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OLD - CFA Exam Level 3 > 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

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33
Q

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

A

Yes - must include both

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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

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35
Q

Do professional organisations need to enforce legal and ethical compliance?

A

Just ethical compliance

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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.

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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

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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

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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
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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.

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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

What is Mosaic theory

A

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.

Comes from II(A): Material Nonpublic Information

54
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.

55
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.

56
Q

I(C): Misrepresentation

A

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

Do not make any misrepresentations or give false impressions.

57
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.

58
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.

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.

60
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.

61
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.

62
Q

III(C): Suitability

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

64
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
  • 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.

65
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.

66
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.

Note: Written consent from a member’s employer includes email communication.

67
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.

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.

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(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.

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

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

70
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.

71
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.

72
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.

Note that family-member accounts which are client accounts should be treated just like any client account—they should not be disadvantaged.

73
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.

74
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.
75
Q

VII(B): 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.

Members must satisfy these requirements to maintain membership:

  • sign PCS annually
  • pay CFA Institute membership dues annually

If they fail to do this, they are no longer active members.

There is no partial designation.

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.

76
Q

Explain the purpose of the Asset Manager Code and the benefits that may accrue to a firm that adopts the Code.

A

The purpose of AMC is to assist the firm in developing ethical business and risk management practices while gaining the trust of clients.

77
Q

Explain the six General Principles of Conduct of the Asset Manager Code.

A

General principles of conduct:

  • 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.
  • Comply with legal and regulatory requirements regarding capital markets.
78
Q

Recommend practices and procedures for Loyalty to Clients of the Asset Manager Code.

A

Loyalty to Clients

  • Always put the client’s interests before your own by designing appropriate compensation arrangements for managers.
  • Determine how confidential client information should be collected, utilized, and stored.
  • Determine the amount of which token gifts can be accepted.
79
Q

Recommend practices and procedures for Trading of the Asset Manager Code.

A

Trading

  • Do not trade on material nonpublic information.
  • Always place client trades before your own.
  • Use soft dollars to aid the manager in the investment decision-making process.
  • Seek best execution and allocate trades equitably among all clients.
80
Q

Recommend practices and procedures for Risk Management, Compliance, and Support of the Asset Manager Code.

A

Risk Management, Compliance, and Support

  • Ensure compliance with the Asset Manager Code and legal and regulatory requirements.
  • Appoint a compliance officer.
  • Disseminate portfolio information in an accurate manner.
  • Have an independent third party review client accounts.
  • Appropriately maintain records.
  • Hire qualified staff with sufficient resources.
  • Have a contingency plan in place.
81
Q

Recommend practices and procedures for Investment Process and Actions of the Asset Manager Code.

A

Investment Process and Actions

  • Take reasonable care when dealing with client accounts.
  • Don’t engage in market manipulation.
  • Deal fairly with all clients.
  • Have a reasonable basis for all investment recommendations.
82
Q

Recommend practices and procedures for Disclosures of the Asset Manager Code.

A

Disclosures deal with any kind of material information disclosed to the client, such as

  • conflicts of interest
  • regulatory disciplinary actions
  • the investment decision-making process
  • strategies including inherent risks
  • fee schedules
  • calculation of performance results
  • proxy voting issues
  • allocating shares of stock
  • results of any audits
83
Q

Recommend practices and procedures for Performance and Valuation of the Asset Manager Code.

A

Report results in an accurate manner using fair market values.

84
Q

Explain what is a distinct business entity with the GIPS standards.

A
  • A firm is held out to clients or potential clients as a distinct business entity.
  • A distinct business entity is that which is separated from other parts of the firm and retains discretion over asset management.
  • Judgment is required to determine what qualifies as a distinct business entity.
85
Q

Explain the definition of the firm with the GIPS standards.

A

The definition of the firm is used to determine the fair value of total firm assets.

include:

  • discretionary and nondiscretionary assets.
  • include fee-paying and non-fee-paying assets.
  • net of leverage used.
  • only actual (not simulated) assets.

exclude:

  • advisory-only assets.
  • uncalled, but committed, capital.
86
Q

Discuss the objectives of the GIPS standards and their benefits to prospective clients and investors, as well as investment managers.

A

The objectives of GIPS are to:

  • 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.
87
Q

Explain the fundamentals of compliance with the GIPS standards.

A

Other Compliance Fundamentals

  • Composite assets (not total firm assets), nondiscretionary assets are not included.
  • The firm must attain compliance for a minimum of 5-years or since firm inception
  • Firms must establish, update, and document GIPS policies and procedures.
  • If GIPS standards conflict with local laws and regulations, comply and disclose the conflict.
  • The firm must not present performance information that is false or misleading.
  • The firm must provide an annual GIPS-compliant report to all existing clients
  • Benchmarks must reflect the corresponding investment strategy
  • The firm must disclose all material errors
88
Q

Discuss the scope of the GIPS standards and their benefits to prospective clients and investors, as well as investment managers.

A

The scope of the GIPS standards is as follows:

  • GIPS compliance can only be claimed on a firmwide basis.
  • A firm must comply with all, not just some
  • 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 and limited-distribution pooled funds assigned to at least one composite.
89
Q

What is a external cash flows (ECF) and what is a Large Cash Flow?

A

External cash flows (ECF): such as client withdrawals or additional client contributions that can distort return calculations. Ideally, eliminate and the subperiod returns must then be geometrically linked to create a true time-weighted rate of return (TWRR):

Large Cash Flows

  • The definition of a large ECF is determined by each firm for each composite.
  • A large ECF is large enough to affect the return calculation.
  • The firm’s policy for the determination of a large cash flow must be documented.
90
Q

Discuss requirements of the GIPS standards when the firm controls an ECF.

A

If the firm controls the timing and size of the ECFs. In these cases, a money-weighted return (MWR) will be more representative of the manager’s skill than the TWRR.

MWRs can be used instead of TWRRs if:

  • The firm has control of the timing of ECFs.
  • The portfolios are closed-end, or fixed life, or fixed commitment, or have a significant amount of illiquid assets.
91
Q

Discuss requirements of the GIPS standards with respect to return calculation methodologies, expenses, and fees.

A

Other return calculation requirements:

  • Trade date, not settlement date, prices must be used to calculate returns.
  • Partial-year returns cannot be annualized.
  • Total returns, which include income and capital gains/losses, must be used.
    • Investments that generate income, (bonds), accrual accounting must be used.
    • Returns must reflect the manager’s allocations to cash and cash equivalents.
  • The presented gross-of-fees return must have been calculated after the deduction of transactions costs.
  • Transactions costs reflect the costs of buying and selling securities.
    • Brokerage commissions, spreads, and exchange fees.
    • For private market investments, they can also include legal, advisory, and other fees.
    • Custody fees should not be included.
    • Transactions costs can be estimated but only if they are unknown.
  • In some cases, portfolios pay bundled or all-in fees.
    • In this case, the presented gross-of-fees return must be reduced by:
      • The portion of the bundled fee due to transactions costs; or
      • The entire bundled fee if the transactions costs cannot be separated out.
92
Q

Discuss requirements of the GIPS standards with respect to return calculation including private market investments.

A

Under the GIPS requirements:

  • Firms must calculate monthly returns for non-private market investment portfolios.
  • If a firm calculates daily valuations and returns, they must be geometrically linked.
  • Normally approximations to the true TWRR that do not require an interim valuation can be used.
  • Large ECFs must be valued at that time to calculate a subperiod return.
  • The monthly return must be geometrically linked to create an annual return.

For Private market investments:

  • Portfolios values and returns must be calculated quarterly.
  • Pooled funds not in a composite must be valued and returns calculated at least annually.
    • Must also be valued and a subperiod return calculated when subscriptions or redemptions.
93
Q

Explain requirements of the GIPS standards with respect to composite construction, including switching portfolios among composites, the timing of the inclusion of new portfolios in composites, and the timing of the exclusion of terminated portfolios from composites.

A
  • The portfolios should be included in a composite at the beginning of the next full measurement period.
  • Terminated portfolios should be included in a composite through the last full measurement period in which the firm had discretion.
  • Switching a portfolio from one composite to another. The portfolio’s performance must remain in the old composite’s history.
  • A firm can temporarily exclude a portfolio from the composite or create and report on a temporary new account.
  • The minimum asset level for a composite. Must be specified in advance.
  • The firm’s policy should be established on a composite-by-composite basis and applied in a timely, consistent manner.
94
Q

Explain requirements of the GIPS standards with respect to composite return calculations, including methods for asset-weighting portfolio returns.

A

Composite returns must be calculated in one of three ways:

  1. Asset-weighting portfolio returns by beginning-of-period values. Each portfolio return is just multiplied by its beginning of the period weight.
  2. Asset-weighting portfolio returns by both beginning-of-period values and ECFs. Same as 1 but adjust for ECFs
  3. The aggregate method. Uses total composite values at the beginning and end of the period.
95
Q

Explain requirements of the GIPS standards with respect to presentation and reporting.

A

The requirements for Composite Time-Weighted Return Reports include the following:

  • At least 5 years of performance history upon GIPS adoption:
    • Unless the firm has been in existence for less than 5 years.
    • And then extended each year until the firm builds a 10-year GIPS compliant history.
  • Time-weighted returns for the composite and benchmark.
  • The amount of firm assets.
  • The amount of composite assets.
  • The number of portfolios in the composite if there are six or more.
  • Internal composite dispersion to show how consistent portfolio performance is within the composite.
  • Historical dispersion for the benchmark and the composite as a whole, using the ex post standard deviation.
96
Q

What are the requirements for what must be included in at least one composite?

A
  • All actual, fee-paying, discretionary (reflect a manager’s decision) segregated accounts.
  • Pooled funds that are also offered as segregated accounts.

Non-fee-paying, discretionary segregated accounts may be included with additional disclosures.

97
Q

What is the requirements for what must not be included in a composite?

A
  • Nondiscretionary accounts.
  • Pooled funds that are not also offered as segregated accounts.
  • Simulated portfolios: hypothetical, model, or theoretical portfolios
98
Q

Explain the role of investment mandates, objectives, or strategies in the construction of composites.

A

As per the GIPS standards, composites must:

  • Be determined by investment mandate, objective, or strategy.
  • Contain all portfolios that match the composite definition.
  • Be based on criteria that are documented in the firm’s policies and procedures.
  • Defined that clients are able to compare the performance of one firm to another.
  • Be representative of the firm’s products and the firm’s marketing strategy.
  • Examples on which to base composite construction include:
    • Style
    • sector
    • strategy
    • benchmark
    • risk/return profile, etc.
99
Q

Explain the conditions under which the performance of a past firm or affiliation may be linked to or used to represent the historical performance of a new or acquiring firm.

A

Portability: When one firm acquires or joins with another firm, group of managers, or manager, the new firm can link their performance to the previous firm’s historical performance if:

  1. Substantially all the investment decision makers are retained by the new firm.
  2. The decision-making process remains substantially intact and independent within the new firm.
  3. The new firm has records that document the previous firms historical performance.
  4. There is no break in the performance record between the new and previous firm.

If only the first 3-conditions are met, then the previous firm’s historical performance can be used to represent that of the new firm, but the records may not be linked.

If the new firm is GIPS compliant but the previous firm is not, then the new firm has one year to bring its assets into compliance for future reporting.

100
Q

Explain the recommended valuation hierarchy of the GIPS standards.

A

The GIPS fair value hierarchy if an asset cannot use their own fair value is:

  1. The quoted price for an identical asset in a liquid market on the same day.
  2. The quoted price for a similar asset in a liquid market on the same day.
  3. The quoted price for identical or similar assets in markets that are not active.
  4. A value based on market inputs.
  5. A subjective value that is unobservable.
101
Q

Discuss the purpose, scope, and process of verification.

A

Although not required, verification is recommended and consistent with best practices.

Verification can be characterized as the process whereby an independent, outside party assesses the firm’s:

  • Policies and procedures for composite or pooled fund construction and maintenance.
  • Performance calculation.
  • Performance presentation.
  • Distribution of performance.
  • Verification must be issued firmwide.
    • Verification cannot be for just a single portfolio, composite, or pooled fund.
    • A firm cannot claim that it is in compliance “except for.”
  • Although verification must be asserted on a firmwide basis, verifiers often use samples of the firm’s products to do so.

OLD - CFA Exam Level 3 (11 decks)

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