Ethics Flashcards
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 complains
- 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 a regs internally
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 punishment
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
- “Firewall” between departments
- Review employee trades
Loyalty, Prudence, and Care
Guidance
- “Client” may be investing public
- Make decisions based on entire portfolio
- Vote proxies and disclose voting policies to clients
- “Soft Dollars” must benefit client
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
Suitability
Guidance
- Prepare IPS and update annually
- Is leverage ok?
- If client wants an unsuitable investment, look to change IPS or reconsider advisory relationship
Performance presentation
Guidance
- all future and former clients
- Have to disclose illegal activities or required by law
- May provide information to CFA for professional conduct program
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 - Loyalty
Recommendations
Encourage adoption of policies with:
1, Outside practice
- Leaving employer
- Incident report
- Employee classification (full/part time)
Duties to Employers - Additional Compensation
Guidance
Written consent from all parties involved
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
Guidance
- must make decisions supported by research
- Encourage firm to adopt policy to review quality of third-party research
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 compesation 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
Conflicts of Interests
Referral Fees
- Must report any compensation to everyone
- Must be disclosed prior to agreement
Responsibilities as a CFA Member
- Have proper conduct
- Reference to CFA Designation/Program – be honest and tell the truth
a. Do not imply superior ability
b. Must be Chartered Financial Analyst or CFA
c. Cannot be used as a noun
Research Objectivity Standards
Policy
- Formal written policy
- Available to clients and prospects
- Disseminate to all employees
- Supervisors procedures ensure compliance
- Senior office attest annually to policy adherence (employees NOT required to sign annually)
Research Objectivity Standards
Public Appearances
Must disclose any personal and firms conflicts
Research Objectivity Standards
Reasonable and Adequate Basis
- Research has reasonable and adequate basis
- Designated person/group to review and approve all research
Research Objectivity Standards
Investment Banking
- Must separate research from investment banking
- Analysts cannot report to investment banking
Research Objectivity Standards
Research Analyst Compensation
- Should be directly linked to quality of research
- Not directly linked to investment banking, corporate finance activities
a. Can be indirectly be linked on investment banking results by should disclose - Measureable criteria for research quality (accuracy over time)
Research Objectivity Standards
Relationship with Subject Companies
An analyst can send only factual information to the subject company for verification
Research Objectivity Standards
Personal Investments and Trading
- Cannot trade personal account 30 days before and 5 days after a recommendation
a. Exception: Severe hardship - Employee/family members cannot have prior IPO shares in the industry the analyst covers
Test Review
- Cannot communicate a rating different than what you published
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