Ethics Flashcards
What are the seven topics in Standard of Professional Conduct?
- Professionalism
- Integrity of Capital Markets
- Duties to Clients
- Duties to Employers
- Investments Analysis, Recommendations, and Actions
- Conflicts of Interest
- Responsibilities as a CFA Institute member or CFA candidate.
What is material nonpublic information?
Information that investors would find valuable before making an investment decision or that could cause the price of a security to change.
What is a security?
A tradeable financial asset
What is a ETF?
Exchange-traded Fund. Investment fund traded on stock exchanges. It holds assets such as Stocks, commodities, or bonds.
Mosaic theory
Combination of public and nonmaterial nonpublic information.
In IV(A): Loyalty which interest comes first? The client or your employer?
The client as they are the ultimate beneficiary.
What are your obligations to your employer related to outside work?
You may perform it, but must discuss the terms with my employer and receiving approval.
When leaving your current employer, can you take client records with you?
Only if you received permission from the employer.
Who does Standard IV(B): Additional Compensation Arrangements protect?
The employer
Can you accept a gift from an outside party?
Only if you have written permission from the employer before the arrangement.
What gift would likely be in violation of Standard IV(B): Additional Compensation Arrangements
Financial gifts or any gifts that would reasonably be expected to create a conflict of interest.
Standard IV(C): Responsibilities of Supervisors, are you responsible for all subordinates?
Yes.
What is Standard IV(C): Responsibilities of Supervisors
Supervisors must make reasonable efforts to be sure that their subordinates will comply with laws, rules, and regulations, as well as the Code and Standards.
What is Standard IV(B): Additional Compensation Arrangements.
Employees must not accept any gifts that would be expected to create a conflict of interest.
What is Standard V(A): Diligence and Reasonable Basis
Requires an appropriate amount of research and investigation is done for each investment. Be thorough in investment analysis.
Do less reliable sources require a greater level of review for accuracy?
Yes.
Could you rely on reports of a third party vendor?
Yes; unless you have reason to believe otherwise.
What is Standard V(B): Communication with Clients and Prospective Clients?
Disclose to clients and prospective clients the basic format and principles of investment processes and any changes to these processes
According to Standard V(B): Communication with Clients and Prospective Clients, what should be disclosed?
Significant risks, such as leverage.
What is an ex ante basis?
Investment decisions on information that was known at the time of the decision.
What must a portfolio manager do in regards to Standard V(B): Communication with Clients and Prospective Clients?
Disclose basic formats and principles of investment processes.
Separate fact from opinion in analysis.
Determine what are important investment factors.
What is Standard V(C): Record Retention?
Develop and maintain appropriate records to support their investment recommendations.
What does Standard V(C): Record Retention describe?
Kinds of records that should be kept, how long they should be kept, and who owns them?
What kind of curve is demand in the perfect competition model?
Horizontal Curve
Pricing Interdependence
Sometimes called “price war.” Firms choose price competitively.
Cournot Equilibrium
Firms choose quantity simultaneously.
Stackelberg Equilibrium
One firm chooses the quantity and the others follow.
Nash Equilibrium
Simultaneous game grid that helps analysis in determination of pricing outcomes.
Oligopoly
A few large firms that control the market.
Characteristics of an Oligopoly
Significant barriers to entry.
Interdependent Pricing
Typically Homogeneous products
What is perfect competition?
A market structure where a large number of firms have homogenous products, no barriers to entry, suppliers are price takers, have no control over the price.
Example of perfect competition
agricultural markets; corn farm.
Material Nonpublic Information Guidance
Members and candidates must not act upon or cause others to act upon information that has not been distributed publicly and could impact the price of a security.
Market manipulation
Members and candidates must not manipulate security prices or volumes with the intent to deceive other investors.
What does market manipulation do?
Reduces market efficiency and harms investor confidence.
How does one conduct market manipulation?
Disseminating incorrect or misleading information and engaging in market transactions that distort security prices.
Standards of Professional Conduct regarding loyalty, prudence, and care require members and candidates to:
Always act in their clients’ best interests
Place their clients’ interests before their own and their employer
Provide clients with as much care, judgment, and caution in investment decisions as they would for themselves.
What procedures are included in Loyalty, Prudence, and Care
Sending clients regular account statements, obtaining client approval for questionable investment actions, and creating firm policies on employees’ responsibilities to clients.
Who is the client?
The ultimate beneficiary
What does Suitability refer to?
Portfolio managers must make investment decisions that are consistent or suitable with the portfolio’s objectives and constraints.
How often should a client’s IPS (Investment Policy Statement) be updated?
Annually or whenever a client experiences any significant changes in life (marriage, divorce, children, retirement, or health concerns).
What is a mutual fund?
Open-end professionally managed investment fund that pools money from many investors to purchase securities.
Regarding suitability, members and candidates must
Make a reasonable inquiry as to the client’s risk and return objectives.
Have a signed IPS in place before making any recommendations or taking investment action
Ensure investments are suitable to the client’s situation and be looked at in the context of entire portfolio
What must members do under fair dealing?
Treat all clients fairly, objectively, and impartially in all professional undertakings. Do not discriminate any client.
What is not a suggested policy of fair dealing
Disseminate all personal trading decisions to clients.
What sounds like a reasonable goal in performance presentation?
Making sure the client recognizes the range of possibilities for future returns.
How does including accounts that no longer exist make a performance report more fair, accurate, and complete?
It protects against biased results.
What is a composite?
An aggregation of one or more portfolios managed according to a similar investment strategy.
What must a member do under Preservation of Confidentiality
Keep all information confidential for former, current, and prospective clients unless it concerns illegal activities, is required by law, or the client gives permissions to disclose the information.
What is an IPS?
Investment Policy Statement
What does Standard VI(A): Disclosure of Conflicts require CFA members & candidates to do?
Make full and fair disclosure of all matters that can reasonably be expected to impair their objectivity to their clients .
If you agreed to serve on the board of directors for a company whose stock is a large holding in one of the mutual funds you managed, would you be required to disclose your board position to your clients of the mutual fund?
Yes.
What is Standard VI(B): Priority of Transactions?
Investment transactions for clients and employers must have priority over investment transactions for CFA members or candidates.
What are the exceptions for Standard VI(B): Priority of Transactions?
The client is not disadvantaged by the trade.
The investment professional does not benefit personally from trades undertaken from clients.
The investment professional complies with applicable regulatory requirements.
What does Standard VI(C): Referral Fees require members and candidates to do?
Disclose to employers or clients any benefit or compensation received from for the recommendation of products or services.
If a financial advisor pays a third party a fee to refer product or services to a client, would it still be a violation of Standard VI(C): Referral Fees if they did not disclose this?
Yes. You must tell client of any compensation given for the recommendation of any services even if its noncash benefits.
What is Standard VII(A): Conduct as Participants in CFA Institute Programs?
Members must not engage in any conduct that compromises the reputation of the CFA
What would be an example of violation of Standard VII(A): Conduct as Participants in CFA Institute Programs?
Sharing any details of the questions or even broad topics and formulas.
What are members and candidates not allowed to do under Standard VII(B): Reference to CFA Institute, the CFA® Designation, and the CFA® Program?
misrepresent or exaggerate their membership in CFA Institute or their participation in the CFA® program.
If you live in a country that has financial laws that are more lenient than the Code of Standards, what do you think you are you required to comply with?
The Code of Standards
What should you do if your employer and candidates are in violation of the Code of Standards?
You are required to inform your supervisor or firm’s compliance department of any violation at your firm. If this does not stop the violation, you must disassociate from the illegal or unethical activity.
In regards to Standard I(A): Knowledge of Law, when operating in a different country with laws that are less strict than the Code of Standards which one do you think should take precedence?
The strictest law or CFA Institute standard applies
If you are the only CFA candidate or member at your firm, what might your responsibilities be regarding the code at work?
Try to get the firm to consider creating policies and procedures that follow the spirit of the code.
What does Standard I(B): Independence and Objectivity state?
Members and candidates have a responsibility to act with good judgment while also maintaining independence and objectivity relating to all professional endeavors
What must candidates and members not do under Standard I(C): Misrepresentation
Not make any misrepresentations in their professional activities, this includes performance reporting, investment analysis, recommendations, and social media.
Under Standard I(D): Misconduct, what must candidates not do?
Members and candidates must not commit fraud, be dishonest, be deceitful, or engage in any activity that has a negative impact on their professional character.
