Ethics Flashcards
CFA Institute Professional Conduct Program
- Overseen by Disciplinary Review Committee
- Professional Conducts Staff conducts inquires
Describe the Six Components of the Code of Ethics
i. Act in an ethical manner
ii. Integrity is paramount and clients always come first
iii. Use reasonable care; be independent
iv. Be a credit to the investment profession
v. Uphold capital market rules and regulations
vi. Be competent
The 7 Standard of Professional Conduct
- Professionalism
- Integrity of Capital Markets
- Duties to Clients
- Duties to employers
- Investment Analysis, Recommendations
- Conflicts of interests
- Responsibility as a CFA member
Conduct Program
Inquiry can be prompted by:
- Self disclosure
- Written complaints
- Evidence of misconduct
- Report by a CFA exam proctor
Discipline
- Cautionary letter
- Sanctions; public sanction of suspension of CFA program
Knowledge of the Law
Requirements
Comply with more strict law
Knowledge of the Law
Guidance
- First, notify supervisor or compliance
- May confront wrongdoer directly
- Dissociate if needed
- No requirement to report to government
Knowledge of the Law
Recommended Procedures
- Seek compliance/legal advice
- Distribute laws and regs internally
- No requirement to report wrongdoers
Independence and Objectivity
Guidance
- Gifts from clients ok, must disclose
- No gifts from vendors (modest gifts OK)
- For issuer-paid research, flat fee is preferred; must disclose
- Users must be aware of credit ratings conflict
Independence and Objectivity
Recommended Prodecures
- Research is unbiased
- Restricted list
- Recommend but do not require travel expenses paid by employer
Misrepresentation
Guidance
- Do not guarantee a return
- No plagiarism
Misrepresentation
Recommended Procedures
- Must maintain record used for research
- Except for recognized places (e.g. bloomberg)
Midconduct
Recommended Procedures
- Adopt a code of ethics
- Provide a list of potential violations and punishments
Professionalism
Recommendations for Firms
- Have a code of ethics
- Provide employees info on laws, rules, and regs
- Have procedures for reporting suspected violations
Independence and Objectivity
Recommendations for Firms
- Research compensation aligns with unbiased opinions
- Restricted securities list (no opinions only facts)
- Limit and require prior approval for employee IPOs
- Establish supervisory procedures for review of actions
- Appoint a senior officer to oversee compliance and ethics
Integrity of Capital Markets
Guidance
- cannot act or cause someone else to act
- If an analyst knows information but the public doesn’t, still can’t act
Integrity of Capital Markets
Recommendations for Firms
- “Firewall” between departments
- Develop procedures for each strategy
- Review employee trades
- Train and communicate rules
Fair Dealing
Guidance
- Fair does not mean equal
- Can have different level of service (must disclose)
- All clients must have fair chance to act
- Disclose written allocation procedures
Duties to Employers - Loyalty
Guidance
- Encouraged to give employer code of ethics
- With other work: disclose to employer time, services, compensation
- Cannot solicit current clients prior to leaving
Knowing client names etc. is ok
- Whistleblowing; ok if benefits clients, NOT for personal gain
Duties to Employers - Responsibility of Supervisors
Guidance
- must make an effort to ensure people under you follow all laws
- Must try to detect violations
- Obligation to indebntify compliance flaws (would decline role until they are good)
Duties to Employers - Responsibility of Supervisors
Recommendations
Compliance officer should:
- Distribute and update procedures
- Educate staff
- Review employee actions
- Limit the wrongdoer until investigation is done
Diligence and Reasonable Basis
Recommendations
- Develop measurable criteria for assessing quality of research
- Review/approve research reports prior to circulation
- Procedure to evaluating outside information providers
4. Do not need to dissociate from group research for a disagreement
Communication with Clients and Prospective Clients
Guidance
- Promptly disclose any changes that may affect research
- Distinguish between fact and opinion
- Disclose risks and limitations
- Inform clients of changes in investment processes
Record Retention
- If no regulatory or firm policy, CFA recommends 7 years
- Cannot recreate record from memory. Must use public sources
Conflicts of Interest
Disclosure
Must disclose to employer;
- Ownership of stock
- Board participation
- special compensation or bonuses
Conflicts of Interests
Priority of Transactions
- Family members that are clients are treated same
- Limit participation in oversubscribed IPOs
- Establish blackout/restricted periods
- Disclose policies on personal investing to clients
AMC Components
A) Loyalty to Clients.
B) Investment Process and Actions.
C) Trading.
D) Risk Management, Compliance, and Support.
E) Performance and Valuation.
F) Disclosures.
AMC Details
- For the firm and is voluntary (Code of Standards is for individuals and mandatory)
- Can claim compliance with AMC
AMC
Loyalty to Clients
Required:
- Client’s interest ahead of firm’s
- Maintain client confidentiality
Recommended:
- Align compensation to avoid COI
AMC
Investment Process and Actions
For specific styles or strategies; do not have to evaluate the suitability to a given client
AMC
Disclosures
Make sure to disclose;
- Regulatroy/disciplinary actions
- Investment process (strategy, risk, etc)
- Trade allocation
- Signigicant personnel changes
From Questions
- Opinions with return is OK
- Cannot trade until written approval
- Must analyze trades on case by case basis
- Subsciption clients and portfolio management clients should get reports at the same time
- Compliance cannot be handed off, must be supervised by compliance officer
