When rules conflict in GIPS
Local rules take precedence if a conflict occurs with local law or standards
Independent verification under GIPS
Independent verification is NOT required
Who can claim compliance with GIPS
Investment managers
Who CANNOT claim compliance with GIPS
Trustees, software firms and plan sponsors cannot claim compliance as they do not manage assets
