Ethics Flashcards
Set of shared beliefs or moral principles about what is good or what is bad
Ethics
Behavior that follows a set of rules and moral principles, based on shared beliefs about what behavior is acceptable and unacceptable
Ethical conduct/behavior
Goes beyond what is legally required
Consistent with society’s ethical expectations
Written set of moral principals that acts as a general guide to behavior; a way to communicate the values, principles, and expectations of what constitutes acceptable behavior for members
Code of ethics
Does not imply gauranteed behavior;
May include rules or standards
Gneral guide for how community members should act; they communicate the organization’s values and overall expectations regarding member behavior, but they do not identify specific behaviors required of community members
May include specific standards or behavior or only state principles of conduct without specific standard or guidance
Code of conduct
A way for a profession to communicate to the public that its members will use their knowledge and skills to serve their client in an honest and ethical manner
Professional code of ethics/conduct
The standard that matches client return requirements and risk tolerance, and the characteristics of securities recommended
suitability standard
(vs fiduciary)
requires professionals to use their knowledge and expertise to act in the best interest of the client
Fiduciary (stronger than suitability)
What are the three challenges to ethical behavior?
- Individuals overestimating their own ethical character
- situational influences (money, prestige, loyalty, peers)
- rules-based compliance culture (people just checking the boxes that they followed the rules)
What objective of ethical conduct best distinguishes from legal conduct?
Ethical conduct:
Considers and benefits multiple stakeholders
Framework designed to lead to better decision making processes:
Framework for Ethical Decision Making
used for all decisions
- Identify: stakeholders, facts, ethical principles, conflicts of interest
- Consider: alternative actions, situational influences, seek other perspectives
- Decide & act:
- Reflect: was the outcome anticipated?
Framework for Ethical Decision Making
Benchmarks for minimally acceptable behavior of community members are:
Standards of conduct
Applied to specific communities or societal groups and identify specific behaviors required of community members
Balances self-interest with both the direct and indirect consequences of the behavior on others
Ethical Conduct
Societies’ beliefs about what is considered good or bad conduct
Ethical Principles
Plays an important part in establishing a profession because a client relationship is based on trust, whereby the professional puts his or her client’s interest first:
Code of ethics
The code enables a relationship to be established on the basis of trust, because clients rely heavily on the specialized knowledge and skills of professionals to achieve their goals
Consciously considering long-term consequences will help offset:
Situational influences
When focusing on the short-term factors, the likelihood of poor ethical decision making increases
This approach can oversimplify decision making and may not encourage decision makers to consider the larger picture
Compliance approach
.A strong compliance culture may be a good start in developing an ethical culture but can become another situational influence that may result in employees failing to consider other important factors
Shown by thinking that your intelligence level will prevent you from acting in an unethical manner
Overconfidence bias
Trading while in possession of material nonpublic information is an example of situation that:
Not illegal; but CFAI considers unethical
(legal, but unethical)
The single most important factor in promoting ethical behavior within an investment firm is done by:
Senior management promoting a strong culture of intergrity
Responsible for enforcing the CFAI Code & Standards
Disciplinary Review Committee (DRC)
This group maintains overall responsibility for the Professional Conduct Program (PCP) and Disciplinary Review Committee (DRC)
CFAI Board of Governors
In a case when where the Professional Conduct staffs finds that a violation has occured, they will proposes a:
Disciplinary Sanction
If the member/candidate rejects the sanction, the DRC will hold a hearing
Provides guidance to which CFA Institute members and candidates are required to adhere:
Standards of Practice Handbook
When an inquiry is initiated, the Professional Conduct staff conducts an investigation that may include:
A written explanation from the member/candidate
As well as:
* Interviewing the member/candidate
* Interviewing the complaintaint and third parties
* Collecting relevant documents and records
The foundation of the financial industry is :
Trust
Because investors rely on the specialized knowledge of investment professionals
Investment professional have more power than their clients, due to high level of knowledge of the material and clients need their assistance
Determine’s the ethical quality of a person’s behavior:
Situational influences
The 8 GIPS Standards for firms
- Fundamentals of complinace
- Input Data & Calculation methodology
- Compsite and Pooled Fund maintenance
- Composite Time-Weighted Return Report
- Composite Money-Weighted Return Report
- Pooled Fund Time-Weighted Return Report
- Pooled Fund Money-Weighted Return Report
- Advertising
Is verification for GIPS compliance required?
No, but it is encouraged
If a firm chooses verification, GIPS require the verification to be performed by
A third party
If a firm chooses verification, GIPS require that the verification:
apply to the entire firm’s methods and practices, rather than that of selected composites
GIPS applies to:
Firms
If you are a charterholder, you are still allowed to work for a firm that does not adopt the GIPS
How are non-discretionary portfolios handled, in regards to Composites?
The company is not required to include these portfolios in it’s corresponding composite becasue the portfolio does not follow the firm’s strategies
Portfolios must be assigned to composites before:
The returns are known; assigning them at the end of the year is not acceptable
Should be assigned at inception of portfolio, even before a full year of performance figures
How many composites can a discretionary portfolio be assigned to?
One
The definition of the firm is the foundation for firm-wide compliance and creates boundaries in order to determine total firm assets, according to which standard?
According to Section 1, Fundamentals of Compliance
Used by GIPS firms to give clients and prospects information about a firm’s past performance managing investments in various asset classes or investment strategies
Composites
Recognizing the need for one globally accepted set of investment performance presentation standards, CFA Institute created the:
Global Investment Performance Standards (GIPS)
Enables a firm to participate in competitive bids against other compliant firms around the world
Compliance with GIPS standards
T/F: Compliance with GIPS eliminates the need for in-depth due diligence on the part of the investor
False
What is the goal number of year of GIPS compliant performance results presented?
10 years
If a firm resides somewhere where local law is different from GIPS, can they still comply with GIPS?
Yes, but they should follow local law over GIPS and disclose where they had to follow different laws
When a firm is first becoming compliant with GIPS, the firm is required to present a minimuim:
of 5 years of compliant annual investment performance
You need 5 years, at least of GIPS standards compliant investment performance
What are the six components of the Code of Ethics?
- Act in ethical manner
- Intergrity
- Use reasonable care and be independent
- Be a credit to the investment profession
- Uphold capital markets rules and regulations
- Be competent
The two principles of the Rules of Procedure for Proceedings Related to Professional Conduct are:
- confidentiality of proceedings
- fair process to the member and candidate
A professional organization most appropriately enforces upon its members:
Ethical standards only
(not legal standards)
Must be the corporation, subsidiary, or division that holds itself out to the client as a specific business entity:
GIPS-compliant firm definition
GIPS:
If the firm has different geographic locations, this firm definition should:
include all the locations
Composites:
- What:
- When:
- How many:
- All discretionary portfolios
- Current and past
- Must be included in one and only one composite
