Ethics

Question 1

Duties to Employer - Responsibilities of Supervisors

Answer 1

1. Establishing monetary incentives to reward ethical behaviors ACCEPTABLE
2. For employee violations, supervisor REQUIRED to investigate and take action to ensure violation won’t occur again; supervisor must either: 1) place restrictions on employee’s activities, or 2) increase monitoring of employee’s activities
3. Supervisor in VIOLATION if aware that compliance procedures are not being followed AND does not take action to address

Question 2

Integrity of the Capital Markets - Market Manipulation

Answer 2

1. Market manipulation includes
   
   1. dissemination of false or misleading information; and
   2. transactions that deceive or would be likely to mislead market participants by distorting the price-setting mechanism of financial instruments.
2. Information-based manipulation:
   
   1. Spreading false rumors to induce trading by others (E.g. issuing overly optimistic projections for security, only to sell it once price, fueled by misleading information, reaches artificially high levels
3. Transaction-based manipulation:
   
   1. Involves instances where candidate knew/should have known that his or her actions could affect the pricing of the security
      
      1. Transactions that artificially affect prices/volume to give the impression of activity/price movement in a financial instrument, which represent a diversion from the expectations of a fair and efficient market
      2. Securing a controlling, dominant position in a financial instrument to exploit/manipulate the price of a related derivative/underlying asset

Question 3

Duties to Clients - Loyalty, Prudence, and Care

Answer 3

1. Client consent to patently unfair allocation process DOES NOT OVERRIDE Member/Candidate duty of fairness and loyalty to clients
2. Oversubscribed issues should be allocated to clients for which the investment is suitable on a PRO-RATA, ROUND-LOT basis; Member/Candidate must forgo any sales for themselves and for immediate family members, unless they are also clients
   3.

Question 4

Duties to Client - Suitability

Answer 4

“When Members and Candidates are in an advisory relationship with a client, they must:

Make a reasonable inquiry into a client’s or prospective client’s investment experience, risk and return objectives, and financial constraints prior to making any investment recommendation or taking investment action and must reassess and update this information regularly.

Determine that an investment is suitable to the client’s financial situation and consistent with the client’s written objectives, mandates, and constraints before making an investment recommendation or taking investment action.

Judge the suitability of investments in the context of the client’s total portfolio.

When Members and Candidates are responsible for managing a portfolio to a specific mandate, strategy, or style, they must make only investment recommendations or take only investment actions that are consistent with the stated objectives and constraints of the portfolio.”

1. Mutual funds/sell-side analysts may not have the opportunity to judge the suitability of an investment for the ultimate client; suitability requirement is only for members/candidates in advisory relationship with client
2. IPS should be updated at least annually AND prior to material changes to any specific investment recommendations/decisions on behalf of the client
3. Members/Candidates responsible for suitability assessment ONLY on basis of information provided by the client
4. For all unsolicited trading requests by the client that not suitable, must discuss before taking action for the client: If immaterial, then at minimum member/candidate must discuss how unsolicited trade deviates from IPS. If material, then member/candidate MUST UPDATE IPS.