LOS2: Code of Ethics and Professional Conduct

Question 1

STRUCTURE - Who rules over the Professional Conduct Program?

Answer 1

The Disciplinary Review Committee of the CFA Institute Board of Governors.

Question 2

STRUCTURE - What 5 circumstances can provoke an inquiry related to professional conduct?

Answer 2

1) Self disclosure by members on their annual Professional Conduct Statements of involvement in civil litigation, or criminal investigation, or written complaint.
2) Written complaints received by the Professional Conduct staff.
3) Evidence of misconduct that the Professional Conduct staff received through public sources (media, broadcast, …)
4) A report by a CFA exam proctor of a possible violation during the exam
5) Analysis of exam materials and monitoring of social media

Question 3

STRUCTURE - What can happen once an inquiry has begun?

Answer 3

Professional Conduct staff may request an explanation and may 1) interview the member, 2) interview the complainant, 3) collect documents relevant to the investigation

Question 4

STRUCTURE - What are the potential outcomes of an inquiry?

Answer 4

1) No disciplinary sanctions are appropriate
2) Issue cautionary letter
3) Discipline the member

Question 5

6 components of the Code of Ethics

Answer 5

1) Act with integrity, competence, diligence, respect, and ethically with the public, clients, prospective clients, and others.
2) Integrity of the investment profession and interest of clients >Personal interests
3) Use reasonable care and exercise independent professional judgement when doing anything related to investment.
4) Be ethical, and encourage others to be ethical
5) Promote the integrity and viability of the global capital markets
6) Maintain and improve your professional competence and help/encourage others to do so.

Question 6

7 Standards of the Professional Conduct

Answer 6

1) Professionalism
2) Integrity of Capital Markets
3) Duties to Clients
4) Duties to Employers
5) Investment Analysis, Recommendations, Actions
6) Conflicts of Interest
7) Responsibilities as a CFA member

Question 7

Explain Professionalism

Answer 7

1) KNOWLEDGE OF THE LAW. Comply with the law governing your activities. When conflicting laws, respect the most restricting one.
2) INDEPENDENCE AND OBJECTIVITY. Don’t offer or accept gifts, benefits, compensation that could compromise your independence and objectivity.
3) MISREPRESENTATION. Don’t knowingly make misrepresentations relating to investments.
4) MISCONDUCT. Don’t be involved in fraud, deceit, or similar acts.

Question 8

Explain Integrity of Capital Markets

Answer 8

1) MATERIAL NONPUBLIC INFORMATION. Don’t act or cause others to act on nonpublic information that can affect the value of an investment.
2) MARKET MANIPULATION. Don’t distort prices or artificially inflate trading volume with the intent to mislead participants.

Question 9

Explain Duties to Clients

Answer 9

1) LOYALTY, PRUDENCE, AND CARE. Be loyal to your clients, act with care and judgement.
2) FAIR DEALING. Be fair and objective with all clients.
3) SUITABILITY. Adjust your investing strategy according to your client’s risk/return objective, and financial constraints. Validate potential investments against clients total portfoli.
4) PERFORMANCE PRESENTATION. Ensure the performance presentation to your clients is fair, accurate, complete.
5) PRESERVATION OF CONFIDENTIALITY. All info is confidential, unless is about illegal activities, or disclosure is required by law, or client approves the disclosure.

Question 10

Explain Duties to Employers

Answer 10

1) LOYALTY. Act for the benefit of your employer, don’t harm your employer.
2) ADDITIONAL COMPENSATION ARRANGEMENTS. Don’t accept gifts/compensation that would create a conflict of interest with the employer’s interest unless there’s a written consent from all parties involved.
3) RESPONSIBILITIES OF SUPERVISORS. Ensure that your subordinates comply with laws/regulations, and the Code and Standards.

Question 11

Explain Investment Analysis, Recommendations, Actions

Answer 11

1) DILIGENCE AND REASONABLE BASIS. Be thorough when analyzing investments, or giving investment advice. Support your advice with appropriate research and investigation.
2) COMMUNICATION WITH CLIENTS/PROSPECTIVE CLIENTS. Disclose to clients the format and general principles of the investment processes used to analyze investments, select securities, and construct portfolios. Disclose any change that might affect those processes. Disclose limitations and risks to the investment processes. Use judgement. Distinguish between fact and opinion.
3) RECORD RETENTION. Develop and maintain appropriate records to support your analysis, recommendations, actions.

Question 12

Explain Conflicts of Interest

Answer 12

1) DISCLOSURE OF CONFLICTS. Disclose fully and fairly to the impacted parties the matters that could be expected to impair your independence and objectivity. Disclose them clearly and efficiently.
2) PRIORITY OF TRANSACTIONS. Transactions for clients and employers take precedence over your (or a CFA member) own transactions.
3) REFERRAL FEES. Disclose to clients, employers, as appropriate, any compensation received for the recommendation of products/services.

Question 13

Explain Responsibilities as a CFA member

Answer 13

1) CONDUCT AS A CFA. Don’t compromise the reputation or integrity of the CFA Institute.
2) REFERENCE TO CFA INSTITUTE. Do not misrepresent or exaggerate the meaning/implication of membership in the CFA Institute.

Question 14

Know when an action violates a Code or Standard. For example, an action could violate Professionalism and not Duties to Employers. An action could violate multiple Standards. Note: if you are prohibited from some action, the motivations/circumstances do NOT matter.

Answer 14

:)

Question 15

Knowledge of the Law - Recommendations for CFAs

Answer 15

1) Encourage employer to establish procedures for employees to be aware of law changes.
2) Review or encourage a review of the firm’s compliance procedures.
3) Maintain or encourage to maintain a copy of the laws.
4) When in doubt, ask a lawyer.
5) Keep records of violations, and encourage employer to end violations.

Question 16

True/False: There’s no requirement in the Standards to report wrongdoers.

Answer 16

True. But local law may require it. Still, it is strongly encouraged.

Question 17

Knowledge of the Law - Recommendations for Firms

Answer 17

1) Have a code of ethics.
2) Provide employees with information on laws.
3) Have procedures to report suspected violations.

Question 18

Risk: Professionalism - Knowledge of the Law

Answer 18

There may be multiple conflicting laws. Choose the most restricting one.

Question 19

Risk: Professionalism - Independence and Objectivity

Answer 19

Analyst may face pressure:

1) Give a security a rating
2) Select outside managers/vendors
3) Produce favorable/unfavorable research and conclusion

Don’t allow pressure, gifts to influence your objectivity. Paid-for reports should be a flat rate, not tied to the reports conclusions.

Question 20

Independence and Objectivity - Recommendations for CFAs

Answer 20

Pay for your own travel to company events/tours. Limit your use of corporate aircrafts.

Question 21

Independence and Objectivity - Recommendations for Firms

Answer 21

1) Restrict employee participation in IPOs and private placements.
2) Appoint a compliance officer, and have policies on independence and objectivity, and procedures to report a violation.
3) Limit gifts.

Question 22

Risk: Professionalism - Misrepresentation

Answer 22

Knowingly mislead, or omitting relevant information, and don’t do plagiarism (not crediting thre sources).

Crediting the source is not required when using from recognized reporting services.

You don’t need to mention names of other members of the firm if they don’t work there anymore as long as you’re not taking sole credits for work done by others.

Question 23

Misrepresentation - Recommendations for CFAs

Answer 23

1) Have procedures for verifying marketing materials provided by 3rd parties concerning their capabilities, products, services.
2) Cite your sources
3) Keep copies of materials used in the preparation of reports
4) Periodically review documents/communications of members for any misrepresentation.

Question 24

Misconduct - Recommendations for Firms

Answer 24

1) Adopt a code of ethics
2) Give employees a list of potential violations and sanctions
3) Check references of potential employees

Question 25

What does “Material” means in “Material Nonpublic Information”

Answer 25

Information is material if its disclosure can impact the price of a security or if a reasonable investor would want the information before making an investment.

Question 26

True/False: An analyst conference call is public disclosure.

Answer 26

FALSE. This is selective disclosure and creates the potential for insider-trading violations.

Question 27

True/False: Reaching an investment conclusion through perceptive analysis of public information combined with non-material nonpublic information is a violation of the Standard.

Answer 27

FALSE. Non-material nonpublic information would not affect the price of securities.

Question 28

True/False: When a firm is in possession of material nonpublic information, the firm should not prohibit all proprietary trading.

Answer 28

True. It may be inappropriate, as it may send a signal to the market.