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CFA L1 > Ethics > Flashcards

Ethics Flashcards

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1
Q

What must Members and Candidates do if they encounter a violation of laws, rules, or regulations?

A

1A. Members and Candidates must disassociate themselves from any such violation.

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2
Q

What must Members and Candidates comply with regarding ethics and standards?

A

1A. Members and Candidates must comply with all applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct).

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3
Q

What should Members and Candidates do in the event of a conflict between different laws, rules, or regulations?

A

1A. Members and Candidates must comply with the stricter law, rule, or regulation.

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4
Q

Are Members and Candidates allowed to participate in violations of laws, rules, or regulations?

A

1A. No, Members and Candidates must not knowingly participate or assist in any violation of laws, rules, or regulations.

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5
Q

Which code must Members and Candidates follow in addition to governmental and regulatory rules?

A

The CFA Institute Code of Ethics and Standards of Professional Conduct.

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6
Q

Violation or not: Doing something allowed by local laws overseas but not CFA institute standards.

A

Violation of 1A.

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7
Q

Violation or not: Knowingly participating or assisting in unethical activity done by others.

A

1A. Violation

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8
Q

Violation or not: Not reporting a legal violation to govt. or regulatory official

A

Not a violation: It is appropriate but not always required.

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9
Q

What must Members and Candidates use to achieve and maintain independence and objectivity in their professional activities?

A

1B. Members and Candidates must use reasonable care and judgment.

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10
Q

Are Members and Candidates allowed to offer, solicit, or accept gifts or benefits?

A

1B. No, Members and Candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that could reasonably be expected to compromise independence and objectivity.

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11
Q

What could compromise the independence and objectivity of Members and Candidates?

A

1B. Offering, soliciting, or accepting any gift, benefit, compensation, or consideration.

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12
Q

Violation or not: Yielding to pressure from another department

A

1B. Violation

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13
Q

Violation or not: Accepting expensive gifts and using them for own business marketing

A

1B. Violation

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14
Q

Violation or not: Employee allocating shares to own account even if IPO is oversubscribed

A

1B. Violation
3B. Violation

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15
Q

Violation or not: Following instructions without using one’s own judgement

A

1B. Violation

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16
Q

Violation or not: Accepting fee for an issuer pay research report based on conclusion of report

A

1B. Violation
Accepting fee - not violation, but accepting fee based on conclusions is.

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17
Q

Violation or not: Gifts from third parties to use their services over others

A

1B. Violation

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18
Q

Violation or not: Accepting a small token

A

1B. Not a Violation

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19
Q

Violation or not: Accepting gifts from clients for good performance after disclosure to employer

A

Not a Violation

(Require written permission if accepting potential gift for FUTURE performance)

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20
Q

Violation or not: Private Jet use for a remote location not accessible otherwise for work purposes

A

Not a Violation

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21
Q

Violation or not: Gifts from Subject Companies

A

1B. Violation

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22
Q

Misrepresentation

A

1C. Must not knowingly misrepresent investment analysis, recommendations, actions, or other professional activities

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23
Q

Violation or Not: No specific reference to source of Information

A

1C. Violation

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24
Q

Violation or not: Citing assurance of consistency in future performance/guaranteed returns

A

1C. Violation, 5B Violation

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25
Q

Violation or not: Claiming third party research as own

A

1C. Violation

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26
Q

Violation or not: Taking credit for someone else’s work

A

1C. Violation

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27
Q

Violation or not: Unintentional error while preparing material

A

Not a violation

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28
Q

Violation or not: Informing clients of guarantee built into product (Ex: T-Bills return)

A

Not a violation

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29
Q

Violation or not: Using information from recognized financial data and reporting without citing sources (ex: Treasury Website)

A

Not a violation

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30
Q

Misconduct

A

1D. must not engage in dishonesty, fraud, deceit or commit any act that compromised professional reputation, integrity or competence.

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31
Q

Violation or Not: Drunk while making financial decisions

A

1D Violation

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32
Q

Violation or not: Including receipt that is not part of company trip expense

A

1D Violation

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33
Q

Violation or Not: Reporting to CFA institute for professionally unrelated disputes

A

1D Violation

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34
Q

Violation or not: Altering facts of a situation

A

1D Violation

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35
Q

Violation or not: Stating vague statements to mislead investors

A

1D Violation

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36
Q

Violation or not: Violation of law not reflecting on members honesty, integrity or competence (Eg: Protest)

A

Not a violation

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37
Q

Violation or not: Personal Bankruptcy without any intention to fraud

A

Not a violation

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38
Q

Mosaic Theory

A

2A Public Material + Non Public Non Material information can be used together and it will not be a violation

Can trade, recommend or disclose

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39
Q

Material Non-Public Information

A

2A Not allowed to Use - if used = insider trading

Material = can affect value of investment

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40
Q

Violation or not: Failure to prevent transfer of material non public info to others

A

2A Violation

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41
Q

Violation or not: Using material non-public information & using public information to cover up for it.

A

2A Violation

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42
Q

Violation or not: Using unreliable material non public information

A

Not a violation

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43
Q

Market Manipulation

A

2B - must not engage in practices that distort market prices or artificially inflate trading volume with the intent to mislead market participants

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44
Q

Violation or not: Spreading false rumours to induce trading

A

2B Violation

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45
Q

Violation or not: Posting false information on social media to increase/ decrease price Simultaneous buying & selling of its subsidiaries, citing volume as evidence of market liquidity.

A

2B Violation

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46
Q

Violation or not: Giving buy recommendation: and then selling client shares when prices have gone up due to the recommendation.

A

2B Violation

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47
Q

Violation or not: Giving a company a smaller number of shares than what it has subscribed, only to get that company’s goodwill attached.

A

2B Violation

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48
Q

Violation or not: Hedging any potential loss from a decline in price of a stock prior to completion of the sale transaction.

A

Not a Violation

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49
Q

Violation or not: Transactions meant for minimizing tax liabilities.

A

Not a violation

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50
Q

Violation or not: Exploiting Arbitrage opportunities between stock and options.

A

Not a violation

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51
Q

Loyalty Prudence & Care

A

3A - duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment.
- must act for the benefit of their clients and place their clients’ interests before their employer’s or their own interests

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52
Q

Violation or not: Investment made against mandate even if it provided high returns.

A

3A Violation

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53
Q

Violation or not: Trading with selective brokers to get recommendations from them for getting more clients.

A

3A Violation

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54
Q

Violation or not: Using client brokerage for services that does not benefit the client.

A

3A Violation

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55
Q

Violation or not: Doing more than required trade in client A/C to accomplish client’s goal & generate commission income.

A

3A Violation - churning of stock

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56
Q

Violation or not: Disadvantaging Client because he is related to you

A

3B Violation

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57
Q

Fair Dealing

A

3B - Treat all clients fairly and objectively

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58
Q

Violation or not: Giving opinion on something to selected clients only.

A

3B Violation

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59
Q

Violation or not: Trading in one A/C prior to trading or announcing recommendation for other clients.

A

3B Violation

60
Q

Violation or not: Arrangement made for shares of an IPO of selected clients just before offer is made to general public

A

3B Violation

61
Q

Violation or not: Immediately trading for own A/C after announcing recommendation change to its clients without giving clients to act

A

3B Violation

62
Q

Violation or not: mail clients with email addresses & regular mail to ones without an email address.

A

Not a violation

63
Q

Suitability

A

3C - must make reasonable inquiry into a client’s investment objectives, and constraints prior to recommendation update info regularly.
- Determine client’s financial situation
- maintain consistency with the objectives, mandates of a fund
- Judge the suitability of investments in the context of the client’s total portfolio.

64
Q

Violation or not: Failing to determine client’s objectives and constraints prior to investing.

A

3C Violation

65
Q

Violation or not: Investing in illiquid securities even if it generates high return if IPS requires liquid securities.

A

3C Violation

66
Q

Violation or not: Investing in securities in a fund that does not suit the mandate of the fund.

A

3C Violation

67
Q

Performance presentation

A

3D must make reasonable efforts to ensure that it is fair, accurate, complete, and timely. (FACT)

68
Q

Violation or not: Failure to credit team in resume

A

3D Violation

69
Q

Violation or not: Advertising the details of past performance of the funds managed at prior firm without identifying that it was earned while working at that firm.

A

3D Violation

70
Q

Violation or not: Advertising simulated results of a strategy as actual performance

A

3D Violation

71
Q

Violation or not: Changing firm’s performance attribution method without disclosing it to the clients.

A

3D Violation

72
Q

Violation or not: Implying future returns will reflect past performance.

A

3D Violation

73
Q

Preservation of confidentiality

A

3E - keep client info confidential

exceptions: required by law (given to relevant authority, info concerns illegal activity, client permits disclosure.

74
Q

Loyalty to Employer

A

4A - must act for benefit of employer
- not deprive employer of any advantage of their skills and abilities
- not divulge confidential info or cause harm to employer

75
Q

Violation or not: Receiving free parking spot for volunteer work in similar field

A

4A Violation - must disclose and obtain written consent

76
Q

Violation or not: Taking model you had created from previous employers without permission

A

4A Violation

77
Q

Violation or not: Mention of past performance of fund without employer permission

A

4A Violation

78
Q

Violation or not: Soliciting clients after leaving a job from memory

A

Not a Violation

79
Q

Violation or not: Soliciting clients while at work for new firm one is going to start

A

4A Violation

80
Q

Additional Compensation Arrangement

A

4B - must not accept benefits, compensation or consideration that competes with or creates conflict of interest with employer unless written consent is obtained from all parties

81
Q

Violation or not: Client gives employee vacation incentive if a particular return is achieved - employee accepts, no disclosure to firm

A

4B Violation

82
Q

Violation or not: Purchasing shares for clients of the Company in which he is in BOD - received that companies products at no charge

A

1B, 4B Violation

83
Q

Responsibility of Supervisor

A

4C - must make reasonable efforts to ensure any subordinate complies to all LRRs and codes.

84
Q

Violation or not: Heavy trading in a stock at a firm’s trading desk not on the firms recommended list

A

4C Violation - duty of supervisor to check

85
Q

Violation or not: Only reporting violation of employee to upper management & providing written warning to employees to cease such activities.

A

4C Violation - not sufficient

86
Q

What should a member do if a firms compliance is inadequate to comply with code of ethics and LRRS?

A

Member should decline supervisory responsibility until firm adopts reasonable compliance procedures in writing.

87
Q

Diligence & Reasonable Basis

A

5A - must exercise diligence, independence, and thoroughness in analysing investments, making investment recommendations, and taking investment actions.
- Have a reasonable and adequate basis, supported by appropriate research and investigation

88
Q

Violation or not: Member selects external advisor for equity based on low fee & does not consider performance or service.

A

5A Violation

89
Q

Violation or not: Issuing recommendation based on what others are buying /IPO shares priced without doing adequate research.

A

5A Violation

90
Q

Violation or not: Making recommendation for a company (which is offering the firm underwriting services) based on its maximum production level and not expected production level.

A

5A Violation

91
Q

Violation or not: While using 3rd party research report, not reviewing assumptions & evaluating objectivity.

A

5A Violation

92
Q

Group Consensus

A

(of all analysts) is not required. If ‘A’ writes a report & B’ while reviewing makes changes, ‘A’ does not need to do anything further. If ‘A’ believes that ‘B’ did not have reasonable basis, he should get his name removed.

93
Q

Violation or not: Compensate analysts based on the quality of their research.

A

Not a violation

94
Q

Violation or not: Member proposes hedge fund to client after proper and adequate research. Hedge fund incurs heavy loss & closes operations.

A

Not a violation

95
Q

Communication with clients and prospective clients

A

5B - disclose basic format and general principles used to analyse, select and construct portfolios
- promptly disclose any changes that might materially affect these processes
- use reasonable judgment in identifying important factors
- Distinguish between fact and opinion in the presentation

96
Q

Violation or not: not include all relevant factors behind investment advice in the newsletter

A

5B Violation

97
Q

Violation or not: Member estimates gold reserves of 500000 ounces in a company’s property & makes report -“based on the fact that it has gold reserves, stock is a buy”

A

5B Violation

98
Q

Violation or not: Due to poor results of benchmark, member decides to structure portfolios passively to track benchmark but does not inform clients.

A

5B Violation

99
Q

Violation or not: Firm changes advisor and discloses in annual report and not immediately to clients.

A

5B Violation

100
Q

Violation or not: Portfolio manager used to do stock selection, now senior manager will; client not informed.

A

5B Violation

101
Q

Violation or not: Analyst discussed how her strategy will perform if euro appreciates as expected but does not mention the scenario where it depreciates.

A

5B Violation

102
Q

Violation or not: Giving guarantee of improved results.

A

5B Violation, 1C Violation

103
Q

Violation or not: Stating expected improvement as a fact.

A

5B Violation, 1C Violation

104
Q

Record Retention

A

5C - must develop and maintain appropriate records to support their investment analysis, recommendations, actions, and other investment-related communications with clients and prospective clients.

105
Q

Violation or not: Shredding of records after preparing reports.

A

5C Violation

106
Q

Disclosure of Conflict of Interest

A

6A - 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
- must ensure that such disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively.

107
Q

Violation or not: Member replaces external manager which has average results with a friend’s firm without telling clients.

A

6A - Violation: Even if friends firm is better, there is a conflict which must be disclosed.

108
Q

Violation or not: Member, a portfolio manager, takes job as a trustee of a fund without informing employer

A

6A Violation - should not only inform but discuss before appointment.

109
Q

Violation or not: Member sits on client’s BOD, member writes a report on client’s stock. She does not disclose the fact of her sitting on the board.

A

6A Violation

110
Q

Violation or not: Member writes an issuer pay research report and does not disclose the same in the report which was published on his website.

A

6A Violation

111
Q

Violation or not: Non-disclosure to employer or all clients on matters including beneficial ownership.

A

6A Violation

112
Q

Violation or not: Member recommends stock of a company that his wife inherits in large amount but he discloses the fact to clients & employer.

A

Not a violation - as along as based on proper research

113
Q

Priority of Transactions

A

Investment transactions for clients and employers must have priority oven investment transactions in which a Member or Candidate is the beneficial owner

114
Q

Violation or not: Not executing client sell order prior to selling own shares.

A

6B Violation

115
Q

Violation or not: Employee purchases stock before client or for his personal A/C.

A

6B Violation

116
Q

Violation or not: Parents are clients. Member purchases shares in client A/C before parents A/C to prevent violation.

A

3B Violation

117
Q

Violation or not: Not giving client an adequate opportunity to act on a recommendation before trading for personal accounts

A

6B Violation, 3B Violation

118
Q

Referral Fees

A

6C - 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.
- must disclose if received for past performance
- must obtain written consent for future compensation for future performance

119
Q

Violation or not: Member advises client to use services of someone else without disclosing that he is being compensated for the same.

A

6C Violation

120
Q

Violation or not: X is a portfolio manager and Y is a recruiter. X lets Y play golf at his club & Y refers to X’s firm any high level executive recruited without disclosure.

A

6C Violation

121
Q

Violation or not: Member works in trust department of a bank. He receives compensation for referral made to bank’s brokerage and personal finance management department. Member does not disclose the referral fee to his clients

A

6C Violation

122
Q

Conduct as Participants in CFA Institute Programs

A

7A - must not engage in any conduct that compromises the reputation for integrity of CFA Institute or the CFA designation or the integrity, validity, or security of CFA Institute programs.

123
Q

Violation or not: Passing CFA exam papers to friends

A

7A Violation

124
Q

Violation or not: Planning to use CFA exam questions to gain advantage over other candidates

A

7A Violation

125
Q

Violation or not: Member uses CFA Committee position to benefit her clients or herself.

A

7A Violation

126
Q

Violation or not: Candidates discussing formulas/weightages/topics that came or did not come in the exam.

A

7A Violation

127
Q

Violation or not: Expressing frustration on a particular topic not being tested in the exam

A

7A Violation - can express frustration but not disclose the topic that was not tested

128
Q

Violation or not: Disagree with CFA institute policies procedures etc.

A

Not a violation

129
Q

Violation or not: Expressing negative opinion about CFA program or institute.

A

Not a violation

130
Q

Reference to CFA institute, the CFA designation, and the CFA program

A

7B - must not misrepresent or exaggerate the meaning or implications of membership in CFA institute, holding the CFA designation, or candidacy in the CFA program.

131
Q

Violation or not: Superior performance statement given as a result of being CF A charter holder

A

7B Violation

132
Q

Violation or not: Use of CFA as a noun

A

7B Violation

133
Q

Violation or not: Member uses CFA designation even when he fails to file his professional conduct statement & stops paying his dues.

A

7B Violation

134
Q

Violation or not: Uses CFA after his name even though his membership has been suspended.

A

7B Violation

135
Q

Violation or not: Put ‘CFA’ logo on company’s letterhead.

A

7B Violation

136
Q

Violation or not: Member stating or implying that he is an active charter holder.

A

7B Violation

137
Q

Violation or not: Statement - “I shall receive my charter this fall “

A

7B Violation

138
Q

Violation or not: Stating that one has cleared all 3 levels consecutively in first attempt.

A

Not a violation

139
Q

Violation or not: Writing after your name - CFA,2013, CFA Society of India

A

7B Violation

140
Q

Violation or not: Giving details of subjects studied and knowledge gained during the course.

A

Not a violation

141
Q

Violation or not: Reference their candidacy if they are enrolled or waiting for their exam results.

A

Not a violation

142
Q

Violation or not: Seminole Equity Fund has been in existence for eight years. In a brief presentation to
potential investors, the fund’s manager reports its performance history for the most recent five years, and notes that more detailed information is available on request.

A

Not a Violation

143
Q

Use of Soft Dollars

A

Using soft dollars for benefit of client is not a violation. Purchasing research reports with soft dollars is not a violation, but the advisor
should ensure that research purchased with client brokerage will benefit her clients. The purchase of office furniture does not benefit clients and is a violation.

144
Q

Violation or not: Not give equal
emphasis to all areas but emphasize certain areas, touch briefly on others, and omit
certain aspects deemed unimportant.

A

Not a Violation

145
Q

If Additional compensation creates conflict, one should (decline it/seek permission from employer)

A

seek permission from employer

146
Q

To have a reasonable basis for selecting a subadviser, criteria should include

A
  • code of ethics
  • its compliance procedures
  • internal controls
  • investment processes
  • adherence to its stated strategies
  • quality of its published information (not quantum necessarily)

CFA L1 (16 decks)

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