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CFA Level II 2020 COPY (552) > Ethics > Flashcards

Ethics Flashcards

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1
Q

Describe the Six Components of the Code of Ethics

A

i. Act in an ethical manner
ii. Integrity is paramount and clients always come first
iii. Use reasonable care; be independent
iv. Be a credit to the investment profession
v. Uphold capital market rules and regulations
vi. Be competent

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2
Q

The 7 Standard of Professional Conduct

A
  1. Professionalism
  2. Integrity of Capital Markets
  3. Duties to Clients
  4. Duties to employers
  5. Investment Analysis, Recommendations
  6. Conflicts of interests
  7. Responsibility as a CFA member
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3
Q

Conduct Program

A

Inquiry can be prompted by:

  1. Self disclosure
  2. Written complains
  3. Evidence of misconduct
  4. Report by a CFA exam proctor

Discipline

  1. Cautionary letter
  2. Sanctions; public sanction of suspension of CFA program
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4
Q

Knowledge of the Law

Requirements

A

Comply with more strict law

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5
Q

Knowledge of the Law

Guidance

A
  1. First, notify supervisor or compliance
  2. May confront wrongdoer directly
  3. Dissociate if needed
  4. No requirement to report to government
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6
Q

Knowledge of the Law

Recommended Procedures

A
  1. Seek compliance/legal advice
  2. Distribute laws a regs internally
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7
Q

Independence and Objectivity

Guidance

A
  1. Gifts from clients ok, must disclose
  2. No gifts from vendors (modest gifts OK)
  3. For issuer-paid research, flat fee is preferred; must disclose
  4. Users must be aware of credit ratings conflict
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8
Q

Independence and Objectivity

Recommended Prodecures

A
  1. Research is unbiased
  2. Restricted list
  3. Recommend but do not require travel expenses paid by employer
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9
Q

Misrepresentation

Guidance

A
  1. Do not guarantee a return
  2. No plagiarism
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10
Q

Misrepresentation

Recommended Procedures

A
  1. Must maintain record used for research
  2. Except for recognized places (e.g. bloomberg)
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11
Q

Midconduct

Recommended Procedures

A
  1. Adopt a code of ethics
  2. Provide a list of potential violations and punishment
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12
Q

Integrity of Capital Markets

Guidance

A
  1. cannot act or cause someone else to act
  2. If an analyst knows information but the public doesn’t, still can’t act
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13
Q

Integrity of Capital Markets

Recommendations

A
  1. “Firewall” between departments
  2. Review employee trades
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14
Q

Loyalty, Prudence, and Care

Guidance

A
  1. “Client” may be investing public
  2. Make decisions based on entire portfolio
  3. Vote proxies and disclose voting policies to clients
  4. “Soft Dollars” must benefit client
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15
Q

Fair Dealing

Guidance

A
  1. Fair does not mean equal
  2. Can have different level of service (must disclose)
  3. All clients must have fair chance to act
  4. Disclose written allocation procedures
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16
Q

Suitability

Guidance

A
  1. Prepare IPS and update annually
  2. Is leverage ok?
  3. If client wants an unsuitable investment, look to change IPS or reconsider advisory relationship
17
Q

Performance presentation

Guidance

A
  1. all future and former clients
  2. Have to disclose illegal activities or required by law
  3. May provide information to CFA for professional conduct program
18
Q

Duties to Employers - Loyalty

Guidance

A
  1. Encouraged to give employer code of ethics
  2. With other work: disclose to employer time, services, compensation
  3. Cannot solicit current clients prior to leaving

Knowing client names etc. is ok

  1. Whistleblowing; ok if benefits clients, NOT for personal gain
19
Q

Duties to Employers - Loyalty

Recommendations

A

Encourage adoption of policies with:

1, Outside practice

  1. Leaving employer
  2. Incident report
  3. Employee classification (full/part time)
20
Q

Duties to Employers - Additional Compensation

Guidance

A

Written consent from all parties involved

21
Q

Duties to Employers - Responsibility of Supervisors

Guidance

A
  1. must make an effort to ensure people under you follow all laws
  2. Must try to detect violations
  3. Obligation to indebntify compliance flaws (would decline role until they are good)
22
Q

Duties to Employers - Responsibility of Supervisors

Recommendations

A

Compliance officer should:

  1. Distribute and update procedures
  2. Educate staff
  3. Review employee actions
  4. Limit the wrongdoer until investigation is done
23
Q

Diligence and Reasonable Basis

Guidance

A
  1. must make decisions supported by research
  2. Encourage firm to adopt policy to review quality of third-party research
24
Q

Diligence and Reasonable Basis

Recommendations

A
  1. Develop measurable criteria for assessing quality of research
  2. Review/approve research reports prior to circulation
  3. Procedure to evaluating outside information providers

4. Do not need to dissociate from group research for a disagreement

25
Q

Communication with Clients and Prospective Clients

Guidance

A
  1. Promptly disclose any changes that may affect research
  2. Distinguish between fact and opinion
  3. Disclose risks and limitations
  4. Inform clients of changes in investment processes
26
Q

Record Retention

A
  1. If no regulatory or firm policy, CFA recommends 7 years
  2. Cannot recreate record from memory. Must use public sources
27
Q

Conflicts of Interest

Disclosure

A

Must disclose to employer;

  1. Ownership of stock
  2. Board participation
  3. special compesation or bonuses
28
Q

Conflicts of Interests

Priority of Transactions

A
  1. Family members that are clients are treated same
  2. Limit participation in oversubscribed IPOs
  3. Establish blackout/restricted periods
  4. Disclose policies on personal investing to clients
29
Q

Conflicts of Interests

Referral Fees

A
  1. Must report any compensation to everyone
  2. Must be disclosed prior to agreement
30
Q

Responsibilities as a CFA Member

A
  1. Have proper conduct
  2. Reference to CFA Designation/Program – be honest and tell the truth
    a. Do not imply superior ability
    b. Must be Chartered Financial Analyst or CFA
    c. Cannot be used as a noun
31
Q

Research Objectivity Standards

Policy

A
  1. Formal written policy
  2. Available to clients and prospects
  3. Disseminate to all employees
  4. Supervisors procedures ensure compliance
  5. Senior office attest annually to policy adherence (employees NOT required to sign annually)
32
Q

Research Objectivity Standards

Public Appearances

A

Must disclose any personal and firms conflicts

33
Q

Research Objectivity Standards

Reasonable and Adequate Basis

A
  1. Research has reasonable and adequate basis
  2. Designated person/group to review and approve all research
34
Q

Research Objectivity Standards

Investment Banking

A
  1. Must separate research from investment banking
  2. Analysts cannot report to investment banking
35
Q

Research Objectivity Standards

Research Analyst Compensation

A
  1. Should be directly linked to quality of research
  2. Not directly linked to investment banking, corporate finance activities
    a. Can be indirectly be linked on investment banking results by should disclose
  3. Measureable criteria for research quality (accuracy over time)
36
Q

Research Objectivity Standards

Relationship with Subject Companies

A

An analyst can send only factual information to the subject company for verification

37
Q

Research Objectivity Standards

Personal Investments and Trading

A
  1. Cannot trade personal account 30 days before and 5 days after a recommendation
    a. Exception: Severe hardship
  2. Employee/family members cannot have prior IPO shares in the industry the analyst covers
38
Q

Test Review

A
  1. Cannot communicate a rating different than what you published

2.

CFA Level II 2020 COPY (552) (13 decks)

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