Ethics Flashcards
Disciplinary review committee (DRC)
Enforcement of the Code and Standards
Standards of Practice Council (SPC)
Maintains and interprets the code and Standards
Standards of professional conduct
- Professionalism
- Integrity of capital markets
- Duties to clients
- Duties to employers
- Investment analysis, recommendations and actions
- Conflicts of interest
- Responsibilities as a CFA institute member or CFA candidate
Professionalism
- Knowledge of the law
- Independance and objectivity
- Misinterpretation
- Misconduct
Integrity of Capital Markets
- Material nonpublic information
- Market manipulation
Duties to clients
- Loyalty, prudence and care
- Fair dealing
- Suitability
- Performance presentation
- Preservation of confidentiality
Duties to employer
- Loyalty
- Additional compensation arrangements
- Responsabilities of supervisors
Investment analysis, recommendations and actions
- Diligence and reasonable basis
- Communication with clients and prospective clients
- Record retention
Conflicts of interest
- Disclosure of conflicts
- Priority of transactions
- Referral fees
Responsibilities as a CFA institute member or CFA candidate
- Conduct as participants in CFA institute programs
- Reference to CFA institute, the CFA designation and the CFA program
Federal Deposit Insurance Corporation
Guarantess the deposits in financial institutions up to a certain limit
Soft Dollar Standards
- Are voluntary standards for Members
- Soft dollars can be for mixed-use products
- Soft dollars arrangement must be disclosed
- Agency trade
- Principal trade
- Involves the payment of a commission
- Involves a “discount” or a “spread”
Client-directed brokerage
- The member or candidate must disclose to the client in those instances where directed brokerage may not be providing the best execution at the best price
In determining the portion of mixed-use research to be paid with client brokerage, the investment manager must:
- be able to make a reasonable, justifiable, and documentable allocation of the cost of the research according to its expected usage
- pay with client brokerage only the portion of the research that is actually used by the investment manager in the investment decision-making process
- reevaluate the mixed-use research allocation at least annually
Reference to the CFA Institute and designation
- Violation: state that the competencies of the CFA chartholders are superior to those of others not holding the designation
- Not a violation: state that someone passed all their CFA exams on the first attempt
- Violation: state that someone would have superior competencies because they passed all their CFA exams on the first attempt
Recommendation categories
Should include a benchmark
Disclosure regarding potential conflicts of interest
Should be comprehensive
Investment suitability in the overall portfolio
Investment decisions may be judged in the context of the total portfolio rather than by individual investments within the portfolio
Prudent man rule (replaced by the prudent investor rule)
- The trustee was not allowed to delegate any duties to others
- The preservation of the principal and purchasing power by earning a return sufficient to offset inflation was required
- The impartiality standard requires prudent handling of different interests, such as those of different beneficiaries
Prudent investor rule
- Risk must be determined and minimized with diversification according to the trust’s (investor’s) needs.
- Fees and expenses must be reasonable
- There must be a fair compromise between current income beneficiaries and remainder beneficiaries (growth versus income)
- Trustees can delegate responsibilities to experts (a key difference from the old rule)
- The impartiality standard requires prudent handling of different interests, such as those of different beneficiaries
Gifts from clients
- Receiving a gift, benefit, or consideration from a client can be distinguished from gifts given by entities seeking to influence a member or candidate to the detriment of other clients. When possible, prior to accepting gifts from clients, members and candidates should disclose to their employers such benefits offered by clients. If notification is not possible prior to acceptance, members and candidates must disclose to their employer benefits previously accepted from clients
- Gifts requiring a certain performance threshold must receive approval from the employer before being accepted
Independent practice that might cause a conflict of interest with the current employer
Standard IV(B) requires members and candidates to obtain permission from their employer before accepting compensation or other benefits from third parties for the services rendered. Members and candidates must obtain written consent from their current employer before engaging in such activities
Independent practice that do not cause a conflict of interest with the current employer
- It is permitted to have another source of income when it does not compete with the original employer
- Members must not deprive their employer of their skills and ability and must not cause harm to the said employer
Research objectivity standard on public appearances
Recommends that sufficient information be included for investors to assess the appropriateness of the investment for their own personal risk profile
Research objectivity standard on trading contrary to published recommendations
It is prohibited for employees and their immediate families to trade contrary to published recommendations except in cases of extreme financial hardship
Research objectivity standard on conflicts of interest
All conflicts of interest must be disclosed but they do not prohibit coverage of companies where such a conflict may be present
