Ethics Flashcards
Ethics
Set of shared beliefs about what is good and acceptable behavior and what is bad or unacceptable behavior. The study of good and bad behavior
Ethical Conduct
Behavior that follows moral principles and is consistent with society’s ethical expectations. Conduct that improves outcomes for stakeholders. Behavior that balances your self-interest with the impact on others.
Stakeholders
People who are directly or indirectly affected by the conduct. Clients, coworkers, employers, self, family
Code of Ethics
Written set of moral principles that can guide behavior by describing what is considered acceptable behavior. Communicates values, principles, expectations (minimum level of ethical behavior). May be rules-based or principle-based
Profession
Group of people with specialized skills and knowledge who serve others and agree to behave in accordance with a code of ethics.
Situational Influences
External influences (more determinant of of ethical behavior). Social pressure, loyalty, prestige, etc.
Unethical Behavior
Providing incomplete, misleading or false information (Misallocation of Capital)
Ethical Principles
Set a higher standard of behavior than laws and regulations. Laws and regulations are the result of what is perceived unethical behavior
Decision Making Framework
- Identify, 2. Consider, 3. Decide and act, 4. Reflect.
Identify
Relevant facts, stakeholders and duties owed, ethical principles, conflicts of interest. Identify facts you have to work with and facts you would like to have
Consider
Situational influences, additional guidance, alternative actions, personal biases, potential but unanticipated ethical consequences
Reflect
Evaluate the outcomes of the actions that were taken. Were results intended?
Professional Code of Conduct
Profession communicates to the public that its members will use their knowledge and skills to serve their clients in an honest and ethical manner
Best Practices
Suggested behavior, not a minimum acceptable level
CFAI Professional Conduct Program
Based on the principles of fairness of the process to the members and candidates and maintaining the confidentiality of the proceedings. Overseen by Board of Governors and Disciplinary Review Committee
Self-disclosure
Members or candidates disclose civil litigation, criminal investigations or written complaints on annual Professional Conduct Statements
Inquiries
Interview subject member or candidate, interview complainant or other third party, collect relevant documents and records
Discipline
None, issue cautionary letter, discipline member or candidate (this may be accepted or rejected, in which case it will be referred to a review panel). Condemnation by peers or suspension
CFAI Code of Ethics
- Act with integrity, competence, diligence, respect, ethical manner
- Place integrity of investment profession and interests of clients above own
- Use reasonable care and exercise independent judgment in analysis and recommendations
- Practice and encourage others to practice in an ethical manner
- Promote integrity and viability of global capital markets
- Maintain and improve professional competence of self and others
Standards of Professional Conduct
- Professionalism
- Integrity of Capital Markets
- Duties to Clients
- Duties to Employers
- Investment Analysis, Recommendations and Actions
- Conflicts of Interest
- Responsibilities
Professionalism
- Knowledge of the Law
- Independence and Objectivity
- Misrepresentation
- Misconduct
Knowledge of the Law
Members and candidates understand and comply with all applicable laws, rules and regulations of any government, regulatory agency or professional association (comply with the more strict rule or law in case of conflict)
Independence and Objectivity
Use reasonable care and judgment to achieve and maintain independence and objectivity in professional activities. Can’t offer gift, benefit, compensation, consideration that compromises this
Misrepresentation
Must not knowingly make any misrepresentation in investment analysis, recommendations, actions
Misconduct
Must not engage in any professional conduct involving dishonesty, fraud, deceit or commit any act adversely affecting reputation, integrity, competence
Integrity of Capital Markets
- Material Nonpublic Information
2. Market Manipulation
Material Nonpublic Information
Those who possess MNPI that could affect asset value may not act or cause others to act on it
Market Manipulation
Must not engage in practices that distort or artificially inflate trading volume with intent to mislead market
Duties to Clients
- Loyalty, Prudence and Care
- Fair Dealing
- Suitability
- Performance Presentation
- Preservation of Confidentiality
Loyalty, Prudence and Care
Have a duty of loyalty to clients and act with reasonable care to exercise prudent judgment. Place client interest above own
Fair Dealing
Deal fairly and objectively with all clients when providing investment analysis, recommendations, taking action
Suitability
Make a reasonable inquiry into client’s investment experience, risk and return objectives, financial constraints before making recommendations or taking action. Determine suitable investments consistent with client objectives, mandates, constraints. Judge suitability in context of total portfolio
Performance Presentation
Make reasonable efforts to ensure performance information is fair, accurate and complete
Preservation of Confidentiality
Keep information about current, former and prospective clients confidential (unless information is about illegal activities, disclosure required by law, or client permits disclosure)
Duties to Employers
- Loyalty
- Additional Compensation Arrangements
- Responsibilities of Supervisors
Loyalty
Members must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or cause harm
Additional Compensation Arrangements
Must not accept gifts, benefits, compensation or consideration that competes with or creates conflict of interest with employer’s interest (unless written consent from all parties obtained)
Responsibilities of Supervisors
Must make reasonable efforts to ensure anyone subject to their supervision or authority complies with applicable rules, laws, regulations
Investment Analysis, Recommendations and Actions
- Diligence and Reasonable Basis
- Communication with Clients and Prospective Clients
- Record Retention
Diligence and Reasonable Basis
Exercise diligence, independence, thoroughness in analyzing investments, making recommendations. Have reasonable and adequate basis for investment analysis, recommendation, action
Communication with Clients and Prospective Clients
Disclose to clients/prospects basic format and general principles of investment process used for analysis, selection, construction, and promptly disclose changes. Disclose limitations and risks. Use reasonable judgment in identifying which factors are important. Distinguish between fact and opinion.
Record Retention
Develop and maintain appropriate records as support, and any other investment communications.
Conflicts of Interest
- Disclosure of Conflicts
- Priority of Transactions
- Referral Fees
Disclosure of Conflicts
Must make full and fair disclosure of all matters that could reasonably be expected to impair independence and objectivity, or interfere with duties to clients and employer. Disclosure must be prominent, delivered in plain language, relevant
Priority of Transactions
Transactions for clients and employers must have priority over your own
Referral Fees
Must disclose to employer, clients, prospects any compensation, consideration or benefit received by or paid to others for recommendation
Responsibilities as CFA Member or Candidate
- Conduct
2. Reference to CFAI, Designation, Program
Conduct as CFAI Program Participant
Must not engage in any conduct that compromises reputation or integrity of CFAI
References to CFAI
Must not misrepresent or exaggerate the meaning or implications of membership in CFAI, holding the CFA designation or candidacy
Mosaic Theory
Reaching an investment conclusion through perceptive analysis of public information combined with non-material nonpublic information is not a violation
IPS Requirements
- Separate Beneficiaries
- Investor Objectives (return and risk)
- Investor Constraints (liquidity, cash flows, tax, regulatory, legal)
- Performance Benchmarks
Liquidity
Ability to exit an investment readily without experiencing a significant extra cost from doing so
Capacity
Investment vehicle’s ability to absorb additional investment without reducing returns
Beneficial Owner
Direct/indirect personal interest in the securities being traded
Front Running
Purchase or sale of securities in advance of anticipated client or employer purchases and sales
Representative Accounts
Showing a top-performing portfolio as representative of a firm’s results
Survivorship Bias
Excluding weak performance accounts that have been terminated
Varying Time Periods
Showing performance for selected time periods with outstanding returns
GIPS
Set of ethical principles based on a standardized, industry-wide approach. Firms can voluntarily follow in presentation of historical investment results. Seek to avoid misrepresentation. Allow clients to more easily compare investment performance across firms and have more confidence
Composite
Grouping of individual discretionary portfolios representing a similar investment strategy, objective or mandate. Include all fee-paying, discretionary portfolios (current and past). Choose portfolio’s composite before performance is known
Verification
Performed by a third party. Attest that the form complied with all GIPS requirements, processes and procedures are established in accordance with calculation methodology, data requirements and format
Fundamentals of Compliance
Contain both GIPS requirements and recommendations
a) Definition of the Firm
b) Documentation of Firm Policies and Procedures
c) Complying with GIPS Updates
d) Claiming Compliance in the Appropriate Manner
e) Appropriate Verification Statement w/ Third Party Verifier
Input Data
Consistent in order to establish full, fair, and comparable investment performance presentations
Calculation Methodology
Certain uniform methodologies are required for portfolio return calculations and others for composite return calculations. Uniformity across firms is required
Composite Construction
Creation of meaningful, asset weighted composites is important to achieve a fair presentation. Based on the performance of one or more portfolios that have same investment strategy
Disclosures
Firm must disclose information about the presentation and the policies adopted by the firm so that raw numbers are understood by the user. Some disclosures may not apply to all firms
Presentation and Reporting
Investment performance must be presented according to GIPS requirements
Real Estate
Certain provisions apply to all real estate investments regardless of the level of control the firm has over management of the investment (land, buildings, etc.)
Private Equity
Must be valued according to the GIPS Private Equity Valuation Principles, unless an open-end or an evergreen fund
Wrap Fee/Separately Managed Accounts
Certain special GIPS standards apply here (some standards supplemented or replaced by specified requirements)
