Lecture #4 Flashcards
What is the difference between Code, Standard, and Laws
Code: is a set of rules that professionals are expected to follow if they are to be part of the profession
- but it doesn’t explain how it should be done
Standard: is a set of technical definitions, specifications, and guidelines that outline the behaviour expected from a professional
Laws: are a set of rules of behaviour that are enforced through legislation and penalties for purposes of social governance.
- They are meant to protect the public, keep the peace, and maintain the welfare and security of a society.
what are the definition(s) of an Accredited Investor
Accredited Investor: an individual who, either alone or with a spouse, beneficially owns financial assets having an aggregate realizable value that before taxes, but net of any related liabilities, exceeds $1,000,000;
- an individual whose net income before taxes exceeded $200,000 in each of the two most recent calendar years or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of the most recent calendar years
- an individual who, either alone or with a spouse, has net assets of at least $5,000,000;
or
- a person, other than an individual or investment fund, that has net assets of at least $5,000,000 as shown on its most recently prepared financial statements; or
what is the Sarbanes-Oxley Act (SOX)’s purpose, goal, and who does it apply to
Purpose: Protect the public from fraudulent or erroneous corporate practices.
Goal:
- Increase transparency in corporate financial reporting.
- Establish a formal system of checks and balances within companies.
Applies To: Publicly traded companies and their executives.
What is the CFA Standard of Practice: Standard 1 Professionalism (D) Misconduct?
Member must be be honest and avoid any bad or unethical behavior that could damage trust in the industry
- Maintain a good reputation by acting with integrity and competence
what is a Nominal Gift and what is not considered a nominal gift?
Nominal Gift: less than $25.00
* An inexpensive bottle of wine
* Or a free pass to a movies
^considered nominal
However, front row seats to a big sporting match and a week at a holiday house is not considered nominal
* anything that could affect your independence or objectivity is NOT considered to be nominal
- NEED to also, maintain the appearance of being independent and objective
What is Standard #2 Integrity of Capital Markets (A) Material Non-Public Information
what is also Material Information
Standard #2 Integrity of Capital Markets (A) Material Non-Public Information: A CFA professional or candidate who possess material non-public information must not act or cause others to act on that information
Material information: Information which would likely affect the price of the security (stock) once it becomes known to the public.
Includes:
* Company earnings
* Mergers, acquisitions
* Innovations, discoveries
* Audit results
* Legal disputes
What is Mosaic Theory? and what does it require? What is the unethical opposite?
Mosaic Theory: Using publicly available data and analytical skill to predict stock movements.
* Example:
○ Predicting takeover targets based on financial indicators like:
§ Declining stock price & earnings → Mismanagement signals.
Requires: free flow of information
Comes from:
- reading public financial statements,
- understanding company strategies
What you’re not supposed to do/the opposite:
- As an analyst you can’t use material NON-PUBLIC information to trade on
- Everything you use is public
- Always disclose to clients if research papers are bought,
- Such research reports should be made public before your company’s clients are informed
What is Standard 2 : Integrity of Capital Markets (B) Market Manipulation ? WHat are some examples of it?
also define pump and dump, and front running
Market Manipulation: The practise of distorting prices or inflating trading volumes
- Information based manipulation:
○ False information that would induce others to trade
○ “pump and dump”: A scheme that boosts the price of a stock artificially by making false, misleading or greatly exaggerated statements to increase the price of the stock
○ “front running”: have a big client, and that client tells you to sell a security (but this will hurt your portfolio), so you sell all your other client’s shares before you sell the big clients
Define Tipping
Tipping: Tipping is the act of providing material non-public information about a publicly traded company or a security to a person who is not authorized to have the information
Ethical Investvesting depends on how infromation is obtained..
○ Fair access: All investors should have equal access to public information.
○ No distortion: Spreading false or misleading information is unethical
READ ONLY
-
Define Information Asymmetry in Markets
Information Asymmetry in Markets: Information asymmetry occurs when one party has better information than another in a transaction.
- if everyone had the same information, securities would always be correctly priced
- earning an alpha relies on some degree of Asymmetry
What is Illegal vs Legal way of obtaining information
- Illegal & Unethical: Trading on inside information that is material and nonpublic.
-
Legal & Ethical:
○ Private Information – superior analysis of public data to generate alpha.
○ Proprietary Research – firms legally charge for exclusive data services (e.g., Bloomberg Terminals).
○ Star Analysts – experts whose insights influence stock prices after public dissemination
