Ethics and Investment Professionalism Flashcards
Identify the ethical obligations to clients, prospective clients, employers and co-workers. I.e. a firm has a fiduciary duty, this means it must put the client’s interest above it’s own. This requires a firm and it’s employees to:
- Act with loyalty to their clients and act with reasonable care and exercise prudent judgement.
- Deal fairly and objectively with all clients when providing investment analysis, making investment recommendation, taking investment decisions, or engaging in other professional activities.
- Provide suitable recommendations when in an advisory relationship.
- Provide fair, accurate and complete information when communicating investment performance information.
- Preserve confidentiality of a client unless the information concerns illegal activities, disclosure is required by regulation or is permitted by the client.
According to the CFA code of ethics candidates must demonstrate which 6 elements:
- Act with integrity, competence, integrity respect and in an ethical manner with the public, clients and prospective clients, employers and employees, colleagues in the investment profession and other participants in the capital markets.
- Place the integrity of the investment profession and the interests of clients above their own personal interests.
- Unreasonable care and exercise independent professional judgement 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 credibility on themselves and the profession.
- Promote the viability and integrity of global capital markets.
- Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.
The Code of Ethics is the underlying philosophy of the Standards of Professional Conduct. The Standards promote fair and ethical behaviour, and are organised into seven broad categories:
a. Professionalism.
b. Integrity of capital markets.
c. Duties of clients.
d. Duties of employers
e. Investment analysis, recommendations and actions.
f. Conflict of interest.
g. Responsibilities as a CFA Institute Member or CFA Candidate
What 4 topics fall under ‘professionalism’, provide examples for each:
- Knowledge of the law. e.g. have knowledge of the regulatory environment
- Independence and objectivity. e.g. free trips or gifts from companies may reduce objectivity.
- Misinterpretation e.g. falsifying own qualifications
- Misconduct e.g. excessive drinking during business hours
What 2 topics fall under ‘integrity of capital markets’, provide examples for each:
- Material non-public information e.g. do not act or cause others to act on material non-public information that could affect the value of an investment
- Market manipulation: practices that distort prices. e.g. transactions that artificially distort prices or volumes
What 5 topics fall under ‘duties to clients’, provide examples for each:
- Loyalty, prudence and care e.g. I.e. putting the interests of the client before yours. e.g. using dealing commission to purchase investment research.
- Fair dealing. e.g. do not favour one client over another.
- Suitability:
- For an advisory relationship: enquire into a client’s experience, risk and return objectives, and financial constraints.
- Managing a portfolio: making recommendations that are consistent with the stated objectives and constraints of the portfolio. - Performance presentation: when communicating investment performance , ensure it’s fair complete and accurate. Companies are encouraged to adopt GIPs although it’s not compulsory.
- Preservation of confidentiality: keep information about current, former and prospective clients confidential. Exceptions: illegal activity/ disclosure by law/ client is required to disclose information
What are 3 topics fall under ‘duties of employers’ and provide examples for each:
- Loyalty: e.g. offering investment advise independently
- Additional compensation agreements: e.g. payments (or benefits in kind) from clients or third parties.
- Responsibilities of supervisors: supervisors can rely on reasonable compliance procedures. e.g. compliance procedures are clearly written and accessible.
What are the 3 standards of professional conduct that fall under investment analysis, recommendations and actions and provide examples of each.
- Diligence and reasonable basis: e.g. have a reasonable and adequate basis for any investment analysis, recommendation or action.
- Communications with clients: e.g. ensuring that the client understands the information being sent to them and clearly distinguishing between fact and opinion.
- Record retention: e.g. develop and maintain appropriate records to support analysis, recommendations and actions.
What are the 3 standards of professional conduct that fall under ‘conflict of interest’ and give examples of each
- Disclosure: make full and fair disclosure of all matters that could impair independence and objectivity or conflict with duties to clients. e.g. disclosing any direct or indirect beneficial interests that one may hold.
- Priority of transactions: transactions for employers take priority over personal transactions. e.g. family accounts should be treated as client accounts.
- Referral of fees: disclose to employer any compensation, and consideration or benefit received from/paid to others for the recommendation of products and services. e.g. disclose the nature of benefit and an estimate of the monetary value.
What are the 2 standards of professional conduct for the responsibilities as a CFA Institute member or CFA candidate? Provide examples:
- Conduct a members and candidates: do not compromise the reputation of the CFA institute through your actions.
- Reference to the CFA Institute, the CFA designation and the CFA Program: do not misrepresent or exaggerate the meaning or implications of membership in the CFA institute.
