Reading 1 - Ethics and Trust in the investment Profession Flashcards
In a 2013 study on trust, investors indicated that to earn their trust, the top three attributes of an investment manager should be that it:
1) Has transparent and open business practices
2) Takes responsible actions to address an issue or crisis
3) Has ethical business practices.
Stakeholders
Individuals or groups of individuals who may be affected either directly or indirectly by a decision and thus have an interest, or stake, in the decision.
The word ‘ethics’ comes from:
The Greek word “ethos,” meaning character, used to describe the guiding beliefs or ideals characterizing a society or societal group.
Define ‘a principle’
A principle is defined as a belief or fundamental truth that serves as the foundation for a system of belief or behavior or a chain of reasoning.
Moral principles or Ethical principles
Beliefs regarding what is good, acceptable, or obligatory behavior and what is bad, unacceptable, or forbidden behavior.
Ethics
The study of moral principles or of making good choices. Ethics encompasses a set of moral principles and rules of conduct that provide guidance for our behavior.
Ethical conduct
Ethical conduct is behavior that follows moral principles and balances self-interest with both the direct and the indirect consequences of the behavior on others.
Ethical actions
Ethical actions are those actions that are perceived as beneficial and conforming to the ethical expectations of society. An action may be considered beneficial if it improves the outcomes or consequences for stakeholders affected by the action.
How is telling the truth about the risks or costs associated with a recommended investment an ethical action?
One that conforms to the ethical expectations of society in general and clients in particular
How is telling the truth an ethical action?
Telling the truth builds trust with customers and clients and enables them to make more informed decisions, which should lead to better outcomes for them and higher levels of client/customer satisfaction for you and your employer.
What are the widely acknowledged ethical principles?
Honesty
Fairness or justice
Diligence
Respect for the rights of others
Define ‘Laws and regulations’
Laws and regulations are rules of conduct specified by a governing body, such as a legislature or a regulator, identifying how individuals and entities under its jurisdiction should behave in certain situations.
Investment advisers and portfolio managers who are required by law to act in their clients’ best interests must:
1) Always put their clients’ interests ahead of their own or their employers’ interests
2) Must understand the client’s financial objectives and risk tolerance, research and investigate multiple investment opportunities, and recommend the investment or investment portfolio that is most suitable for the client in terms of meeting his or her long-term financial objectives.
3) be expected to monitor the client’s financial situation and investments to ensure that the investments recommended remain the best overall option for meeting the client’s long-term financial objectives.
In countries with only a suitability requirement, it is legal for investment professionals to:
It is legal for investment professionals to recommend a suitable investment to a client even if other, similar suitable investments with lower fees are available.
Code of ethics
An established guide that communicates an organization’s values and overall expectations regarding member behavior. A code of ethics serves as a general guide for how community members should act.
Standards of conduct
Behaviors required by a group; established benchmarks that clarify or enhance a group’s code of ethics.
Violations of a community’s established code of ethics and/or standards of conduct can harm the community in a variety of ways:
1) Violations have the potential to damage the community’s reputation among external stakeholders and the general public
2) Violations can also damage the community’s reputation internally and lead to reduced trust among community members and can cause the organization to fracture or splinter from within.
To protect the reputation of its membership and limit potential harm to innocent members, the community may:
Take corrective actions to investigate possible violations, repair any damages, and attempt to discipline the violator or, in severe cases, revoke the violator’s membership in the community.
CFA Institute is an example of a community with an established code of ethics and standards of conduct. Its members and candidates commit to adhere to shared beliefs about acceptable conduct for individuals participating in the investment industry. These beliefs are presented where?
In the Code of Ethics and Standards of Professional Conduct (Code and Standards), which are included in the CFA Institute Standards of Practice Handbook.
The CFA Institute’s Code of Ethics and Standards of Professional Conduct communicates what?
The organization’s principles, values, and expectations
What does the CFA Institute’s Standards of Professional Conduct outline?
Minimally acceptable behaviors expected of all CFA Institute members and candidates
Each year, what do the CFA Institute members and candidates do?
CFA Institute members and candidates re-affirm their commitment to adhere to the Code and Standards each year. In addition, to protect the reputation of the community, members and candidates agree to submit a Professional Conduct Statement each year disclosing conduct that may have violated the Code and Standards.
1) Which of the following statements is most accurate? Ethics can be described as:
(A) a commitment to upholding the law.
(B) an individual’s personal opinion about right and wrong.
(C) a set of moral principles that provide guidance for our behavior.
C is correct. Ethics can be described as a set of moral principles that provide guidance for our behavior; these may be moral principles shared by a community or societal group.
Which of the following statements is most accurate? Standards of conduct:
(A) are a necessary component of any code of ethics.
(B) serve as a general guide regarding proper conduct by members of a group.
(C) serve as benchmarks for the minimally acceptable behavior required of members of a group.
C is correct. Standards of conduct serve as benchmarks for the minimally acceptable behavior required of members of a group. Some organizations will adopt only a code of ethics, which communicates the organization’s values and overall expectations regarding member behavior. Others may adopt both a code of ethics and standards of conduct. Standards of conduct identify specific behavior required of community members and serve as benchmarks for the minimally acceptable behavior of community members.