L3. Guidance for Standards I-VII Flashcards

Question

1D. Recommended procedures for compliance (Employee references)

Answer 1

Ensure employees are of good character and not ineligible to work in the investment industry because of past infractions of the law

Answer 2

Standard II (Integrity of capital markets) a) Standard II(A) Material nonpublic information - Acting on nonpublic information - Controlling nonpublic information - Selective disclosure of material information - Determining materiality - Analyst recommendations as material nonpublic information b) Market manipulation - Independent analysis and company promotion - Personal trading practices and price and or volume - Creating artificial price volatility - Pump priming strategy - Pump and dump strategy

Answer 3

Information is material if its disclosure have an impact on the price of a security or if reasonable investors would want to know the information before making a decision. Eg; earnings, merges and acquisitions, innovative product, new patents, change in management, bankruptcies etc - source of information also determines materiality; the less reliable, less likely info will be considered material. Educated conjecture by subject experts not involved in trials is unlikely to be material

Answer 4

Until it has been disseminated or is available to marketplace in general (as opposed to a selected group of investors) If individual uses info provided legitimately by source company for specific purpose such as conducting due diligence for activities such as mergers, no violation BUT if used to do trade or entice others to trade, then there is a conflict with the standard

Answer 5

Analyst gathering and interprets information from sources inclusive on nonmaterial nonpublic information provided by the source company directly; analyst are free to act on this collection without risking violation - Analyst are free to use mosaic information in their research reports but should save and document all their research. Evidence of analysts' knowledge of public and nonmaterial nonpublic information about a company strengthens the assertion that conclusion is reached solely through appropriate methods rather than the use of material nonpublic information

Answer 6

Encourage issuing company to make information public

Answer 7

Especially compliance in such as areas such as review of employee and proprietary trading, review of investment recommendations, document of firm procedures, and the supervision of interdepartmental communications in multiservice firms

Answer 8

Companies should share information equitably irregardless of where the analysts comes from or if they have a history of writing negative reports

Answer 9

Prevent the communication of material nonpublic information within firms, using firewall as barrier. Min. elements of such system includes; 1. Substantial control of relevant interdepartmental communications 2. Review of employee trading through the maintenance of 'watch' 'restricted' and 'rumour' lists 3. Documentation of the procedures designed to limit the flow of information between departments 4. Heightened review or restriction of proprietary trading while a firm is in possession of material nonpublic information

Answer 10

Employees should make periodic reports of their own transactions and transactions made for the benefit of family members. Securities should be placed on restricted list when a firm has material nonpublic information

Answer 11

Includes practices that distort security prices or trading volume with the intent to deceive people or entitles that rely on information in the market Includes dissemination of false or misleading information Includes transactions that deceive or would likely to mislead market participants by distorting price setting mechanism of financial instruments

Answer 12

Spreading false rumours to induce trading by others ; refrain from pumping up price of an investment by issuing misleading positive information or overly optimistic projections of a security's worth only to later dump the investment once the price, reaches an artificially high level

Answer 13

When an individual knew or should have known that his actions could affect the pricing of a security; transaction that artificially affect prices or volume to give impression of activity or price movement in a financial instrument or securing a controlling, dominant position in a financial instrument to exploit and manipulate the price of a related derivative or underlying asset

Answer 14

Standard III (Duties to clients) a) Standard III(A) Loyalty, prudence and care - Identifying the client - Client commission practices - Brokerage arrangements - Excessive trading b) Standard III(B) Fair dealing - Selective disclosure - Fair dealing between Funds - Fair dealing and transaction allocation c) Standard III(C) Suitability - Investment suitability - Risk profile - IPS updating - Following an investment mandate - IPS requirements and limitations d) Standard III(D) Performance Presentation - Performance calculation and length of time - Performance calculation and asset weighting - Performance attribution changes d) Standard III(E) Preservation of confidentiality - Possessing confidential information - Disclosing confidential information - Disclosing possible illegal activity

Answer 15

They have direct or indirect access to client funds

Answer 16

Not always so direct. When an investment manager managing the personal assets of an individual, client is easily identified. But when manager is responsible for portfolios of pension plans or trusts, the client is not the person or entity who hires the manager but the beneficiaries of the plan/trust

Answer 17

When an investment manager uses client brokerage to purchase research services; paying higher brokerage commission that he would normally pay to allow for the purchase of goods/services without corresponding benefit to the client violates the duty of loyalty to the client. Eg. An example would be a mutual fund receiving research and advising services in return for sending order flow through a brokerage desk

Answer 18

Submit to each client, at least quarterly, an itemised statement showing funds and securities in the custody or possession of the member or candidate. Disclose where the assets are to be maintained or where or when they are moved Separate clients' assets from any other party's assets

Answer 19

When uncertain about course of action with respect to a client, should disclose questionable matter in writing to client and obtain approval

Answer 20

Should include; 1. Follow all applicable rules and laws 2. Establish investment objectives of client; make reasonable inquiry into client's experience, risk and return objectives and financial constraints before making recommendations 3. Consider all information before taking action; suitability of investment relative to 1) client's needs and circumstances 2) investment's basic characteristics 3) basic characteristics of total portfolio 4. Diversify; reduce loss 5. Carry out regular reviews 6. Deal fairly with all clients with respect to investment actions 7. Disclose conflict of interests 8. Disclose compensation arrangements 9. Maintain confidentiality 10. Seek best execution; refers to trading process that seeks to maximise value of portfolio within client's stated investment objectives and constraints

Answer 21

Information must be disseminated in a manner that all clients have a fair opportunity to act on every recommendation

Answer 22

If issue is oversubscribed, should be prorated to all subscribers. Members should forgo sales for themselves or family members unless managed similarly to accounts of other clients

Answer 23

Initial recommendations be made available to all customers who indicate an interest. Points to consider when establishing fair dealing compliance; 1. Limit number of people involved 2. Shorten time frame between decision and dissemination 3. Publish guidelines for pre-dissemination behaviour; prohibit personnel who have prior knowledge of recommendation from discussing or taking action 4. Simultaneous dissemination

Answer 24

How they select accounts to participate in an order and how they determine the amount of securities each account will buy/sell

Answer 25

To ensure no customer or client given preferential treatment and actions taken are favourable to account's objectives

Answer 26

If organisation offers different levels of service to clients for same fee or different fees

Answer 27

Must gather information such as: 1. Financial circumstances 2. Attitudes toward risk 3. Objectives in investing 4. Personal data such as age and occupation relevant to investment decisions Must be written into a investment policy statement (IPS) that addresses risk tolerance, liquidity needs, tax concerns, legal and regulatory factors IPS should also identify and describe roles and responsibilities of parties to the advisory relationship and investment process and schedules for reviews and evaluation

Answer 28

Should be at least an annual process. Review should be an ongoing process as changes may include the number of dependents, personal tax status, health, liquidity needs, risk tolerance, amount of wealth

Answer 29

Members may receive requests from client for trades that do not align with the risk and return objectives outlined in client's investment policy statement - Need to balance clients' requests with their responsibilities to follow the agreed on IPS - Need to discuss before making the trade, advise how the trade deviate from current policy statement - If unsolicited trade have a huge impact on portfolio, need to update the the IPS

Answer 30

Take into consideration the following: 1. Client identification (1) Type and nature of client, (2) The existence of separate beneficiaries (3) Approximate portion of total client assets that the member or candidate is managing 2. Investor objectives (1) Return objectives (2) Risk tolerance 3. Investor constraints (1) Liquidity needs (2) Expected cash flow (3) Investable funds (4) Time horizon (5) Tax considerations (6) Regulatory and legal circumstances (7) Investor preferences (8) Proxy voting responsibilities 4. Performance measurement benchmarks

Answer 31

Reviewed periodically to reflect changes in client's circumstances

Answer 32

Test procedures should include: 1. An analysis of impact on the portfolio's diversification 2. Comparison of investment risks with client's assessed risk tolerance 3. Fit of investment with required investment strategy

Answer 33

The GIPS standards are a set of standardised, industry-wide ethical principles that guide investment managers and asset owners on how to fairly calculate and present their investment results, with the goal of promoting performance transparency and comparability

Answer 34

1. Considering knowledge of audience to whom a. performance presentation is addressed 2. Presenting performance of weighted composite of similar portfolios rather than using single representative account 3. Including terminated accounts as part of performance history with clear indication when accounts were terminated 4. Including disclosures that fully explain the performance results being reported 5. Maintaining the data and records used to calculate performance being presented

Answer 35

1. Information concerns illegal activities on part of client 2. Disclosure is required by law 3. Client permits disclosure of information

Answer 36

If client expressly authorise to disclose, follow the terms of authorisation and provide the information

Answer 37

If applicable law requires members to maintain confidentiality even if information concerns illegal activities on part of client, should not disclose

Answer 38

Do not require candidates to be expert but should a have good understanding of the policies of their employers when it comes to data security

Answer 39

Will not be considered in violation of this standard by forwarding confidential information to PCP (Professional Conduct Program)

Answer 40

Discuss with clients the appropriate way to provide confidential information

Answer 41

Standard IV (Duties to employers) a) Standard IV(A) Loyalty - Soliciting former clients - Former employer's documents and files - Ownership of completed prior work b) Standard IV(B) Additional Compensation Arrangements - Notification of client bonus compensation - Notification of outside compensation c) Standard IV(C) Responsibilities of supervisors - Supervising research activities

Answer 42

Although candidates must always place client's interest above interests of employer but should also consider the effects of their conduct on the sustainability and integrity of employer firm

Answer 43

Responsible for a positive working environment which includes an ethical workplace

Answer 44

Abstain from independent competitive activity that could conflict with the interests of their employer. Must notify employer if providing independent service and disclose service and compensation; have to receive consent before engagement

Answer 45

Must not engage in activity that would conflict with the duties until resignation becomes effective. Activities that violates include; 1. Misappropriation of trade secrets 2. Misuse of confidential information 3. Solicitation of employer's clients prior to cessation of employment 4. Self dealing 5. Misappropriation of clients or client list

Answer 46

Some specific accounts created by candidates are solely for professional reasons, including firm approved accounts for client engagements = belongs to the employer thus require deletion or transfer directed by company's policies

Answer 47

Personal interest and employer interest are secondary to protecting the integrity of the markets and interests of clients. Therefore, conflicts with the standard. However, may be justified if such intent is clearly aimed at protecting clients or market and not for personal gain

Answer 48

Understand restriction placed by employer on offering similar services outside the firm while employed

Answer 49

Should establish clear procedures regarding the resignation process, including addressing how termination will be disclosed to clients and staff. Importantly, it should address agreements that allow departing employees to remove specific client related information upon resignation

Answer 50

Aware of firm's whistleblowing policies

Answer 51

Understand status within their employer firm and how each policies applies to each employee class

Answer 52

Requires members to obtain permission from their employer before accepting compensation from third parties for services rendered

Answer 53

Should make an immediate written report to supervisor specifying compensation they propose to receive for services in additional to compensation received from their employer

Answer 54

Candidates with supervisory responsibility must understand what constitutes an adequate compliance system for their firms; compliance procedures must be placed prior to occurrence of violation Once supervisor learns that an employee has violated, must promptly initiate an assessment

Answer 55

Codes of ethics and compliance procedures should be separated to reduce legal terminology that can make underlying ethical principles incomprehensible to average person

Answer 56

1. Contained in a clearly written and accessible manual that is tailored to the firm's operations 2. Be drafted so that procedures are easy to understand 3. Designate a compliance officer whose authority and responsibility are clearly defined 4. Describe hierarchy of supervision and assign duties among supervisors 5. Outline scope Once program in place, supervisor should 1. Disseminate contents of program 2. Periodically update 3. Continually educate 4. Incorporate professional conduct as KPI 5. Take steps to enforce if violation occurs Once violation discover, supervisor should 1. Respond promptly 2. Conduct investigation 3. Increase supervision 4. Review policies

Answer 57

Regular ethics and compliance training will establish strong culture of integrity

Answer 58

When compensation and incentives are firmly tied to client interests and how outcomes are achieved, employees will work to achieve culture of integrity

Answer 59

Standard V (Investment analysis, recommendations and actions) a) Standard V(A) Diligence and reasonable basis - Sufficient due diligence b) Standard V(B) Communication with clients and prospective clients - Notification to changes of investment process - Sufficient disclosure c) Standard V(C) Record retention - Record retention and IPS objectives and recommendations - Record retention and research process

Answer 60

Examples of attribute to consider before forming basis for recommendation 1. Global, regional and country macroeconomic conditions 2. Company's operating and financial history 3. Industry and sector's current conditions and stage of the business cycle 4. Mutual fund's fee structure and management history 5. Output and limitations of quantitative models 6. Quality of assets included in securitisation

Answer 61

Determine research is sound. Secondary research is defined as research conducted by someone else in the firm. Third party research conducted by entities outside the member's firm

Answer 62

Refers to research through processes such as computer generated model-ing, screening and ranking of investment securities - Need to understand the parameters used in models and quantitative research that are used

Answer 63

Must understand the technical aspects of the products and a thorough testing of model and resulting analysis should be completed prior to product distribution

Answer 64

Review managers as diligently as they do individual funds and securities

Answer 65

Recommendations and conclusions represent consensus of the group and are not necessarily the views of the member

Answer 66

Establish policy requiring research reports, recommendations have basis that can be substantiated as reasonable. Set up review committee Develop detailed and written guidance for analysts Develop measurable criteria for assessing quality of research

Answer 67

Must describe to clients manner in which they conduct investment decision making process

Answer 68

Presentation of information can be made via any means of communication, including in person recommendation or description, telephone, media broadcast etc

Answer 69

Disclose general market related risks and associated risks like country risk, sector or industry risk etc

Answer 70

Must be supported by available reference material

Answer 71

Separate fact from statistical conjecture

Answer 72

Depends on case to case review rather than have a specific checklist. But should be able to supply additional information with regards to research

Answer 73

This includes emails, text messages, blog posts and twitter posts

Answer 74

- Cannot take records without consent of previous employer when leaving the firm - Cannot use historical recommendations or research reports created at previous firm because supporting documentation is unavailable - Must recreate supporting documents at new firm gathered through public sources or directly from covered company and not from memory or sources obtained at previous employer

Answer 75

Recommends maintaining records for at least 7 years

Answer 76

- Responsibility generally falls with the firm rather than individuals - Individuals to archive research notes and other documents that support current investment related communications

Answer 77

Standard VI (Conflicts of interest) a) Standard VI(A) Disclosure of conflicts - Conflict of interest and business relationships - Conflict of interest and business stock ownership - Conflict of interest and personal stock ownership - Conflict of interest and compensation arrangements - Conflict of interest and directorship b) Standard VI(B) Priority of transactions - Personal trading - Trading for family member account - Personal trading and disclosure - Trading prior to report dissemination c) Standard VI(C) Referral fees - Disclosure of referral arrangements and outside parties - Disclosure of interdepartmental referral arrangements - Disclosure of referral arrangements and informing firm

Answer 78

This standard protects investors and employers - candidates must give enough information to assess the impact of the conflict - candidates must take reasonable steps to avoid conflicts and if they occur, must report as promptly to that employer so as to resolve as quickly and effectively as possible

Answer 79

- Most obvious conflicts are relationships between issuer and the candidate

Answer 80

Eg A marketing division may ask an analyst to recommend the stock of a certain company in order to obtain business from that company

Answer 81

- Candidates ownership of stock in companies that he recommends to clients

Answer 82

Service as a director posses 3 conflicts; 1. Conflict exist between duties owed to clients and duties owned to shareholders 2. Investment personnel who serve as director may receive securities or options to purchase securities of the company as compensation for serving on the board (questions about trading actions that might increase value of those securities) 3. board service creates opportunity to receive material nonpublic information involving company

Answer 83

Should disclose special compensation arrangements with the employer that might conflict with client interests

Answer 84

- Giving priority to interest of clients and employers over personal financial interests - Conflicts of interest exist and is inherently unethical making money from personal investment as long as 1) client is not disadvantaged by the trade 2) Investment professional does not benefit personally from these trades undertaken for clients 3) investment professional complies with applicable regulatory requirements

Answer 85

Having priority for clients and employers over personal transactions

Answer 86

Prohibited from conveying nonpublic information to any personal whose relationship with the candidate makes the candidate a beneficial owner of the person's securities

Answer 87

Personal transactions include those made for the member's own account, for family accounts Family accounts are client accounts should be treated like any other firm account, should not be given special treatment nor be disadvantaged

Answer 88

Limited participation in equity IPOs - As value of IPOs rise quickly, opportunity to participate is limited. Can create conflict in 2 ways: 1. may have the appearance of taking away an attractive investment opportunity from clients for personal gain 2. may have the appearance that investment opportunity is being bestowed as incentive to make future investment decisions for the benefit of the party providing the opportunity

Answer 89

Restrictions on private placement - Should not participate in private placements that could be perceived as favours or gifts that seem designed to influence future judgement or to reward past business deals

Answer 90

Establish blackout/ restricted periods - Investment personnel involved in investment decision making process should establish black out periods prior to trades for clients so that managers cannot take advantage of their knowledge of client activity by front. running client trades (trading for one's personal account before trading for client accounts)

Answer 91

Reporting requirements - disclosure of holdings in which employee has beneficial interest - providing duplicate confirmations of transactions - pre clearance procedures

Answer 92

To inform employers and prospective clients any benefit received for referrals of customers and clients - allow clients or employers to evaluate 1) any partiality shown in recommendation 2) full cost of service - must disclose when they pay a fee or provide compensation to others who have referred prospective clients to member - must disclose the nature of consideration or benefit, flat fee or percentage basis, one time or continuing benefit, based on performance, benefit in form or provision of research or other noncash benefit

Answer 93

Develop procedures related to referral fees

Answer 94

Standard VII (Responsibilities as a CFA Institute member or CFA candidate) a) Standard VII(A) Conduct as participants in CFA institute programs - Sharing exam questions - Bringing written material into exam room - Writing after exam period end - Sharing exam content b) Standard VII(B) Reference to CFA institute, the CFA designation and CFA program - Passing exams in consecutive years - Right to use CFA designation

Answer 95

Examples of information that cannot be disclosed by candidates include 1. Specific details of questions appearing on exam 2. Broad topical areas and formulas tested or not tested on exam

Answer 96

Examples of information that cannot be shred by members involving in developing, administering or grading exams include 1. Questions appearing on exam or under consideration 2. Deliberation related to exam process 3. Information related to scoring of questions

Answer 97

Free to agree or disagree on policies, procedures or any advocacy positions taken by organisation

Answer 98

Once accepted as a CFA institute member, must satisfy the following requirements to maintain status 1. Remit annually CFA institute a completed professional conduct statement, which renews commitment to abide by requirements code and standards of CFA institute professional conduct program 2. Pay applicable CFA membership dues on annual basis

Answer 99

Those earned rights to use CFA designation encouraged to do so but not misrepresent or exaggerate the meaning or implications

Answer 100

Incorrectly claiming or implying superior ability by obtaining CFA certification