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Ethics > Reading 1 - Code of Ethics > Flashcards

Reading 1 - Code of Ethics Flashcards

1
Q

What are the 6 components of the CFA Code of Ethics?

A
  1. Act with integrity, competence, diligence, respect , and in an ethical manner.
  2. Place the integrity of the investment profession and the interests of clients above their own personal interests.
  3. Use reasonable care and excercise independent professional judgement when conducting investment analysis, making professional recommendations, taking investments actions, and engaging in other professional activities.
  4. Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.
  5. Promote the integrity of, and uphold rules governing, capital markets
  6. Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals
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2
Q

What are the 7 Standards of Professional Conduct?

A

I. Professionalism

II. Integrity of Capital Markets

III. Duties to Clients

IV. Duties to Employers

V. Investment Analysis, Recommendations, and Actions

VI. Conflicts of Interest

VII. Responsibilities as a CFA Institute Member or CFA Candidate

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3
Q

What are the 4 sub-components of the Professionalism standard?

KIMM

A

A. Knowledge of the Law

B. Independence and Objectivity

C. Misrepresentation

D. Misconduct

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4
Q

What are the 2 sub-components of the Integrity of Capital Markets standard?

MM

A

A. Material Nonpublic Information

B. Market Manipulation

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5
Q

What are the 5 sub-components of the Duties to Clients standard?

LOFASUPP

A

A. Loyalty, Prudence, and Care

B. Fair Dealing

C. Suitability

D. Performance Presentation

E. Preservation of Confidentiality

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6
Q

What are the 3 sub-components of the Duties to Employers standard?

LOADRESP

A

A. Loyalty

B. Additional Compensation Arrangements

C. Responsibilities of Supervisors

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7
Q

What are the 3 sub-components of the Investment Analysis, Recommendations, and Actions standard?

DILCOMRR

A

A. Diligence and Reasonable Basis

B. Communication with Clients and Prospective Clients

C. Record Retention

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8
Q

What are the 3 sub-components of the Conflicts of Interest standard?

DISPRIREF

A

A. Disclosure of Conflicts

B. Priority ofTransactions

C. Referral Fees

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9
Q

What are the 2 sub-components of the Responsibilities as a CFA Institute Member of CFA Candidate standard?

CONREF

A

A. Conduct as Members and Candidates in the CFA Program

B. Reference to CFA Institute, the CFA Designation, and the CFA Program

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10
Q

What are the recommended procedures for compliance (for members) of Standard I (Professionalism - Knowlege of the Law)

A
  • Members should have procedures to keep up with changes in applicables laws, rules, and regulations
  • Compliance standards should be reviewed on an ongoing basis to assure they address current law, CFAI Standards, and regulations
  • Should maintain current reference materials for employees to access in order to keep up to date on laws, rules, and regulations
  • Should seek counsel or their compliance department when in doubt
  • Should document any violations when they disassociate themselves from prohibited activity
  • No requirements in the standards to report violations to government authorities
  • Members are strongly encouraged to report other member’s violations of the Code and Standards
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11
Q

What are the recommended procedures for compliance (for firms) of Standard I (Professionalism - Knowlege of the Law) ?

A
  • Develop and/or adopt a code of ethics
  • Make available to employees information that highlights applicable laws and regulations
  • Establish written procedures for reporting suspected violation of laws, regulations, or company policies
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12
Q

What are the recommended procedures for compliance (for members) of Standard I (Professionalism - Independence and Objectivity)

A
  • Protect the integrity of opinions - make sure they are unbiased
  • Create a restricted list and distribute only factual information about companies on the list
  • Restrict special cost arrangements - pay for one’s own commercial transportation and hotel; limit use of corporate aircraftto cases in which commercial transportation is not available
  • Limit gifts - token items only
  • Restrict employee investments in equity IPOs and private placements
  • Review procedures - have effective supervisory and review procedures
  • Firms should have formal written policies on independence and objectivity of research
  • Firm should appoint a compliance offier and provide clear procedures for employee reporting of unethical behavior
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13
Q

What is the basic idea of Standard I (Professionalism - Knowlege of the Law) ?

A

Members & candidates must understand and comply with all applicable laws, rules and regulations (including CFA Code and Standards).

** In event of conflict, the strictest rules must be followed

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14
Q

What is the basic idea of Standard I (Professionalism - Independence and Objectivity) ?

A

Don’t let the investment process be influenced by external sources..

Modest gifts are permitted.

Oversubscribed IPOs should not go to personal accounts

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15
Q

What is the basic idea of Standard I (Professionalism - Misrepresentation) ?

A

Members and Candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions or professional activities.

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16
Q

What are the recommended procedures for compliance of Standard I (Professionalism - Misrepresentation)

A
  • Provide employees who deal with clients or prospects a written list of the firm’s available services and a description of the firm’s qualifications
  • Employee qualifications should be accruately presented
  • To avoid plagiarism, maintain records of all materials used to generate reports
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17
Q

What is the basic idea of Standard I (Professionalism - Misconduct) ?

A
  • Members and candidates must not engage in any professional conduct involving dishonest, fraud or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence
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18
Q

What are the recommended procedures for compliance of Standard I (Professionalism - Misconduct)

A
  • Develop and adopt a code of ethics make clear that unethical behavior will not be tolerated
  • Given employees a list of potential violations and sanctions, including dismissal
  • Check references of potential employees
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19
Q

What is the basic idea of Standard II (Integrity of Capital Markets - Material Nonpublic Information) ?

A

Members and candidates who posses material nonpublic information that could affect the value of an investment must not act or cause others to act on the information

*** An analyst conference call is not public disclosure

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20
Q

What are the recommended procedures for compliance of Standard II (Integrity of Capital Markets - Material Nonpublic Information)

A
  • Create a “firewall” within the firm, this can include
  1. Control of relevant interdepartmental communications, through a clearance area such as the compliance or legal department
  2. Review employee trades, maintain a “watch”, “restricted” and “rumor” lists
  3. Monitor and restrict properietary trade while the firm is in possession of nonpublic info
21
Q

What is the basic idea of Standard II (Integrity of Capital Markets - Markets Manipulation) ?

A

Members and candidates must not engage in practices that distort prices or artificially inflate trading vloume with the intent to mislead market participants

** Spreading false rumors is prohibited

22
Q

What is the basic idea of Standard III (Duties to Clients - Loyalty, Prudence and Care) ?

A

Clients interest come first

  • “client” may be the investing public as a whole
  • “soft dollars” must be used to benefit the client
  • Vote proxies in an informed and responsible manner
  • Make investment decisions in the context of the total portfolio
  • Exercise prudence, care, skill and dilligence
23
Q

What are the recommended procedures for compliance of Standard III (Duties to Clients - Loyalty, Prudence and Care) ?

A
  • Submit to client at least quarterly itemized statements showing all securities included all debits, credits and transactions
  • Encourage firms to address these topics
    1. Follow applicable rules and laws
    2. Establish investment objectives of clients
    3. Diversity
    4. Deal fairly with all clients
    5. DIsclose conflicts
    6. Disclose compensation arrangements
24
Q

What is the basic idea of Standard III (Duties to Clients - Fair Dealing) ?

A

Do not discriminate against any clients when disseminating recommendations or taking investment action… Fairly does not mean equally.

25
Q

What are the recommended procedures for compliance of Standard III (Duties to Clients - Fair Dealing) ?

A
  • Limit the # of people who are aware that a change in recommendation will be made
  • Shorten the time frame between decision and dissemination
  • Publish personnel guideline for pre-dissemination
  • Maintain a list of clients and holdings
  • Disclose trade allocation procedures
26
Q

What is the basic idea of Standard III (Duties to Clients - Suitability) ?

A
  • Be sure to gather client information at the beginning of the relationship in the form of an investment policy statement (IPS)
  • If managing a fund to an index, make sure investments are consistent with the stated mandate
27
Q

What are the recommended procedures for compliance of Standard III (Duties to Clients - Suitability) ?

A
  • Put the needs and circumstances of each client into an IPS
  • Consider the type of client and whether there a seperate beneficiaries, investment objectives, investor constraints and performance measurement benchmarks
  • Review investor’s objectives and constraints periodically
28
Q

What is the basic idea of Standard III (Duties to Clients - Performance Presentation) ?

A

Must avoid misstating performance or misleading clients/prospects about investment performance of themselves or their firms

Should not guarantee any return

29
Q

What are the recommended procedures for compliance of Standard III (Duties to Clients - Performance Presentation) ?

A
  • Encourage firms to adhere to GIPS
30
Q

What is the basic idea of Standard III (Duties to Clients - Preservation of Confidentiality) ?

A

Must keep information about current, former and prospective clients confidential unless:

  • Information concerns illegal activity
  • Disclosure is required by law
  • Client or prospective client permits disclosure of information
31
Q

What are the recommended procedures for compliance of Standard III (Duties to Clients - Preservation of Confidentiality)?

A
  • Should avoid disclosing information received from a client to only authorized co-workers
  • Should follow firm procedures for storage of electronic data
32
Q

What is the basic idea of Standard IV (Duties to Employers - Loyalty) ?

A

Members must not engage in activities which would injure the firm, deprive it of profit, or deprive it of the advantage of employees’ skills and abilities

**No requirement that the employee put employer interest ahead of family and other personal obligations…

33
Q

What is the basic idea of Standard IV (Duties to Employers - Additional Compensation Arrangements) ?

A

Compensation includes direct and indirect compensation from a client and other benefits received from third parties. Written consent from a member’s employer includes email communication

34
Q

What is the basic idea of Standard IV (Duties to Employers - Responsibility of Supervisors) ?

A

Members must prevent employees from violating laws, rules, regulations, or the Code and Standards, as well as make reasonable efforts to detect violations.

35
Q

In regards to Standard IV (Duties to Employers - Responsibility of Supervisors), what is the minimum compliance procedures that every firm should have?

A
  • Be clearly written
  • Be easy to understand
  • Designate a compliance officer with authority clearly defined
  • Outline the scope of procedures
  • Outline what conduct is permitted
  • Contain procedures for reporting violation and sanctions.
36
Q

If a member or candidate is offered a supervisory role but finds that there are no compliance procedures or inadequate procedures, what should the candidate do?

A

Must decline supervisory responsibility in writing until adequate procedures are adopted by the firm.

37
Q

What is the basic idea of Standard V (Investment Anaylsis, Recommendations, and Actions - Diligence and Reasonable Basis) ?

A

Reasonable Basis:

  • Should consider a firm’s financial results, operating history and business cycle stage
  • Fees and historical results for mutual funds
  • Limitations of any quant models

Dilligence:

  • Review assumptions of third party research
  • For Quantitative reseach, consider scenarios outside those typically used to asses downside risk

***If a member does not agree with group research decisions, they do not have to decline being identified in the report, as long as there is a reasonable and adequate basis for their decision

38
Q

What are the recommended procedures for compliance of Standard V (Investment Anaylsis, Recommendations, and Actions - Diligence and Reasonable Basis)?

A
  • Have a policy requiring that research reports and recommendations have a basis that can be substantiated as reasonable and adequate
  • Have detailed, written guidance for proper research and due dilligence
  • Have measurable criteria for judging the quality of research, and base analyst compensation on such criteria
  • Have a policy for evaluating outside providers of information
  • Have a set of standards that provides criteria for evaluating external advisors
39
Q

What is the basic idea of Standard V (Investment Anaylsis, Recommendations, and Actions - Communication with Clients and Prospects) ?

A
  • Must distinguish opinions from facts
  • Must illustrate to clients the investment decision-making process utilized
  • When using Quantitative models, must explain the limitations of the models.
40
Q

What is the basic idea of Standard V (Investment Anaylsis, Recommendations, and Actions - Record Retention) ?

A
  • Must maintain research records that support the reasons for the analyst’s conlusions.
  • These records are property of the firm
  • CFA Institute recommends 7 yr holding period
41
Q

What is the basic idea of Standard VI (Conflict of Interest - DIsclosure of Conflicts) ?

A

Members must fully disclose to clients, prospects, and their employers all actual and potential conflicts of interest in order to protect investors and employers

42
Q

What are the recommended procedures for compliance of Standard VI (Conflict of Interest - DIsclosure of Conflicts)?

A

Any special compensation arrangements, bonus programs, commissions, and incentives should be disclosed.

43
Q

What is the basic idea of Standard VI (Conflict of Interest - Priority of Transactions) ?

A

Client transactions take priority over personal transactionsand transactions on behalf of the member’s firm.

**Personal transactions can occur after client and firm has had adequate opportunity to act of the recommendation

**Family member accounts that are client accounts should be treated like any other client account.

44
Q

What are the recommended procedures for compliance of Standard VI (Conflict of Interest - Priority of Transactions)?

A
  • Limited participation in equity IPOs
  • Restrictions on private placements
  • Establish blackout/restricted periods
45
Q

What is the basic idea of Standard VI (Conflict of Interest - Referral Fees) ?

A

Members must inform employers, clients, and prospects of any benefit received from referrals of customers and clients, allowing them to evaluate the full cost of the service as well as any potential partiality

46
Q

What is the basic idea of Standard VII (Responsibilities of CFA Member or Candidate - Conduct as Member and Candidates in the CFA Program) ?

A

Standard applies to conduct such as :

  • Cheat on the CFA exam or any exam
  • Revealing anthing about either broad of specific topics tested, content of exam questions or formula required or not required on the exam
  • Not following rules and policies of the CFA program
  • Giving out confidential information on the CFA program to candidates or the public
  • Inproperly using the designation
47
Q

What is the basic idea of Standard VII (Responsibilities of CFA Member or Candidate - Reference to the CFA Institute, the CFA designation, and the CFA Program) ?

A

Must not make promotional promises or guarantees tied to the CFA designation

Do not:

  • Over-promise individual competence
  • Over-promise investment results in the future
48
Q

What 2 requirements must CFA members satisfy to maintain their CFA membership?

A
  • Sign PCS annually
  • Pay CFA Institute membership dues annually

Ethics (6 decks)

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