Ethics

Question 1

Code of Ethics

Answer 1

• Act with integrity, competence, diligence, and respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets.
• Place the integrity of the investment profession and the interests of clients above their own personal interests.
• Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.
• Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.
• Promote the integrity and viability of the global capital markets for the ultimate benefit of society.
• Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.

Question 2

Standard of Professional Conduct

Answer 2

1. Professionalism
   
   • Knowledge of the Law
   • Independence and Objectivity
   • Misrepresentation
   • Misconduct
2. Integrity of Capital Markets
   
   • Material Nonpublic Information
   • Market Manipulation
3. Duties to Clients
   
   • Loyalty, Prudence, and Care
   • Fair Dealing
   • Suitability
   • Performance Presentation
   • Preservation of Confidentiality
4. Duties to Employers
   
   • Loyalty
   • Additional Compensation Arrangements
   • Responsibilities of Supervisors
5. Investment Analysis, Recommendations, and Actions
   
   • Diligence and Reasonable Basis
   • Communication with Clients and Prospective Clients
   • Record Retention
6. Conflicts of Interest
   
   • Disclosure of Conflicts
   • Priority of Transactions
   • Referral Fees
7. 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

Question 3

CFA Institue Research Objective Standards (ROS)

Answer 3

• *1.0 Research Objectivity Policy** Firms must have:
  (a) A formal written policy on the independence and objectivity of research (Policy) that must be:

1. Made available to clients and prospective clients (both investing and corporate);
2. Disseminated to all firm employees;

(b) Supervisory procedures that reasonably ensure that the firm and its covered employees comply with the provisions of the policy and all applicable laws and regulations; and
(c) A senior officer of the firm who attests annually to clients and prospective clients to the firm’s implementation of, and adherence to, the Policy.
* *2.0 Public Appearances** Firms that permit research analysts and other covered employees to present and discuss their research and recommendations in public appearances must require these employees to fully disclose personal and firm conflicts of interest to the host or interviewer and, whenever possible, to the audience.
* *3.0 Reasonable and Adequate Basis** Firms must require research reports and recommendations to have a basis that can be substantiated as reasonable and adequate. An individual employee (supervisory analyst who is someone other than the author) or a group of employees (review committee) must be appointed to review and approve all research reports and recommendations.
* *4.0 Investment Banking** Firms that engage in, or collaborate on, investment banking activities must:
(a) Establish and implement effective policies and procedures that:

1. Segregate research analysts from the investment banking department; and
2. Ensure that investment banking objectives or employees do not have the ability to influence or affect research or recommendations;

(b) Implement reporting structures and review procedures that ensure that research analysts do not report to, and are not supervised or controlled by, investment banking or another department of the firm that could compromise the independence of the analyst; and
(c) Implement procedures that prevent investment banking or corporate finance departments from reviewing, modifying, approving, or rejecting research reports and recommendations on their own authority.
* *5.0 Research Analyst Compensation** Firms must establish and implement salary, bonus, and other compensation for research analysts that:
(a) Align compensation with the quality of the research and the accuracy of the recommendations over time; and
(b) Do not directly link compensation to investment banking or other corporate finance activities on which the analyst collaborated (either individually or in the aggregate).
* *6.0 Relationships with Subject Companies** Firms must implement policies and procedures that manage the working relationships that research analysts develop with the management of subject companies. Research analysts must be prohibited from:
(a) Sharing with, or communicating to, a subject company, prior to publication, any section of a research report that might communicate the research analyst’s proposed recommendation, rating, or price target; and
(b) Directly or indirectly promising a subject company or other corporate issuer a favorable report or a specific price target, or from threatening to change reports, recommendations, or price targets.
* *7.0 Personal Investments and Trading** Firms must have policies and procedures that:
(a) Manage covered employees’ “personal investments and trading activities” effectively;
(b) Ensure that covered employees do not share information about the subject company or security with any person who could have the ability to trade in advance of (“front run”) or otherwise disadvantage investing clients;
(c) Ensure that covered employees and members of their immediate families do not have the ability to trade in advance of or otherwise disadvantage investing clients relative to themselves or the firm;
(d) Prohibit covered employees and members of their immediate families from trading in a manner that is contrary to, or inconsistent with, the employees’ or the firm’s most recent, published recommendations or ratings, except in circumstances of extreme financial hardship; and
(e) Prohibit covered employees and members of their immediate families from purchasing or receiving securities prior to an IPO for subject companies and other companies in the industry or industries assigned.
* *8.0 Timeliness of Research Reports and Recommendations** Firms must issue research reports on subject companies on a timely and regular basis.
* *9.0 Compliance and Enforcement** Firms must:
(a) Have effective enforcement of their policies and compliance procedures to ensure research objectivity;
(b) Implement appropriate disciplinary sanctions for covered employees, up to and including dismissal from the firm, for violations;
(c) Monitor and audit the effectiveness of compliance procedures; and
(d) Maintain records of the results of internal audits.
* *10.0 Disclosure** Firms must provide full and fair disclosure of all conflicts of interest to which the firm or its covered employees are subject.
* *11.0 Rating System** Firms must establish a rating system that:
(a) Is useful for investors and for investment decision-making; and
(b) Provides investors with information for assessing the suitability of the security to their own unique circumstances and constraints.

Question 4

Soft Dollar Accounts

Answer 4

Soft dollar accounts should be used only to purchase research services that directly assist the investment manager in the investment decision-making process, not to assist the management of the firm or to further education.