Ethics: Ethics and Trust in the Investment Profession

Question 1

Stakeholder

Answer 1

Individuals or groups of individuals who may be affected either directly or indirectly by a decision and thus have an interest, or stake, in the decision.

Ex. of stakeholders: colleagues, clients, employers, the communities in which we live/work, the investment profession, and other financial market participants

Question 2

Moral principles/Ethical Principles

Answer 2

Beliefs regarding what is good, acceptable, or obligatory behavior and what is bad, unacceptable, or forbidden behavior.

Question 3

Ethics

Answer 3

The study of moral principles or of making good choices. Ethics encompasses a set of moral principles and rules of conduct that provide guidance for our behavior

Question 4

Code of Ethics

Answer 4

Publicly communicates the established principles and expected behavior of members.

An established guide that communicates an organization’s values and overall expectations regarding member behavior. A code of ethics serves as a general guide for how community members should act.

Question 5

Standards of conduct

Answer 5

Standards of conduct identify specific behavior required of community members and serve as benchmarks for the minimally acceptable behavior of community members.

Not all companies have both Standards of conduct

Question 6

Profession

Answer 6

Is the ultimate evolution of an occupation, resulting from the efforts of members practicing the occupation at a high level and creating a set of ethics and standards of conduct for the entire group.

Question 7

Profession Characteristics (3)

Answer 7

1. based on specialized knowledge and skills.
2. based on service to others.
3. practiced by members who share and agree to adhere to a common code of ethics.

Question 8

Clients and Professionals

Answer 8

A client enters into an ongoing relationship with a professional, hiring the professional to use his or her special knowledge for the benefit of the client, usually for a fee.

• Relationship is based on trust
• The professional accepts the duty to place the client’s interests first at all times.

Question 9

Standard of Conduct

Answer 9

can be principle based or rule based

CFA Code and Standards: are principle based

Question 10

Principle based

Answer 10

• Based on the shared principles of honesty, integrity, transparency, diligence, and placing client interests first.
• They apply to all candidates and members at all times regardless of title, position, occupation, geographic location, or specific situation.

Question 11

Rule based

Answer 11

Are often narrowly defined, applying to specific groups of individuals in specific circumstances

Question 12

Professionals use specialized knowledge and skills…

Answer 12

In service to others

Question 13

To claim part of a profession…

Answer 13

the activity must be based on:

1. Specialized knowledge and skills
2. Must include service to others
3. Must be practiced by members who share and agree to adhere to a common code of ethics.

Question 14

The Overconfidence Bias

Answer 14

• can result in a failure to consider, explicitly or implicitly, important inputs and variables needed to form the best decision from an ethical perspective.
• leads us to place too much importance on internal traits and intrinsic motivations, such as “I’m honest and would not lie,” even though studies have shown that internal traits are generally not the main determinant of whether or not someone will behave ethically in a given situation

Question 15

Situational Influences

Answer 15

External factors, such as environmental or cultural elements, that shape our behavior.

Ex. Money, Prestige, Loyalty

Question 16

3 Challenges to Ethical Conduct

Answer 16

1. overconfidence bias
2. situational influences (underestimating)
3. compliance programs
4. Focusing on immediate rather than long term outcomes/consequences

Well-intentioned firms may adopt or develop strong compliance programs to encourage adherence to rules, regulations, and policies. A strong compliance policy is a good start to developing an ethical culture, but a focus on adherence to rules may not be sufficient. A compliance approach may not encourage decision makers to consider the larger picture and can oversimplify decision making. Taken to the extreme, a strong compliance culture can become another situational influence that blinds employees to other important considerations.
It creates “rule followers” (check the box)

Question 17

Investors vs borrowers

Answer 17

Investors supply capital and expect to generate return

Borrowers seek capital to achieve long or short term goals (from banks, financial markets, etc)

Question 18

Who benefits when capital flows to borrowers?

Answer 18

Investors and society

Question 19

Investment industry and financial markets are built on?

Answer 19

TRUST (because investments are intangible). When parties behave ethically, increase broad participation in financial markets.

Increase need and demand for investment professions and job opportunities

Question 20

Investment professionals have a special responsibility to act ethically because?

Answer 20

They have a special responsibility because clients entrust them to protect the clients’ assets.
Specialized knowledge to serve/benefit the clients interest

Question 21

Unethical firms

Answer 21

Cost more for investigations; harm society and markets, firms and employees.

Decrease in jobs, growth, and innovation

Question 22

Laws and Regulations (venn diagram)

Answer 22

• Often codify ethical actions that lead to better outcomes for society of specific groups or stakeholders
• varies country/jurisdiction
• insufficient to ensure ethical behavior

Legal and ethical = not always the same
ex. Civil disobedience (illegal, but ethical)

Question 23

Whistleblowing

Answer 23

The disclosure by an individual of dishonest, corrupt, or illegal activity by an organization or government

(illegal, but ethical)

Question 24

Best mechanism to decrease unethical behavior?

Answer 24

Standards of conduct based on ethical principles may represent a higher standard of behavior than the behavior required by law.

Laws are not always the best because:

1. Follow market practices (could be vague, conflicting, or too narrow in scope)
2. New law may create opportunity for a different but similar problem
3. Laws vary across jurisdictions and countries
4. Laws are subject to interpretation and compliance (can be interpreted wrong or compliance could be delayed)

Question 25

Good ethical judgement

Answer 25

• Requires actively considering the interests of stakeholders and trying to benefit multiple stakeholders—clients, family, colleagues, employers, market participants, and so forth—and minimize risks, including reputation risk

Question 26

Specialized knowledge and skills, a commitment to serve others, and a shared code of ethics best characterize a(n):

Answer 26

Profession

Question 27

What may be the single most important factor in promoting ethical behavior among the firm’s employees?

Answer 27

Development, maintenance, and demonstration of a strong culture of integrity within the firm by senior management

Question 28

Ethical decision making framework: (4 parts)

Answer 28

Consists of multiple phases and components

ICDAR

• Identify: Relevant facts, stakeholders and duties owed, ethical principles, conflicts of interest
• Consider: Situational influences, additional guidance, alternative actions
• Decide and act
• Reflect: contemplate decision; Was the outcome as anticipated? Why or why not?

Question 29

External factors that may shape our behavior?

Answer 29

Situational influences

Question 30

Framework for ethical decision making

Answer 30

Can help people look at and evaluate a decision from different perspectives, enabling them to identify important issues, make wise decisions, and limit unintended consequences.

Question 31

Two primary principles of the CFA Institute Rules of Procedure for Proceedings Related to Professional Conduct

Answer 31

confidentiality of proceedings and fair process to the member and candidate

Question 32

Which group is most likely responsible for maintaining oversight and responsibility for the Professional Conduct Program?

Answer 32

The CFA Institute Board of Governors maintains oversight and responsibility for the Professional Conduct Program (PCP)

Question 33

Role of Professional Conduct Division?

Answer 33

Professional Conduct Division works with the DRC to:

• establish and
• review professional conduct policies and
• enforcing testing policies of other CFA Institute education programs as well as the professional conduct of Certificate in Investment Performance Measurement (CIPM) certificants

Question 34

Role of Disciplinary Review Committee (DRC)?

Answer 34

Disciplinary Review Committee (DRC) works in conjunction with the PCP and is responsible for enforcement of the Code and Standards.

Question 35

What is the annual Professional Conduct Statement?

Answer 35

• Must disclose written complaints/allegations, even if untrue
• Members and candidates must self-disclose on the annual Professional Conduct Statement all matters that question their professional conduct, such as involvement in civil litigation or a criminal investigation or being the subject of a written complaint

Question 36

Sanctions imposed by CFA Institute for violations of the CFA Institute Code of Ethics or Standards of Professional Conduct include?

Answer 36

Public censure, suspension of membership and use of the CFA designation, and revocation of the CFA charter.

• Candidates enrolled in the CFA Program who have violated the Code and Standards or testing policies may be suspended or prohibited from further participation in the CFA Program.
• DOES NOT include monetary fines

Question 37

How many components included in Code of Ethics and Standards of Professional Conduct?

Answer 37

• six components of the Code of Ethics

- seven Standards of Professional Conduct

Question 38

Standards of Professional Conduct (7)

Answer 38

1. Professionalism
   Independence/Objectivity,
   Misrepresentation
   Misconduct
2. Integrity of Capital Markets
   Market manipulation
   Material nonpublic inform
3. Duties to client
   Loyalty, prudence, care
   Fair dealing
   Suitability
   Performance Presentation (fair, accurate, complete)
   Preservation of Confidentiality
4. Duties to employers
   Loyalty
   Additional compensation arrangements (do not except
   gifts unless written consent obtained from all parties)
   Responsibilities of supervisors
5. Investment analysis, recommendations, and analysis
   Diligence and Reasonable Basis
   Communication with Clients and Prospective Clients
   Record Retention
6. Conflicts of Interest
   Disclosure of Conflicts
   Priority of Transactions
   Referral Fees
7. Responsibilities as a CFA Institute Member or Candidate
   Conduct as Participants in CFA Institute Programs
   Reference to CFA Institute, the CFA Designation, and
   the CFA Program

Question 39

Suitability (Standard of Professional Conduct

Answer 39

• Make a reasonable inquiry into a client’s or prospective client’s investment experience, risk and return objectives, and financial constraints.
• Make sure it is suitable for client
• Make only investment recommendations or take only investment actions that are consistent with the stated objectives and constraints of the portfolio.

Question 40

State components of Code of Ethics (6)

Answer 40

1. Act with integrity, competence, diligence, and respect and in an ethical manner
2. Place the integrity of the investment profession and the interests of clients above their own personal interests.
3. Use reasonable care and exercise independent professional judgment (when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities)
4. Practice and encourage others to practice in a professional and ethical manner
5. Promote the integrity and viability of the global capital markets for the ultimate benefit of society.
6. Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.

Question 41

Q. When can a party, nonmember or firm, most likely claim compliance with the CFA Institute Code of Ethics and Standards of Professional Conduct? Once they have:

Answer 41

Ensured that their code and ethics meets the principles of the Code and Standards.

(CFA does NOT verify claims, and it welcomes public acknowledgement when appropriate)

Question 42

Professional Conduct Program

Answer 42

see flashcard #6

Question 43

Conduct inquiries may arise from? (PECS)

Answer 43

• self disclosure on annual professional conduct statement
• written complaints
• CFA staff through media, regulatory notices
• exam proctors
• post-exam behavior

Proctor
Evidence
Complaints
Self

Question 44

Designated officer may decide:

Answer 44

CFA institute designate officer (Professional conduct staff)

• No disciplinary action
• Cautionary letter
• Disciplinary action
  Suspension
  Condemnation by member’s peers