Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

FIN 330 > Final Exam > Flashcards

Final Exam Flashcards

1
Q

• Duties to Clients

A

o Loyalty, Prudence, and Care

 Members and Candidates have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment. Members and Candidates must act for the benefit of their clients and place their clients’ interests before their employer’s or their own interests. In relationships with clients, Members and Candidates must determine applicable fiduciary duty and must comply with such duty to persons and interests to whom it is owed.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

• Standard III (C) Suitability

A

o Know your client’s circumstances, needs, and objectives.
o Only recommend or place the client in suitable investments (as judged within the context of the entire portfolio).
o Take investment actions that are consistent with the stated objectives of the portfolio.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

• Unsolicited Trade Requests

A

o In the case of unsolicited trade requests, the member is not required to develop an IPS.
o However, if the investment is clearly unsuitable for a client, then the broker should warn the client and obtain a statement from the client that suitability is not an issue.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

• Standard III(D) Performance Presentation

A

o When communicating investment performance information, Members and Candidates must make reasonable efforts to make sure that it is fair, accurate, and complete.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

• Cherry Picking

A

Strong Funds – Would start numerous funds and then close the poorly performing funds.

the act of choosing top securities for investment from research that generally overlooks large amounts of data or disregards broad market metrics

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

• Standard III: Duties to Clients (E) Preservation of Confidentiality

A

o Disclosure is required by law.

o The client or perspective client permits disclosure of the information.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

• Capitalism

A

An economic system in which the major portion of production and distribution is in private hands operating under what is called a profit or free market system.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

• Mercantile Capitalism

A

– A term used by economic historians. It was a form of capitalism that preceded industrial capitalism and was focused on the distribution and sale of goods produced by artisans and craftsmen such as weavers and shoemakers.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

• Industrial Capitalism

A

In the early 1800’s large industrial companies began replacing craftsmen. Weaving Industry, Railroads (Steam Engines).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

• Financial Capitalism

A

generation of profits by the use of financial instruments such as stock, bonds, derivative assets, insurance contracts and other financial instruments.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

• State Welfare Capitalism

A

government plays an active role in regulating economic activities in an effort to smooth out the boom and bust pattern of the business cycle. Also attempts to ameliorate some of the problems associated with capitalism such as wealth disparity and monopoly. Includes programs such as social security and unemployment insurance.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

• Profit motive

A

The motivation for investment in capital because profit is possible

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

• Private ownership of property

A

important because we want the right to sell/trade what we have

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

• Criticisms of Capitalism

A

o A) Pursuit of Self Interest is Too Narrow
o B) Inequality of Wealth in Capitalist Systems
o C) Oligopolies and Monopolies
o D) Corporate Welfare
o E) Exploitation and Alienation
o F) Cost and Other Inefficiencies of Competition
o G) Nash Equilibrium
o H) Market Myopia

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

• Moral Justifications of Capitalism

A

o Psychological Egoism
o Enlightened Egoism – still pursue self-interest, but keep the law in mind
o Natural Right to Property
o Efficiency and Productivity (Utilitarian)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

• Example of Nash Equilibrium

A

o Two people are pumping oil from the same underground pool of oil. Neither knows how fast the other is pumping oil.
o Strategy A: Limit the amount that you pump
o Strategy B: Pump as fast as you can

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

• (F) Market Myopia

A

o Institutional and cultural incentives encourage short term profit maximization instead of long term (global) profit maximization.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

• Slippery Slope

A

o Government regulation can mitigate some of the negative aspects of Laissez- Faire capitalism.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

• laissez-faire

A

o literally means “to let people do as they wish.”

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

• Examples of Government Regulation

A

o Monopolies and Cartels- Anti Trust legislation
o Inequalities of Wealth - Social Welfare Programs AFDC, Food Stamps, Free Public Education, Minimum Wage Laws, Graduated Income Taxes, Compensation Limits in the Banking Industry
o Exploitation and Alienation – Safety regulations, Workers Rights legislation (labor laws)
o Nash Equilibrium – Minerals Development

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

• Socialism

A

o Government controls the means of production. This may be accomplished in the extreme by total government ownership and control of productive capital. A more moderate form of socialism would involve government regulation that directs or affects production.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

• Standard IV – Duties to Employers

A 
o	IV(A): Loyalty
o	IV(B): Additional Compensation Arrangements
o	IV(C): Responsibilities of Supervisors
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

• Standard IV (A) Loyalty

A

o In matters related to their employment, Members and Candidates must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

• Loyalty to Employer Cover Issues Related to:

A

o Moonlighting
o Changing Employment
o Whistle blowing

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

• Moonlighting (Independent Practice)

A

o Member must notify and receive consent from their employer regarding any independent practice for compensation
o Notification must include types of services, the duration of the services, and the compensation.
o Member must abide by employer rules regarding moonlighting.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

• Changing Employment

A

o When planning to change jobs you must continue to act in your employers interest until your resignation is effective.
 You may make preparations to go into competition with your employer without disclosing the preparations provided
 The preparations do not interfere with your obligations to act in employers interest.
 The preparations do not involve the use of your employer’s assets or facilities.
 The preparations are made on your time and do not distract you from your responsibilities.
 The preparations do not violate “no compete” provisions of your employment.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

• Whistle Blowing

A

o Activities inconsistent with employers interests are permitted when
 Necessary to comply with duties to the market and clients.
 When the employer is violating the law.
 When the employer is engaged in unethical activities
o Such action is permitted only if the intent is clearly aimed at protecting clients or the markets and are not for personal gain.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

• Activities that might constitute a violation of standard IV

A

o Misappropriation of trade secrets
o Use of confidential information
o Solicitation of employer’s clients (prior to cessation of employment)
o Misappropriation of information such as a business opportunity
o Misappropriation of client’s lists

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

• Standard IV (B) Additional Compensation Arrangements

A

o Members and Candidates must not accept gifts, benefits, compensation, or consideration that competes with, or might reasonably be expected to create a conflict of interest with their employer’s interest unless they obtain written consent from all parties involved.

30
Q

• Standard IV (C) Responsibilities of Supervisors

A

o Members must make reasonable efforts to detect violations of laws, rules, regulations, and the Code and Standards by anyone subject to their supervision or authority.

31
Q

• Compliance Program Violations

A

o If the Member establishes a compliance program but a violation occurs and is not detected, the Member may not be in violation of the Standard.
o The Member may be in violation if she knows or should know that the procedures designed to detect and prevent violations are not being followed

32
Q

• What would it be like if it were very easy for shareholders to bitch about their loss of money?

A

o There is never going to be a decision that everyone agrees with
o You can’t tell for sure if the decision directly caused the outcome
o If businesses are discouraged from taking risks, it will result in a very stagnant economy

33
Q

• Business Judgment Rule

A

o The business judgment rule specifies that the court will not review the business decisions of directors who performed their duties (1) in good faith; (2) with the care that an ordinarily prudent person in a like position would exercise under similar circumstances; and (3) in a manner the directors reasonably believe to be in the best interests of the corporation.
o Does not say that a manager must do all 3 things to do the right thing, the shareholders must prove that 1/3 were violated

34
Q

• Standard IV (B) Additional Compensation Arrangements

A

o Members and Candidates must not accept gifts, benefits, compensation, or consideration that competes with, or might reasonably be expected to create a conflict of interest with their employer’s interest unless they obtain written consent from all parties involved.

35
Q

• Standard IV (C) Responsibilities of Supervisors

A

o Members must make reasonable efforts to detect violations of laws, rules, regulations, and the Code and Standards by anyone subject to their supervision or authority.

36
Q

• When do the costs of misrepresentation become too high?

A

o Judge on two dimensions:
 Intention
• Fair account of company, perhaps ironing out some quirks (year end date is arbitrary), or
• Intending to deceive, encouraging the belief that company is better than it really is
o Extent of Adjustment
 Within effective margins of error on the accounting process, or
 Material

37
Q

o Professional ethics of accounting

A

 Ensure tax returns are true, correct and complete
 Assist taxpayer in paying no more than is legally required
 Must have a good faith belief that position taken (supporting strategy or product) has at least a realistic possibility of being upheld if challenged administratively or judicially

38
Q

• Standard V – Diligence and reasonable bias

A

o Exercise diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions
o Have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action

39
Q

• Secondary research

A

conducted by someone else in the firm

40
Q

• Third party research

A

conducted by entities outside of the firm

41
Q

• Payday Loans, etc. ethical support

A

o Utilitarian – businesses should maximize profits while staying within law. Laws prohibiting these transactions could be passed if society decided to do so.
o Rawls – justice – Libertarian
 Are the deals really consensual or is there coercion?
o Kantian – are customers merely a means to business profits?
 Advertising
 Protecting the vulnerable
 How defaulters are treated

42
Q

• Securitization

A

o Removed constraints on supply of funds
o Separated loan origination and its consequences
o Lend as much as possible at highest rates

43
Q

• Subprime Ethical Considerations

A

o Utilitarian – mortgages promote home ownership: security, retirement, clean and safe neighborhoods. But consequences of failure/default are dire.
o Kantian – lending without regard to the ability to repay would fail universalizing test. Customers are merely a means to profit.
o Virtue – professional loan originators would match loans to borrower’s capabilities.

44
Q

• Microfinance

A

o Primary purpose is to help people lift themselves out if poverty
o Average loan = $200
o Loans made primarily to women
o Not for consumption, but for enterprise
o Criticisms
 Non-traditional roles for women
 Corporate welfare, not sustainable business
 High interest rates, public failures, suicide

45
Q

• Standard V (B) - Communication with Clients and Prospective Clients

A

o Members and Candidates Must:
o Disclose to clients and prospective clients the basic format and general principles of the investment processes used to analyze investments, select securities, and construct portfolios and must promptly disclose any changes that might materially affect those processes.
o Use reasonable judgment in identifying which factors are important to their investment analyses, recommendations, or actions and include those factors in communications with clients and prospective clients.
o Distinguish between fact and opinion in the presentation of investment analysis and recommendations.

46
Q

• Firm Money or Client Money?

A

o Firm – interests aligned, maybe staff over shareholder, but no real issue
o Client – traders not paying for cost, so are less likely to control it

47
Q

• Ethics Frameworks of Excessive Trading - Kant

A

 Under universalizing test, it seems OK to trade (everyone does do it; it’s expected)
 Traders don’t use the ultimate beneficiaries, they are fairly far removed from the people

48
Q

• Ethics Frameworks of Excessive Trading - Utilitarian

A

 Transfer of wealth from clients to the owners and operators of the financial markets
 Increase in pleasure for traders

49
Q

• Ethics Frameworks of Excessive Trading - Virtue

A

 Intemperate
 Using others’ money without permission? – Like kids leaving their mark?
 But traders may be genuinely optimistic, well-meaning, etc.

50
Q

• Rogue Trader

A

o Immoral – out of control - Elephant
o But are they all rogues, out to steal?
o Environment – promotes competitiveness, mob thinking, risky behavior, gambling chips or computer game
o Had to gamble to get a complete recovery
o Places blame on trader, but not the system he or she operates within

51
Q

• Active fund management

A

o Shopping for value

o Active Managers will on average underperform because it’s a zero sum game.

52
Q

• Passive fund management

A

o Index fund

53
Q

• Fiduciary duty

A

to recognize that the soft dollar amounts are there, but you are still investing in the best option for the client

54
Q

• VI (A) Disclosure of Conflicts

A

o Members and Candidates must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients, and their employer. Members and Candidates must ensure that such disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively.

55
Q

• Standard VI (B) Priority of Transactions

A

o Investment Transactions for clients and employers must have priority over investment transactions in which a Member or Candidate is the beneficial owner.
o Individual portfolio managers or investment advisors may trade for their own account in securities in which their customers also have positions.
o However, such investments must not be to the disadvantage of the client.
o Members can only undertake transactions for their personal account after their clients and employers have had adequate opportunity to act on the recommendation.

56
Q

• Blackout periods

A

o Blackout periods should be established for investment personnel involved in the investment decision-making to assure that there is no “front-running” of client trades.

57
Q

• Front Running Example

A

o A mutual fund has a substantial position in a medium cap company. The management team decides to liquidate the position but because of the low volume of trading it is expected that it will take several hours to unwind the position. During the process of selling the stock, the company should impose a blackout period to assure that their employees do not front run the trades in their own account.

58
Q

• Standard VI(C) Referral Fees

A

o Members and Candidates must disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received by, or paid to, others for the recommendation of products or services.

59
Q

• Institutional Investors

A 
o	Manage Large Volumes of Capital
o	Examples
	Mutual Funds
	Insurance Companies
	Pension Funds
	University Endowments
60
Q

Institutional investors ethical issues

A

 In Mutual Funds
 Relationship Investing
 Socially Responsible Investing

61
Q

o What is Market Timing?

A

the strategy of making buying or selling decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis.

62
Q

Personal trading should be banned because

A

 Industry image
 Heavy responsibility undertaken by funds
 Anything less than ban too hard to enforce
 Investor fairness demands ban

63
Q

Personal trading should NOT be banned because

A

 Not needed – competition cures potential ills
 Hurts investors – no access to the very best
 Not fair to fund personnel – limits freedom

64
Q

• Soft-Dollar Brokerage

A

In asset management and securities industries, soft dollars are the benefits provided to an asset manager by a broker-dealer as a result of commissions generated from financial transaction executed by the broker-dealer for client accounts or funds managed by the asset manager.

o Institutional investors pay commissions to brokerage firms
o What are some ways that brokerage firms might differentiate themselves from competition?

65
Q

• Issues with Soft-Dollar Arrangements

A

o Invisible to investors, not arm’s length
o Fiduciary duty to act in best interest of investors = best execution?
o Safe Harbor – OK, as long as the managers have a good faith belief that higher commissions are reasonable given the totality of services provided
o And the “competition cures all ills argument” again

66
Q

• Socially Responsible Investing

A 
o	Avoid “Sin Stocks” or
o	Actively Screen other factors
	Competitive returns plus
	Negative Screens – avoid particular businesses or those with objectionable records
	Positive Screens – identify companies with notable achievements
o	Less diversification possible
o	Hard to quantifiably measure companies
o
67
Q

Utilitarian view of capitalism

A

Capitalism can be justified by it’s results. It does a better job than other systems with regard to producing and distributing wealth.

68
Q

You may contact clients and prospective clients provided:

A

You are no longer employed by your former employer.

The information about the clients does not come from records taken without permission from your former employer.

The activity does not violate any “no compete” provisions in your contract with your employer.

69
Q

Ordinary care

A 
which means no negligence
which means acting reasonably
which means acting prudently
which means acting as a similarly situated person in similar circumstances would
Care, competence, diligence, etc.
70
Q

Duty of Loyalty

A

Agent is in a position of trust and confidence
Agent is obliged to put the principal’s interests above its own
No unapproved benefits to Agent
Confidentiality
No competition
No acting for others with conflicting interests

FIN 330 (2 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions