Ethics Flashcards
Introduction
Enforcement
What is the basic structure for enforcing the Code and Standards?
Rules of Procedure
Introduction
Enforcement
What is the body that enforces the code and standards?
Disciplinary Review Committee (DRC)
Introduction
Enforcement
Overview of process
- Grounds for discipline - any act which violates the Code and Standards
- Investigation by Designated Officer (DO) - can conclude no sanction, cautionary letter or continue proceedings (recommend a disciplinary sanction, member can agree or request hearing panel)
- Hearing - case heard in front of 3+ members
Introduction
Enforcement
Authorised Sanctions
- Suspension or revocation of membership
- Private/public censure
- Private reprimand
Introduction
Code of Ethics
What are the 6 components of the Code of Ethics?
- Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession
- Promote the integrity of, and uphold the rules governing capital markets
- Place the integrity of the investment profession and interests of clients above their own personal interests
- Maintain and improve professional competence, and strive to maintain and improve competence of other investment professionals.
- Use reasonable care and exercise independent professional judgement when conducting investment analysis,…
- Act with integrity, competence, diligence, respect and in an ethical manner with clients, public, employer, employee, colleagues….
Introduction
Code of Ethics
Applies to who?
- CFA Institute members
- CFA Charterholders
- CFA candidates
Introduction
Standards of Professional Conduct
What are the 7 standards?
PIDDICR
- Professionalism
- Integrity of Capital Markets
- Duties to Clients
- Duties to Employers
- Investment Analysis, Recommendations and Actions
- Conflicts of Interest
- Responsibilities as a CFA member/candidate
Introduction
Standards of Professional Conduct
1 - Professionalism
4 parts
LIMM
A) Knowledge of the Law - in the event of conflict comply with the more strict law/rule
B) Independence and Objectivity - don’t offer, solicit or accept any gift/benefit/compensation/consideration that could reasonably be expected to comprimise your or anothers independence and objectivity
C) Misrepresentation - don’t knowlingly make misrepresentations related to professional activities
D) Misconduct - dishonesy, fraud, deceit or any act that reflects adversely on professional reputation, integrity or competence
Introduction
Standards of Professional Conduct
2 - Integrity of Capital Markets
2 parts
A) Material Nonpublic information
B) Market Manipulation - practices to distort prices or artificially inflate trading volume with the intent to mislead market participants
Introduction
Standards of Professional Conduct
3 - Duties to Clients
5 parts
A) Loyalty, Prudence and Care
B) Fair Dealing
C) Suitability (detailed rules)
D) Performance Presentation - investment performance information must be fair, accurate and complete
E) Preservation of Confidentiality - unless it concerns illegal activities, disclosure is required by law or client/prospective client permits disclosure
Introduction
Standards of Professional Conduct
3 - Duties to Clients
Suitability rules
When in an advisory relationship you must:
a) Make a reasonable inquiry into clients investment experience, risk/return objectives and financial constraints prior to making recommendation or taking action. Also must reassess and update this info regularly.
b) Determine that an investments is suitable and consistent with clients written objectives/mandates/constrains before making recommendation or taking action.
c) Judge suitability in context of clients total portfolio.
* When responsible for managing a portfolio to a specific mandate/strategy, must only make recommendations or actions consistent with stated obejctives and constraints of the portfolio
Introduction
Standards of Professional Conduct
4 - Duties to Employers
3 items
A) Loyalty
B) Additional Compensation Arrangements - don’t accept gifts/benefits/consideration that might reasonably be expected to create a conflict of interest with employer, without written consent from all parties involved
C) Responsibility of supervisors - reasonable effort to detect and prevent violations of laws/rules/code and standards by people you supervise
Introduction
Standards of Professional Conduct
5 - Investments analysis, recommendations & actions
3 items
A) Diligence and reasonable basis - reasonable and adequate basis means supported by appropriate research and investigation
B) Communication with clients & PCs - must
- disclose basic format and principles of investment processes used
- use reasonable judgement in identifying factors important to the work and include them in communication to Cs & PCs
- Distinguish between fact and opinion in presentation of information
C) Record Retention - develop and maintain appropriate records to support work and communications with Cs & PCs
Introduction
Standards of Professional Conduct
6 - Conflicts of Interest
3 items
A) Disclosure of conflicts
B) Priority of transactions - transactions of clients/employers before personal transactions
C) Referral fees - must disclose to employer/Cs/PCs any consideration received for recommendation of products or services
Introduction
Standards of Professional Conduct
7 - Responsibilities as a member/candidate
2 items
A) Conduct - no conduct that comprimises reputation or integrity of institute or integrity/validity/security of the exams
B) Reference to CFA Institute/Designation/Program - Must not misrepresent or exaggerate the meaning or implications of membership, holding the CFA designation or candidacy in the CFA program
Standards - Professionalism
1) a) Knowledge of the Law
Is a detailed knoweldge of all laws required?
Who are you required to report violations to (firms counsel, regulators, CFA institute)?
How do you respond if situation is not remedied?
Detailed knowledge of all laws not required.
Should seek advice of firms counsel and accept it as long as you believe they’re competent and unbaised.
No requirement to report to govmt/regulators unless the law requires it. Encourages but NOT required to report to CFA institute.
If situation isn’t resolved dissassociate yourself.
Standards - Professionalism
1) a) Knowledge of the Law
Compliance procedures
- Maintain files of applicable statutes, rules, regulations and important cases in an accessible manner
- Keep informed of changes in the law
- Review compliance procedures regularly
Standards - Professionalism
1) b) Independence & Objectivity
Types of gifts considered modest
How are gifts from clients percieved?
Gifts below $100 may be accepted as well as entertainment.
Gifts from clients are a lower concern since they’re less likely to impair independence. However they must be disclosed to employers.
Standards - Professionalism
1) b) Independence and Objectivity
Compliance Procedures
- Policies that every research report reflects analysts unbaised opinion and compensation that protects the integrity of the process
- Create a restricted list of corporate clients about which the firm is unwilling to permit negative information
- Restrict special cost arrangements - Issuers shouldn’t reimburse members for transportation (although this can be allowed), limit corporate aircraft to where nothing else efficient could be arranged
- Limit gifts
- Review procedures to ensure compliance
Standards - Professionalism
1) c) Misrepresentation
Two types of misrepresentation affected
1 - An untrue or misleading statement about services you/your firm are capable of performing, qualifications of you/your firm, academic or professional qualifications.
Can’t imply orally or in writing any guarantees regarding investments (unless factually accurate) or that superior returns can be expected based on members past success
2 - Plagiarism - Must attribute quotes, projections, data etc to sources.
Doesn’t apply to recognised sources (eg S&P, Moodys) of factual information already in the public realm, or ideas/methodologies developed by people in your firm (if you speak as an expert witness you need to attribute info to specific person in your firm).
Standards - Professionalism
1) d) Misconduct
Description
Beyond standard 1A on laws and regulations, this addresses personal behaviour that will reflect poorly on the profession (eg lying, cheating, stealing, other dishonest conduct).
Standards - Integrity of Capital Markets
2) a) Material nonpublic information
Material definition
Public definition
Mosaic Theory
Possible action on reciept of info
Standard only affects MATERIAL and NONPUBLIC info.
Material - Means disclosure may affect security price or reasonable investors would want to know the information before investing. The reliability of the source is a factor (less reliable means less material)
Public - Disclosure to a room of analysts doesn’t make it public. Information being public also requires enough time for investors to have reacted to the news.
Conclusions reached from a “mosaic” of nonmaterial nonpublic information are accepted by the standard, even if had the conclusion been dislosed in one go it would be material.
Possible action on reciept of info - encourage the issuer to make the information public.
Standards - Integrity of Capital Markets
2) b) Market Manipulation
Critical point in this standard
Example relating to misleading information
The critical point is the intention - legitimate trading strategies or for tax purposes are ok, only if the intent is to deceive people or entities that rely on market information.
If companies re-release information or present over-optimistic information to generate interest and use this to sell shares (“hype and dump”) it violates this standard.
Standards - Duties to Clients
3) a) Loyalty, Prudence and Care
Who does it mainly relate to?
Fiduciary Duty
When is there a heightened level of duty?
Who do you owe it to if managing pension fund assets?
Soft dollar brokerage compensation
Relates mainly to members with discretionary authority over managing clients assets.
Fiduciary duty is the obligation of loyalty and care in regard to responsibility of managing someone else’s assets. It is heightened when you have effective control over the assets.
In pension fund case, fiduciary duty is owed to the beneficiaries of the plan, not the guy who hires you.
Sometimes ok to receive soft dollars (eg investment research) from a broker in return for trading with them, as long as you get best execution and disclose the soft dollar arrangement.
Standards - Duties to Clients
3) b) Fair Dealing
Two areas affected by the standard
Dissemination of recommendations - All clients should be informed at roughly the same time. Can filter clients based on suitability or interest but not preferred or favoured status
Investment Actions - Trade allocation procedures must be fair to clients, discretionary treated the same as non-discretionary. If an issue is oversubscribed forgo sales to yourself or immediate family. Don’t withhold “hot issue” securities for yourself or as a reward.
Standards - Duties to Clients
3) c) Suitability
Advice on new clients or maturing investment of existing client
What’s wrong with advising a client on the characteristics of a particular investment?
No requirement to invest assets immediately, it’s acceptable to put assets into cash funds in the short term and take the time to assess suitability before making any investment action.
You should advise clients based on their overall portfolio, not just talk about an individual investment.
Standards - Duties to Clients
3) d) Performance Presentation
4 bad practices
- Representative accounts - only presenting the best results
- Survivorship bias - excluding terminated accounts that have performed badly
- Portability of investment results - results from previous employment are disclosed
- Varying time periods - only the results from good time periods are selected
Standards - Duties to Clients
3) e) Preservation of Confidentiality
When are you allowed to release information?
Two criteria for confidentiality rules to apply
Fellow employees working on the client
PCP
Allowed to release info when it concerns clients illegal activities, if required by the law or if given permission.
Confidentiality rules apply when the analyst is in a relationship of trust with the client who has engaged him and, the information received is relevant to the portion of the clients business that is the subject of the confidential relationship.
You can share information with colleagues working on the client.
You must forward information to the CFAs Professional Conduct Program if requested.
