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CFA Level 1 > Ethics > Flashcards

Ethics Flashcards

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CFA flashcards
1
Q

Ethics

A

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

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2
Q

Ethical Conduct

A

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.

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3
Q

Stakeholders

A

People who are directly or indirectly affected by the conduct. Clients, coworkers, employers, self, family

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4
Q

Code of Ethics

A

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

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5
Q

Profession

A

Group of people with specialized skills and knowledge who serve others and agree to behave in accordance with a code of ethics.

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6
Q

Situational Influences

A

External influences (more determinant of of ethical behavior). Social pressure, loyalty, prestige, etc.

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7
Q

Unethical Behavior

A

Providing incomplete, misleading or false information (Misallocation of Capital)

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8
Q

Ethical Principles

A

Set a higher standard of behavior than laws and regulations. Laws and regulations are the result of what is perceived unethical behavior

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9
Q

Decision Making Framework

A
  1. Identify, 2. Consider, 3. Decide and act, 4. Reflect.
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10
Q

Identify

A

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

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11
Q

Consider

A

Situational influences, additional guidance, alternative actions, personal biases, potential but unanticipated ethical consequences

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12
Q

Reflect

A

Evaluate the outcomes of the actions that were taken. Were results intended?

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13
Q

Professional Code of Conduct

A

Profession communicates to the public that its members will use their knowledge and skills to serve their clients in an honest and ethical manner

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14
Q

Best Practices

A

Suggested behavior, not a minimum acceptable level

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15
Q

CFAI Professional Conduct Program

A

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

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16
Q

Self-disclosure

A

Members or candidates disclose civil litigation, criminal investigations or written complaints on annual Professional Conduct Statements

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17
Q

Inquiries

A

Interview subject member or candidate, interview complainant or other third party, collect relevant documents and records

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18
Q

Discipline

A

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

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19
Q

CFAI Code of Ethics

A
  1. Act with integrity, competence, diligence, respect, ethical manner
  2. Place integrity of investment profession and interests of clients above own
  3. Use reasonable care and exercise independent judgment in analysis and recommendations
  4. Practice and encourage others to practice in an ethical manner
  5. Promote integrity and viability of global capital markets
  6. Maintain and improve professional competence of self and others
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20
Q

Standards of Professional Conduct

A
  1. Professionalism
  2. Integrity of Capital Markets
  3. Duties to Clients
  4. Duties to Employers
  5. Investment Analysis, Recommendations and Actions
  6. Conflicts of Interest
  7. Responsibilities
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21
Q

Professionalism

A
  1. Knowledge of the Law
  2. Independence and Objectivity
  3. Misrepresentation
  4. Misconduct
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22
Q

Knowledge of the Law

A

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)

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23
Q

Independence and Objectivity

A

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

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24
Q

Misrepresentation

A

Must not knowingly make any misrepresentation in investment analysis, recommendations, actions

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25
Q

Misconduct

A

Must not engage in any professional conduct involving dishonesty, fraud, deceit or commit any act adversely affecting reputation, integrity, competence

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26
Q

Integrity of Capital Markets

A
  1. Material Nonpublic Information

2. Market Manipulation

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27
Q

Material Nonpublic Information

A

Those who possess MNPI that could affect asset value may not act or cause others to act on it

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28
Q

Market Manipulation

A

Must not engage in practices that distort or artificially inflate trading volume with intent to mislead market

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29
Q

Duties to Clients

A
  1. Loyalty, Prudence and Care
  2. Fair Dealing
  3. Suitability
  4. Performance Presentation
  5. Preservation of Confidentiality
30
Q

Loyalty, Prudence and Care

A

Have a duty of loyalty to clients and act with reasonable care to exercise prudent judgment. Place client interest above own

31
Q

Fair Dealing

A

Deal fairly and objectively with all clients when providing investment analysis, recommendations, taking action

32
Q

Suitability

A

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

33
Q

Performance Presentation

A

Make reasonable efforts to ensure performance information is fair, accurate and complete

34
Q

Preservation of Confidentiality

A

Keep information about current, former and prospective clients confidential (unless information is about illegal activities, disclosure required by law, or client permits disclosure)

35
Q

Duties to Employers

A
  1. Loyalty
  2. Additional Compensation Arrangements
  3. Responsibilities of Supervisors
36
Q

Loyalty

A

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

37
Q

Additional Compensation Arrangements

A

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)

38
Q

Responsibilities of Supervisors

A

Must make reasonable efforts to ensure anyone subject to their supervision or authority complies with applicable rules, laws, regulations

39
Q

Investment Analysis, Recommendations and Actions

A
  1. Diligence and Reasonable Basis
  2. Communication with Clients and Prospective Clients
  3. Record Retention
40
Q

Diligence and Reasonable Basis

A

Exercise diligence, independence, thoroughness in analyzing investments, making recommendations. Have reasonable and adequate basis for investment analysis, recommendation, action

41
Q

Communication with Clients and Prospective Clients

A

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.

42
Q

Record Retention

A

Develop and maintain appropriate records as support, and any other investment communications.

43
Q

Conflicts of Interest

A
  1. Disclosure of Conflicts
  2. Priority of Transactions
  3. Referral Fees
44
Q

Disclosure of Conflicts

A

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

45
Q

Priority of Transactions

A

Transactions for clients and employers must have priority over your own

46
Q

Referral Fees

A

Must disclose to employer, clients, prospects any compensation, consideration or benefit received by or paid to others for recommendation

47
Q

Responsibilities as CFA Member or Candidate

A
  1. Conduct

2. Reference to CFAI, Designation, Program

48
Q

Conduct as CFAI Program Participant

A

Must not engage in any conduct that compromises reputation or integrity of CFAI

49
Q

References to CFAI

A

Must not misrepresent or exaggerate the meaning or implications of membership in CFAI, holding the CFA designation or candidacy

50
Q

Mosaic Theory

A

Reaching an investment conclusion through perceptive analysis of public information combined with non-material nonpublic information is not a violation

51
Q

IPS Requirements

A
  1. Separate Beneficiaries
  2. Investor Objectives (return and risk)
  3. Investor Constraints (liquidity, cash flows, tax, regulatory, legal)
  4. Performance Benchmarks
52
Q

Liquidity

A

Ability to exit an investment readily without experiencing a significant extra cost from doing so

53
Q

Capacity

A

Investment vehicle’s ability to absorb additional investment without reducing returns

54
Q

Beneficial Owner

A

Direct/indirect personal interest in the securities being traded

55
Q

Front Running

A

Purchase or sale of securities in advance of anticipated client or employer purchases and sales

56
Q

Representative Accounts

A

Showing a top-performing portfolio as representative of a firm’s results

57
Q

Survivorship Bias

A

Excluding weak performance accounts that have been terminated

58
Q

Varying Time Periods

A

Showing performance for selected time periods with outstanding returns

59
Q

GIPS

A

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

60
Q

Composite

A

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

61
Q

Verification

A

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

62
Q

Fundamentals of Compliance

A

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

63
Q

Input Data

A

Consistent in order to establish full, fair, and comparable investment performance presentations

64
Q

Calculation Methodology

A

Certain uniform methodologies are required for portfolio return calculations and others for composite return calculations. Uniformity across firms is required

65
Q

Composite Construction

A

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

66
Q

Disclosures

A

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

67
Q

Presentation and Reporting

A

Investment performance must be presented according to GIPS requirements

68
Q

Real Estate

A

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.)

69
Q

Private Equity

A

Must be valued according to the GIPS Private Equity Valuation Principles, unless an open-end or an evergreen fund

70
Q

Wrap Fee/Separately Managed Accounts

A

Certain special GIPS standards apply here (some standards supplemented or replaced by specified requirements)

CFA Level 1 (7 decks)

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