Ethics

Question 1

Code of ethics - Members of CFA Institute [including Chartered Financial Analyst® (CFA®) charterholders] and candidates for the CFA designation (“Members and Candidates”) must

Answer 1

• 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.
• Place the integrity of the investment profession and the interests of clients above their own personal interests.
• Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.
• Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.
• Promote the integrity and viability of the global capital markets for the ultimate benefit of society.
• Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.

Question 2

Standard I: Professionalism

Standard I(A) Knowledge of the Law

Standard I(B) Independence and Objectivity

Answer 2

Standard I(A) Knowledge of the Law

Members and Candidates must understand and comply with all applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct) of any government, regulatory organization, licensing agency, or professional association governing their professional activities

Members and Candidates must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities. Members and Candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another’s independence and objectivity.

Question 3

Standard I(C) Misrepresentation

Standard I(D) Misconduct

Answer 3

Members and Candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities. Presenting third-party research as your own, without attribution to the source.
Third party source without reference are only permissible from recognised financial or statistical reporting services.

Members and Candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence.

Question 4

Standard II(A) Material Nonpublic Information

Standard II(B) Market Manipulation

Answer 4

Members and Candidates who possess material nonpublic information that could affect the value Regularly maintain webpages for accuracy. of an investment must not act or cause others to act on the information.

Members and Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.

Question 5

Standard III(A) Loyalty, Prudence, and Care

Standard III(B) Fair Dealing

Answer 5

Members and Candidates have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment.

Members and Candidates must deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities.

Question 6

Standard III(C) Suitability

Answer 6

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.
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.

Question 7

Unsolicited Trade Requests

Answer 7

An investment manager may receive a client request to purchase a security that the manager knows is unsuitable, given the client’s investment policy statement. The trade may or may not have a material effect on the risk characteristics of the client’s total portfolio and the requirements are different for each case. In either case, however, the manager should not make the trade until he has discussed with the client the reasons (based on the IPS) that the trade is unsuitable for the client’s account.

Question 8

Standard III(D) Performance Presentation

Standard III(E) Preservation of Confidentiality

Answer 8

When communicating investment performance information, Members and Candidates must make reasonable efforts to ensure that it is fair, accurate, and complete.

Members and Candidates must keep information about current, former, and prospective clients confidential unless:
The information concerns illegal activities on the part of the client;
Disclosure is required by law; or
The client or prospective client permits disclosure of the information.

Question 9

Standard IV(A) Loyalty

Standard IV(B) Additional Compensation Arrangements

Answer 9

In matters related to their employment, Members and Candidates must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer..

Members and Candidates must not accept gifts, benefits, compensation, or consideration that competes with or might reasonably be expected to create a conflict of interest with their employer’s interest unless they obtain written consent from all parties involved.

Question 10

Standard IV(C) Responsibilities of Supervisors

Answer 10

Members and Candidates must make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations, and the Code and Standards. Members and Candidates must make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations, and the Code and Standards.

Question 11

Standard V(A) Diligence and Reasonable Basis

Standard V(B) Communication with Clients and Prospective Clients

Answer 11

Members and Candidates must:
Exercise diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions.
Have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action. Requires analysts who use third-party research to review its assumptions and evaluate the independence and objectivity of the research.

Members and Candidates must:
Disclose to clients and prospective clients the basic format and general principles of the investment processes they use to analyze investments, select securities, and construct portfolios and must promptly disclose any changes that might materially affect those processes.
Disclose to clients and prospective clients significant limitations and risks associated with the investment process.
Use reasonable judgment in identifying which factors are important to their investment analyses, recommendations, or actions and include those factors in communications with clients and prospective clients.
Distinguish between fact and opinion in the presentation of investment analyses and recommendations.
Communicate the risk associated with the investment strategy used and how the strategy is expected to perform in a range of scenarios. ie both positive and negative possible scenarios of a piece of research.

Question 12

Standard V(C) Record Retention

Answer 12

Members and Candidates must develop and maintain appropriate records to support their investment analyses, recommendations, actions, and other investment-related communications with clients and prospective clients. Members must maintain research records that support the reasons for the analyst’s conclusions and any investment actions taken. Such records are the property of the firm. All communications with clients through any medium, including emails and text messages, are records that must be retained. Record Retention recommends that records be maintained for a minimum of seven years.

Question 13

Standard VI(A) Disclosure of Conflicts

Standard VI(B) Priority of Transactions

Standard VI(C) Referral Fees

Answer 13

Members and Candidates must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients, and employer. Members and Candidates must ensure that such disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively.

Personal transactions may be undertaken only after clients and the member’s employer have had an adequate opportunity to act on a recommendation. Note that family member accounts that are client accounts should be treated just like any client account; they should not be disadvantaged.

Members and Candidates must disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services.
Members must inform employers, clients, and prospects of any benefit received for referrals of customers and clients, allowing them to evaluate the full cost of the service as well as any potential partiality. All types of consideration must be disclosed

Question 14

Standard VII(A) Conduct as Participants in CFA Institute Programs

Standard VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program

Answer 14

Members must not engage in any activity that undermines the integrity of the CFA charter. This Standard applies to conduct that includes:

Cheating on the CFA exam or any exam.
Revealing anything about either broad or specific topics tested, content of exam questions, or formulas required or not required on the exam.
Not following rules and policies of the CFA Program.
Giving confidential information on the CFA Program to candidates or the public.
Improperly using the designation to further personal and professional goals.
Misrepresenting information on the Professional Conduct Statement (PCS) or the CFA Institute Professional Development Program.

When referring to CFA Institute, CFA Institute membership, the CFA designation, or candidacy in the CFA Program, Members and Candidates must not misrepresent or exaggerate the meaning or implications of membership in CFA Institute, holding the CFA designation, or candidacy in the CFA Program.
Members must not make promotional promises or guarantees tied to the CFA designation, such as over-promising individual competence or over-promising investment results in the future (i.e., higher performance, less risk, etc.).

Question 15

The Asset Manager Code of Professional Conduct

Purpose

Answer 15

The Asset Manager Code (AMC) is global, voluntary, and applies to investment management firms. Firms are encouraged to adopt the AMC as a template and guidepost to ethical business practice in asset management.

The purpose of the Asset Manager Code is to foster a culture of ethical and professional behavior throughout the firm that protects the interests of investors, protect and enhance the reputation of the firm, and provide a useful framework for asset management firms to provide services in a fair and professional manner with full disclosure.

Question 16

There are six components to the Asset Manager Code of Professional Conduct1:

Answer 16

A) Loyalty to Clients.

B) Investment Process and Actions.

C) Trading.

D) Risk Management, Compliance, and Support.

E) Performance and Valuation.

F) Disclosures.

Question 17

A) Loyalty to Clients

Answer 17

Place the client’s interest ahead of the firm’s.

Recommendations: Align manager compensation to avoid conflict with client best interests, such as avoiding an incentive for excessive risk taking in order to increase manager compensation.

Maintain client confidentiality.

Recommendations: Create a privacy policy to document how such information is gathered, stored, and used. Include an anti-money laundering policy (if needed) to prevent the firm’s involvement in illegal activities.

Refuse business relationships and gifts that would compromise independence, objectivity, and loyalty to clients.

Question 18

B) Investment Process and Actions

Answer 18

USe reasonable care and judgement, do not manipulate price, deal fairly, have adequate basis for recommendations.
For portfolios managed to a specific style or strategy, managers do not have to evaluate the suitability to a given client. Managers must provide suitable disclosure so clients can determine if the portfolio is suitable for their needs.

When managing portfolios of a specific client, understand the client’s objectives and constraints in order to take suitable actions for that client.

Question 19

C) Trading

D) Risk Management, Compliance, and Support

Answer 19

C) Do not act or cause others to act on material nonpublic information. Create information barriers falls under this section.

D) Risk Management, Compliance, and Support
Develop detailed P&Ps to comply with the AMC and all legal/regulatory requirements.
Appoint a competent, knowledgeable, credible compliance officer with authority to implement the P&Ps. Use an independent third party to verify that information provided to clients is accurate and complete. Establish a business continuity plan to deal with disasters or market disruptions. At minimum this should include:
Backup (preferably offsite) of account information.
Plans to monitor, analyze, and trade investments.
Communication plans with key vendors and suppliers.
Employee communication and coverage of key business functions when normal communications are out.
Client communication plans. Establish a firm-wide risk management plan to measure and manage the risks taken

Question 20

E) Performance and Valuation

F) Disclosures

Answer 20

GIPs Present performance data that is fair, accurate, relevant, timely, and complete. Do not misrepresent performance of accounts or the firm. Have a third party value client accounts.

Recommendations: Adopt GIPS.

F) Disclosures
Use fair market prices when available and fair valuation in other cases.
Ongoing, timely communication with clients using appropriate methods.
Ensure truthful, accurate, complete, and understandable communication. Use plain language. Determine what to disclose and how.
Include any (all) material facts regarding the firm, personnel, investments, and the investment process.
Any conflicts of interest such as those arising from relationships with brokers and other clients, fees, soft dollars, bundled fees, directed brokerage, manager or employee holdings in the same securities as clients, and any other material issues

Question 21

Soft dollars

Answer 21

Soft Dollar Arrangement refers to an arrangement whereby the Investment Manager directs transactions to a Broker, in exchange for which the Broker provides Brokerage and Research Services to the Investment Manager.
Definitions—to enable all parties dealing with
soft dollar practices to have a common understanding of all of the different aspects of soft
dollars.
• Research—to give clear guidance to investment
managers on what products and services are
appropriate for a manager to purchase with client
brokerage.
• Mixed-Use Products—to clarify the manager’s
duty to clearly justify the use of client brokerage
to pay a portion of a mixed-use product.
• Disclosure—to obligate investment managers to
clearly disclose their soft dollar practices and
give detailed information to each client when
requested.
• Record keeping—to ensure that the client can (1)
receive assurances that what the investment
manager is doing with the client’s brokerage can
be supported in an “audit,” and (2) receive
important information on request.
• Client-Directed Brokerage—to clarify the manager’s role and fiduciary responsibilities with
respect to clients.

Question 22

Ethical responsibilities of the Asset Manager Code

Answer 22

Always act ethically and professionally;
Act in the best interest of the client;
Act in an objective and independent manner;
Perform actions using skill, competence, and diligence;
communicate accurately with clients on a regular basis; and
comply with all legal and regulatory requirements.

Question 23

General principles of the Asset Manager Code:

Answer 23

Act in a professional and ethical manner at all times;
Act for the benefit of the clients;
Act with independence and objectivity;
Act with skill, competence, and diligence;
Communicate with clients in a timely and accurate manner; and
Uphold the applicable rules governing capital markets.

Question 24

What is GIPs?

Answer 24

The Global Investment Performance Standards (GIPS®) contain ethical and professional standards for the presentation of investment performance results. The GIPS are a voluntary set of standards. They are based on the fundamental principles of full disclosure and fair representation of performance results. When investment management firms comply with the GIPS, clients, prospective clients, and consultants are better equipped to fairly assess historical investment performance.

Question 25

The objectives of GIPS are as follows

Answer 25

Advance the interests of investors and increase their confidence in the investment industry.
Provide accurate and comparable data to investors.
Create a globally accepted standard for the determination and presentation of investment performance.
Facilitate fair competition among global investment managers.
Encourage self-regulation in the global investment industry.

Question 26

The scope of the GIPS standards is as follows:

One way of thinking about the scope of the GIPS is that it can’t be halfway. To be GIPS compliant; , all customers should be provided a report, all of the firm’s products must be compliant, and all GIPS standards must be followed. Compliance with GIPS can’t be halfway. The exception to this is broad distribution pooled funds, which often do not have to be included in a composite,

Answer 26

GIPS compliance can only be claimed on a firm-wide basis.
GIPS compliance cannot be claimed for just some of an investment firm’s products.
GIPS compliance cannot be claimed for only specific composites, pooled funds, or portfolios.
To claim GIPS compliance, a firm must comply with all, not just some, of, the applicable GIPS standards requirements.
The GIPS standards also include recommendations, which are optional but following them is consistent with best practices.
The GIPS standards will evolve over time as strategies and technologies change.
A claim of GIPS compliance indicates, among other things, that:
A firm’s data inputs, processes, and return calculations are compliant.
All the firm’s fee-paying segregated accounts have been assigned to at least one composite.
All the firm’s limited distribution pooled funds are included in a composite appropriate to their characteristics.
Note: Broad distribution pooled funds are only required to be in a composite if their strategy is also offered in separate accounts.

Question 27

Benefits to Prospective Clients and Investors

Answer 27

GIPS compliance standardizes the determination and presentation of investment results, thereby making manager performance more comparable.
Manager performance is more reliable when the firm is GIPS compliant.
The benchmark requirements of GIPS can facilitate a discussion with the manager about the proposed investment strategy’s past and targeted future performance.

Question 28

Benefits to Investment Managers

Answer 28

Firms incur costs to ensure GIPS compliance. In return, GIPS may provide the following benefits:

GIPS increase investor confidence in both the investment industry and the firm.
This is especially true if the firm is verified by a third- party.
GIPS compliance helps attract new investors who prefer or require their managers to be GIPS compliant.
GIPS helps firms compete internationally because firm performance is comparable across borders.
GIPS helps firms strengthen and maintain internal controls due to the record keeping and reporting required by GIPS.
Firms may gain additional information about their operations due to the technology often adopted by firms to comply with GIPS.

Question 29

How often should GIPs portfolios value?

AMC valuations time frame?

Answer 29

At least monthly AND on any significant cash outflow/inflow days.

AMC valuations should be sent at least quarterly and within 30 days of month end

Question 30

Modified Dietz Return
(used for GIPs compliance on a TWRR)

The Rooney account was $2,500,000 at the start of the month and $2,700,000 at the end. During the month, there was a cash inflow of $45,000 on day 7 and $25,000 on day 19. The values of the Rooney account are $2,555,000 and $2,575,000 (inclusive of the cash flows for the day) on day 7 and day 19, respectively. Calculate the time-weighted rate of return (assuming 30 days in the month).

Answer 30

RMD=( EV-BV–ECF) / BV + adjusted ECF

ECF	Weight (W)	Adjusted ECF
$45,000	(30 – 7) / 30 = 23 / 30	23 / 30 × $45,000 = $34,500
$25,000	(30 – 19) / 30 = 11 / 30	11 / 30 × $25,000 = $9167

RMD=$2,700,000–$2,500,000–$45,000–$25,000 / $2,500,000+$34,500+$9,167
= 5.1%

days to END of month / days in month

Question 31

GIPS compliance 3 requirements

Answer 31

1. Portfolios valued with fair value of assets.
2. TRADE date accounting for assets purchased or sold during a month.
3. Accrual Accounting for fixed income assets which earn interest income.

Question 32

Can weighting between beginning of periiod values or beginning of period value plus external vashflows be mixed in a composite?

Answer 32

Yes

Question 33

how should carve outs of cash be reported?

Answer 33

A cash carve out would need to be managed separately. You couldn’t allocated it in part with other assets.

Question 34

GIPs private equity provisions

Answer 34

First calculate the (since inceptions) SI-IRR annualised using daily cash flows.
PE should be valued at least ANNUALLY.