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Kaplan CFA Exam Level 2 > Ethics > Flashcards

Ethics Flashcards

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1
Q

What must a CFA candidate not do when referring to their CFA charter status in marketing materials?

A

They must not refer to themselves as if they will qualify with the charter in a few years contingent upon completing level III etc.

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2
Q

Under CFA standards can a member use insider information when making investment decisions?

A

The analyst can only trade on NONMATERIAL nonpublic information, they should keep documentation of any analysis conducted

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3
Q

What must an analyst do if they obtain material non-public information?

A

They should not act on it. Ie they should not share it with another individual or trade on it

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4
Q

Can a CFA member make an investment decision on the back of a hunch/ recommendation from a friend etc.?

A

No CFA members must conduct a comprehensive set of due diligence and thoroughness to be able to evidence their recommendations if required

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5
Q

According to the standards, can an individual participating in the distribution of an IPO participate in the IPO themselves?

A

Yes if the IPO is not oversubscribed

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6
Q

Can an employee act for client independently of their employee / employment?

A

They can, however they must receive written approval from their employer first and outline to them the exact scope of services, fee and time requirement.

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7
Q

What does the standard V(C) Record Retention require from an analyst?

A

It requires that all data and analysis contributing towards an investment are kept on file

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8
Q

When analysts send out their investment ideas to prospective clients, do they need to include the underlying data and analysis?

A

No - can be as simple as a buy/sell recommendation

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9
Q

Is there a requirement to only send investment ideas to client to whom it may be suitable?

A

No - it is okay to send out both conservative and aggressive ideas to any type of client - this is not moderated by the standards

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10
Q

What should an analyst do if the firms compliance function is sub-standard?

A

The analyst should to decline to take on any supervisory positions until an adequate compliance system is adopted

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11
Q

Should terminated accounts be used in historical performance analysis?

A

Yes

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12
Q

Who is the fiduciary duty owed to in relation to a pension plan?

A

The plan participants and the beneficiaries

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13
Q

What should a broker at a firm tell a client who wants to buy a share which they have recently downgrades from buy to hold?

A

The broker should inform them of the change in recommendation before accepting the order

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14
Q

How many years of GIPS compliance data must a firm demonstrate to be regarded as a GIPS compliant firm?

A

5 years or since inception if less than 5 years and still compliant

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15
Q

What are the rules around referral fees?

A

The analyst must disclose any referral fees to his employer and the prospective client

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16
Q

What can a member do when faced with a disciplinary sanction?

A

Members can accept or reject a disciplinary sanction proposed by the Professional Conduct Program staff. If the member rejects the sanction, the matter is referred to a hearing before a disciplinary review panel of CFA Institute member

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17
Q

What are the rules around accepting gifts for prior service?

A

For a gift from a client in appreciation of past service or performance, informing his supervisor verbally is sufficient

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18
Q

Does drink driving violate the CFA standards around knowledge of the law and / or misconduct?

A

No, the analysts behaviour is not unfortunate but as long as it hasn’t violated his work professional integrity, judgement or reputation it is not a violation

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19
Q

Must an analyst pay for their own travel and transportation costs if visiting a client?

A

Yes

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20
Q

Must analysts put client needs before their employers and their own?

A

Yes

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21
Q

Is recommending to sell a stock you have recommended as a “hold” a violation of ethics?

A

No

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22
Q

How often do the standards say an IPS must be updated?

A

At least annually

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23
Q

Are investment managers allowed to vote on proxies on the clients behalf?

A

Yes for non-material votes they can

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24
Q

Are analysts allowed to solicit clients they had at an old firm once they join their new firm?

A

Yes as long as it doesn’t violate a non compete

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25
Q

What are the rules around placing your personal trade order before placing the clients order?

A

The clients order must always take priority over your own

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26
Q

Is it an ethical requirement that an analyst must put work before personal life?

A

No

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27
Q

Must analysts always cite the source of their data for their reports?

A

No, not if it is from a reputable source

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28
Q

Do the CFA institute impose fines for unethical behaviour?

A

No

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29
Q

Should all conversations and recommendations with clients be documented?

A

Yes

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30
Q

Should investment managers notify the client of any material changes to the portfolio composition?

A

Yes

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31
Q

In what case must the analyst notify the client of a change in minimal trade?

A

When it differs to the IPS

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32
Q

What makes a piece of insider information material?

A

The source of the information and the ambiguity of the price change

33
Q

Must total assets for GIPS include fee paying and discretionary accounts?

A

Yes - must include both

34
Q

Is it okay for a investment manager to replicate a successful clients trades?

A

Yes as long as the IM still prioritises the clients trades over their own

35
Q

Do professional organisations need to enforce legal and ethical compliance?

A

Just ethical compliance

36
Q

What should an IM follow the law or the codes of standard?

A

law where they reside, the law where they do business, or the Code and Standards.

37
Q

Can you present non-GIPS compliant data to a client on top of the 5 years worth of compliance?

A

Yes but you can only go back to 2000

38
Q

Can an analyst begin to prepare the operations for a new business once they have resigned from their existing employer?

A

Yes as long as they are not directly conflicting with the operations of their previous employer at that time

39
Q

What are the 9 sections of the GIPS standards?

A
  1. Wrap Fee/Separately Managed Account (SMA) Portfolios
  2. Private Equity
  3. Real Estate
  4. Presentation and Reporting
  5. Disclosures
  6. Composite Construction
  7. Calculation Methodology
  8. Input Data
  9. Fundamentals of Compliance
40
Q

Describe the Code of Ethics members of the CFA Institute must subscribe to.

A

Act with integrity, competence, diligence, and respect.

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

Use reasonable care and exercise independent professional judgment.

Practice and encourage others to practice in a professional and ethical manner.

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

Maintain and improve their professional competence.

41
Q

Name the 7 areas of the Standards of Professional Conduct.

A

I. Professionalism

II. Integrity of Capital Markets

III. Duties to Clients

IV. Duties to Employers

V. Investment Analysis, Recommendations, and Actions

VI. Conflicts of Interest

VII. Responsibilities as a CFA Institute Member or CFA Candidate

42
Q

Name the specific practical guidelines for asset managers provided in the Asset Manager Code.

A

Loyalty to clients

The investment process

Trading

Compliance

Performance evaluation

Disclosure

43
Q

List the areas of Professionalism (I) that are part of the CFA Institute Standards of Professional Conduct.

A

A. Knowledge of the Law

B. Independence and Objectivity

C. Misrepresentation

D. Misconduct

44
Q

List the areas of Integrity of Capital Markets (II) that are part of the CFA Institute Standards of Professional Conduct.

A

A. Material Nonpublic Information

B. Market Manipulation

45
Q

List the areas of Duties to Clients (III) that are part of the CFA Institute Standards of Professional Conduct.

A

A. Loyalty, Prudence, and Care

B. Fair Dealing

C. Suitability

D. Performance Presentation

E. Preservation of Confidentiality

46
Q

List the areas of Duties to Employers (IV) that are part of the CFA Institute Standards of Professional Conduct.

A

A. Loyalty

B. Additional Compensation Arrangements

C. Responsibilities of Supervisors

47
Q

List the areas of Investment Analysis, Recommendations, and Actions (V) that are part of the CFA Institute Standards of Professional Conduct.

A

A. Diligence and Reasonable Basis

B. Communication with Clients and Prospective Clients

C. Record Retention

48
Q

List the areas of Conflicts of Interest (VI) that are part of the CFA Institute Standards of Professional Conduct.

A

A. Disclosure of Conflicts

B. Priority of Transactions

C. Referral Fees

49
Q

List the areas of Responsibilities as a CFA Institute Member or CFA Candidate (VII) that are part of the CFA Institute Standards of Professional Conduct.

A

A. Conduct as members and candidates in the CFA program

B. Reference to CFA Institute, the CFA Designation, and the CFA Program

50
Q

List the 3 possible outcomes of a Professional Conduct inquiry.

A

Take no disciplinary action.

Issue a cautionary letter.

Continue proceedings to discipline the member or candidate.

51
Q

Sanctions imposed by CFA Institute may have what significant consequences?

A

Public censure

Suspension of membership and use of the CFA designation

Revocation of the CFA charter

52
Q

CFAI Enforcement

A

The CFA Institute Board of Governors maintains oversight and responsibility for the Professional Conduct Program (PCP), which, in conjunction with the Disciplinary Review Committee (DRC), is responsible for enforcement of the Code and Standards.

53
Q

IV(A): Loyalty

A

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 must not engage in any activities which would injure the firm, deprive it of profit, or deprive it of the advantage of employees’ skills and abilities. Always place client interests above interests of employer. There is no requirement that the employee put employer interests ahead of family and other personal obligations.

Independent practice for compensation is allowed if a notification is provided to the employer fully describing all aspects of the services.

Leaving an employer: Members must continue to act in their employer’s best interests until resignation is effective.

Whistleblowing: There may be isolated cases where a duty to one’s employer may be violated in order to protect clients or the integrity of the market, and not for personal gain.

54
Q

I(C): Misrepresentation

A

Members and Candidates must not knowingly misrepresent facts regarding investment analysis, recommendations, actions, or other professional activities.

Trust is a foundation in the investment profession. Do not make any misrepresentations or give false impressions. This includes oral and electronic communications. Misrepresentations include guaranteeing investment performance and plagiarism. Plagiarism encompasses using someone else’s work (e.g., reports, forecasts, charts, graphs, and spreadsheet models) without giving them credit

55
Q

Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.

A

This LOS requires you to know the different Standards and how they apply (or don’t apply) to specific situations. Because this LOS is so broad, working through as many problems as possible is a good way to prepare for the ethics material that will be tested.

56
Q

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

A

Participants in CFA Institute Programs must not engage in any conduct that compromises the reputation or integrity of CFA Institute or the CFA designation or the integrity, validity, or security of CFA Institute programs.

This Standard applies to conduct which includes:

Cheating on the CFA exam or any exam.
Not following rules and policies of the CFA program.
Giving confidential information on the CFA exam 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.
Members and candidates are not precluded from expressing their opinions regarding the exam program or CFA Institute.

57
Q

VI(C): Referral Fees

A

Members and Candidates must disclose to their employers, clients, and prospects any compensation, consideration, or benefit received by, or paid to, others for recommendations of products and 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.

58
Q

I(B): Independence and Objectivity

A

Members and Candidates must use reasonable care and judgment to exercise independence and objectivity in professional activities. Members and Candidates are not to offer, solicit, or accept any gift, benefit, compensation, or consideration that would compromise either their own or someone else’s independence and objectivity.

Do not let the investment process be influenced by any external sources. Modest gifts are permitted. Allocation of shares in oversubscribed IPOs to personal accounts is NOT permitted. Distinguish between gifts from clients and gifts from entities seeking influence to the detriment of the client. Gifts must be disclosed to the member’s employer in any case.

59
Q

II(B): Market Manipulation

A

Members and Candidates must not engage in any practices intended to mislead market participants through distorted prices or artificially inflated trading volume. Spreading false rumors is also prohibited.

This Standard applies to transactions that deceive the market by distorting the price-setting mechanism of financial instruments or by securing a controlling position to manipulate the price of a related derivative and/or the asset itself.

60
Q

V(B): Communication with Clients and Prospective Clients

A

Disclose to clients and prospects the basic format and general principles of investment processes they use to analyze and select securities and construct portfolios. Promptly disclose any process changes.

Disclose to clients and prospective clients significant limitations and risks associated with the investment process.

Use reasonable judgment in identifying relevant factors important to investment analyses, recommendations, or actions, and include factors when communicating with clients and prospects.

Investment analyses and recommendations should clearly differentiate facts from opinions.

Proper communication with clients is critical to provide quality financial services.

Members must illustrate to clients and prospects the investment decision-making process utilized. The suitability of each investment is important in the context of the entire portfolio.

All means of communication are included here, not just research reports.

61
Q

I(A): Knowledge of the Law

A

Members must understand and comply with laws, rules, regulations, and Code and Standards of any authority governing their activities. In the event of a conflict, follow the more strict law, rule, or regulation. Do not knowingly participate or assist in violations, and disassociate from any known violation.

Members must know the laws and regulations relating to their professional activities in all countries in which they conduct business. Members must comply with applicable laws and regulations relating to their professional activity. Do not violate Code or Standards even if the activity is otherwise legal. Always adhere to the most strict rules and requirements (law or CFA Institute Standards) that apply.

Members should disassociate or separate themselves from any ongoing client or employee activity that is illegal or unethical, even if it involves leaving an employer (an extreme case). While a member may confront the involved individual first, he must approach his supervisor or compliance department. Inaction with continued association may be construed as knowing participation.

62
Q

III(C): Suitability

A
  1. When in an advisory relationship with client or prospect, Members and Candidates must:
    a. Make reasonable inquiry into clients’ investment experience, risk and return objectives, and constraints prior to making any recommendations or taking investment action. Reassess information and update regularly.
    b. Be sure investments are suitable to a client’s financial situation and consistent with client objectives before making recommendation or taking investment action.
    c. Make sure investments are suitable in the context of a client’s total portfolio.
  2. When managing a portfolio, investment recommendations and actions must be consistent with the stated portfolio objectives and constraints.
63
Q

Describe the six components of the Code of Ethics and the seven Standards of Professional Conduct.

A

Members of CFA Institute (including CFA charterholders) and candidates for the CFA designation (“Members and Candidates”) must:1

  1. Act with integrity, competence, diligence, and 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.
  2. Place the integrity of the investment profession and the interests of clients above their own personal interests.
  3. Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.
  4. Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.
  5. Promote the integrity and viability of the global capital markets for the ultimate benefit of society.
  6. Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.
64
Q

Explain the ethical responsibilities required of CFA Institute members and candidates in the CFA Program by the Code and Standards.

A

The Standards of Professional Conduct are organized into seven standards:

I. Professionalism
II. Integrity of Capital Markets
III. Duties to Clients
IV. Duties to Employers
V. Investment Analysis, Recommendations, and Action
VI. Conflicts of Interest
VII. Responsibilities as a CFA Institute Member or CFA Candidate

65
Q

I(D): Misconduct

A

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

CFA Institute discourages unethical behavior in all aspects of members’ and candidates’ lives. Do not abuse CFA Institute’s Professional Conduct Program by seeking enforcement of this Standard to settle personal, political, or other disputes that are not related to professional ethics.

66
Q

III(B): Fair Dealing

A

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

Do not discriminate against any clients when disseminating recommendations or taking investment action. Fairly does not mean equally. In the normal course of business, there will be differences in the time emails, faxes, etc. are received by different clients. Different service levels are okay, but they must not negatively affect or disadvantage any clients. Disclose the different service levels to all clients and prospects, and make premium levels of service available to all who wish to pay for them.

Give all clients a fair opportunity to act upon every recommendation. Clients who are unaware of a change in a recommendation should be advised before the order is accepted.

67
Q

IV(B): Additional Compensation Arrangements

A

No gifts, benefits, compensation, or consideration are to be accepted which may create a conflict of interest with the employer’s interest unless written consent is received from all parties.

Compensation includes direct and indirect compensation from a client and other benefits received from third parties. Written consent from a member’s employer includes email communication.

68
Q

V(A): Diligence and Reasonable Basis

A

When analyzing investments, making recommendations, and taking investment actions use diligence, independence, and thoroughness.

Investment analysis, recommendations, and actions should have a reasonable and adequate basis, supported by research and investigation.

The application of this Standard depends on the investment philosophy adhered to, Members’ and Candidates’ roles in the investment decision-making process, and the resources and support provided by employers. These factors dictate the degree of diligence, thoroughness of research, and the proper level of investigation required.

Using secondary or third-party research: See that the research is sound.

Group research and decision making: Even if a Member does not agree with the independent and objective view of the group, he does not necessarily have to decline to be identified with the report, as long as there is a reasonable and adequate basis.

69
Q

V(C): Record Retention

A

Maintain all records supporting analysis, recommendations, actions, and all other investment-related communications with clients and prospects.

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. If no other regulatory standards are in place, CFA Institute recommends at least a 7-year holding period.

70
Q

III(E): Preservation of Confidentiality

A

All information about current and former clients and prospects must be kept confidential unless it pertains to illegal activities, disclosure is required by law, the client or prospect gives permission for the information to be disclosed, or when cooperating with a CFA Institute Professional Conduct Program (PCP) investigation.

If illegal activities by a client are involved, members may have an obligation to report the activities to authorities. The confidentiality Standard extends to former clients as well.

71
Q

II(A): Material Nonpublic Information

A

Members and Candidates in possession of nonpublic information that could affect an investment’s value must not act or induce someone else to act on the information.

Information is “material” if its disclosure would impact the price of a security or if reasonable investors would want the information before making an investment decision. Ambiguous information, as far as its likely effect on price, may not be considered material. Information is “non-public” until it has been made available to the marketplace. An analyst conference call is not public disclosure. Selectively disclosing information by corporations creates the potential for insider-trading violations.

Mosaic theory: There is no violation when a perceptive analyst reaches an investment conclusion about a corporate action or event through an analysis of public information together with items of non-material non-public information.

72
Q

III(A): Loyalty, Prudence, and Care

A

Members must always act for the benefit of clients and place clients’ interests before their employer’s or their own interests. Members must be loyal to clients, use reasonable care, and exercise prudent judgment.

Client interests always come first.

Determine and comply with any applicable fiduciary duty to clients.
Exercise the prudence, care, skill, and diligence under the circumstances that a person acting in a like capacity and familiarity with such matters would use.
Manage pools of client assets in accordance with the terms of the governing documents, such as trust documents or investment management agreements.
Make investment decisions in the context of the total portfolio.
Vote proxies in an informed and responsible manner. Due to cost benefit considerations, it may not be necessary to vote all proxies.
Client brokerage, or “soft dollars” or “soft commissions” must be used to benefit the client.

73
Q

VI(B): Priority of Transactions

A

Investment transactions for clients and employers must have priority over those in which a Member or Candidate is the beneficial owner.

Client transactions take priority over personal transactions and transactions made on behalf of the member’s firm. Personal transactions include situations where the member is a “beneficial owner.” 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 which are client accounts should be treated just like any client account—they should not be disadvantaged.

74
Q

Reference to CFA Institute, the CFA Designation, and the CFA Program

A

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 program.

Members must not make promotional promises or guarantees tied to the CFA designation. Do not over-promise individual competence or investment results in the future (i.e., higher performance, less risk, etc.).

Members must satisfy these requirements to maintain membership: (1) sign PCS annually and (2) pay CFA Institute membership dues annually. If they fail to do this, they are no longer active members.

Do not misrepresent or exaggerate the meaning of the designation.

There is no partial designation. It is acceptable to state that a Candidate successfully completed the program in three years, if in fact they did, but claiming superior ability because of this is not permitted.

The Chartered Financial Analyst and CFA marks must always be used either after a charterholder’s name or as adjectives, but not as nouns, in written and oral communications.

75
Q

III(D): Performance Presentation

A

Presentations of investment performance information must be fair, accurate, and complete.

Members must avoid misstating performance or misleading clients/prospects about investment performance of themselves or their firms, should not misrepresent past performance or reasonably expected performance, and should not state or imply the ability to achieve a rate of return similar to that achieved in the past.

76
Q

VI(A): Disclosure of Conflicts

A

Members and Candidates must make full and fair disclosure of all matters which may impair their independence or objectivity or interfere with their duties to their employer, clients, and prospects. Disclosures must be prominent, in plain language, and effectively communicate the information.

Members must fully disclose to clients, prospects, and their employers all actual and potential conflicts of interest in order to protect investors and employers. These disclosures must be clearly stated.

The requirement that all potential areas of conflict be disclosed allows clients and prospects to judge motives and potential biases for themselves. Disclosure of broker/dealer market-making activities would be included here. Board service is another area of potential conflict.

The most common conflict which requires disclosure is actual ownership of stock in companies that the member recommends or that clients hold.

Members must give the employer enough information to judge the impact of the conflict. Take reasonable steps to avoid conflicts, and report them promptly if they occur.

77
Q

Demonstrate a thorough knowledge of the CFA Institute Code of Ethics and Standards of Professional Conduct by applying the Code and Standards to specific situations

A

This LOS requires you to know the different Standards and how they apply (or don’t apply) to specific situations. Because this LOS is so broad, working through as many problems as possible is a good way to prepare for the ethics material that will be tested.

78
Q

IV(C): Responsibilities of Supervisors

A

All 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 must take steps to prevent employees from violating laws, rules, regulations, or the Code and Standards and make reasonable efforts to detect violations.

Understand that an adequate compliance system must meet industry standards, regulatory requirements, and the requirements of the Code and Standards. Members with supervisory responsibilities have an obligation to bring an inadequate compliance system to the attention of firm’s management and recommend corrective action. While investigating a possible breach of compliance procedures, it is appropriate to limit the suspected employee’s activities.

Kaplan CFA Exam Level 2 (7 decks)

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