Ethics & Professional Standards Flashcards
What is Standard 1?
Professionalism
Part A of Standard 1?
Knowledge of the law: members must understand and comply with all laws.
What should you do in the case of conflict of laws for Standard 1 Part A?
comply with the stricter law
what if you participate where others have violated?
you still bear he consequences and will bear the burden of the law. If a member thinks that client/employer activities are illegal, member must separate from this activity or stop this behaviour
Part B of Standard 1?
Independence and Objectivity
What does independence and objectivity mean?
anything that comes from your client or employer that makes you less objective and independent: gifts, commissions, bonuses, transportation reimbursement
part c of standard 1?
misrepresentation
what does misrepresentation mean?
any untrue statement or omission of a fact that is false or misleading. Don’t guarantee any specific return on volatile investments. Avoid plagiarism. The firm is allowed to use the research conducted by analysts previously employed by the firm.
what is part D of section 1?
misconduct
what does misconduct mean?
you mustn’t engage in any professional conduct that involves dishonesty, fraud or deceit
can a legal conduct still damage competence and trustworthiness?
yes, example is abusing alcohol during business hours, personal bankruptcy, lack of necessary due diligence
what is standard 2 of professional conduct?
integrity of capital markets
what is part A of standard 2?
material non public information
what does material non public info entail?
if you use any material non public information to your advantage
What does the material information include?
earnings, mergers, change in assets, innovative products, new licenses, changes in management, change in customer info, change in audit, bankrputcy or a legal dispute. Basically any info that has not been made known/disseminated yet.
what should you do under mosaic theory?
you should save the info you have or find and document it
what is a firewall element?
it’s an information barrier that prevents communication of material non public info. This can include review of employees trading, documentation of procedures limiting flow of info between the departments. Physical separation of departments, prevention of personnel overlap, records maintenance, communication to employees
what is part b of standard 2?
market manipulation
what is market manipulation?
you shouldn’t engage in practices that influence or artificially inflate trading volume. This can include dissemination of misleading or false info and doing transactions that mislead the market.
what is standard 3?
duties to clients
what is part A of standard 3?
loyalty, prudence and care. You must act for client’s benefit. You should identify the client to whom loyalty is owed. You should make sure client’s objectives and risk preferences are discussed and accounted for.
what is part b of standard 3?
fair dealing
what does fairly mean?
fairly means that member must take not to discriminate against a client when giving investment advice, should not have different levels of service and should nto have preferential treatment
what is part c of standard 3?
suitability, looking into client’s experience, return/risk objectives.
what is part d of standard 3?
performance presentation: investment policy and includes client id, investor objective, investor constraint: tax, liquidity, expected cash flow; performance measurement benchmark
how should the IP be presented?
it must be presented accurately, fairly and should be complete, should follow the GIPS standards to meet thee obligations which means should present performance of weighted composite of similar portfolios, should include terminated accounts as part of performance history
what is part e of standard 3?
preservation of confidentiality: should maintain client’s confidentiality even if they are no longer a client, should disclose illegal info
what is standard 4?
duties to employers
what is part A of standard 4?
loyalty: employees must act for the benefit of an employer but should still place client’s interests before employer’s
what should members who plan to engage in independent activity do?
they must obtain an approval form employer
how is practice defined?
it is service that employee does for remuneration
what can cause violation when leaving an employee?
misappropriation of trade secrets, misuse of confidential info, reaching out to employer’s clients prior to leaving, using client’s lists
can the knowledge and experience gained on the job be used elsewhere?
yes, as long as you are not using any of the intellectual property of the previous company
what is whistleblowing?
employee acting against employer’ interests due to illegal activities
what is part B of standard 4?
additional compensation
what does additional compensation entail?
you must not accept gifts, benefits, compensation or consideration that creates conflict of interest
what is part c of standrd 4?
responsibility of supervisors
what does responsibility of supervisors entail?
must make reasonable effort to make anyone subject to their authority complies with the rules. Should assume effective compliance system. Implement education programs. Notify the management of inadequate compliance system.
what is standard 5?
investment analysis and recommendations
what is part a of standard 5?
diligence and reasonable basis
what does diligence and reasonable basis include?
exercise diligence and independent in analysing investments, have a reasonable basis for investment analysis, should have necessary due diligence: macro conditions, operating fin.industry, industry’s current conditions, mutual fund’s management history, quality of assets, peer comparison; if there is secondary research, must determine that it’s sound. Should look at assumptions, rigour of analysis, date of research and evaluation of objectivity
what is part b of standard 5?
communication with clients/prospective clients
what does communication with clients/prospective clients include?
should disclose to clients basic format of investment process you use; disclose to clients significant limitations and risks; use reasonable judgement in finding which factors are important to investment analysis
what should members do to stay compliant with part b of standard 5?
should communicate the important factors in making investment recommendations, should followup with communication of changes in risk, provide regular updates on changes in risk, should maintain records
what is part c of standard 5?
record retention
what does record retention entail?
must develop and maintain appropriate records to support investment analysis
why are the records unique?
they are property of the firm and so when an employee leaves, they cannot take their own research or forms
what is standard 6?
disclosure of conflicts
what does disclosure of conflicts means?
must make full and fair disclosure of all matters that could impair the employees independence and objectivity
what are the guidelines of disclosure of conflicts?
if a conflict cannot be avoided, their disclosure is necessary, members should disclose any materially beneficial ownership interest in security
what is part b of standard 6?
priority of transactions
what does priority of transactions mean?
it means that investment transactions for clients or employers must have priority over the transactions by an employee who is the beneficial owner of a specific asset in that transaction
when can an employee take action on account where they are beneficial owners?
only when a client had adequate opportunity to act on a recommendation
what is part c of standard 6?
referrals: must disclose to their employer or clients any compensation received or paid for the recommendation of products or services
What is standard 7?
Conduct as participant in cfa program
What is standard 7?
Conduct as participant in cfa program
What is part a of section 7?
Must not engage in any conduct that compromises reputation of CFA, shouldn’t divulge questions/answers, when expressing own opinion shouldn’t disclose content details. As a member you should remit annually to CFA a professional conduct statement and pay applicable fee
What is gips?
Global investment performance standard
Why was gips created?
To gauge a fund manager’s ability to make investment decisions
What are the gips misleading practices?
Using best performing portfolio to present firm’s overall performance
What is survivorship bias?
Historical data that excludes performance of assets that performed poorly and were terminated
What is carrying time period?
Performance only in the period where it outperformed the market
Who benefits from gips?
Investment management groups and clients
What does gips require
Use of composites which combines discretionary portfolio into one group that represents particular investment objective
What are GIPS objectives?
Establish investment industry best practices for calculating/presenting, obtain single standard investment performance benchmark, promote the use of accurate data, encourage fair and global competition
