Reading 29 and 30 Flashcards
Ethics
CFA Institute conducts inquiries when
- self disclosure
- written complaints
- evidence of misconduct
- report by CFA exam proctor
- Analysis of exam materials and monitoring of social media by CFA Institute
List the code of ethics
- Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets.
- Place the integrity of the investment profession and the interests of clients above their own personal interests.
- Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.
- Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.
- Promote the integrity and viability of the global capital markets for the ultimate benefit of society.
- Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.
Name the 7 standard of Professional Conduct
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 of CFA Candidate
Professionalism
- Knowledge of the law
- Independence and Objectivity
- Misrepresentation
- Misconduct
Integrity of Capital Markets
- MNPI
- Market Manipulation
Duties to Clients
- Loyalty, prudence and care
- Fair Dealing
- Suitability
- Performance Presentation
- Preservation of Confidentiality
Duties to Employers
- Loyalty
- Additional Compensation Arrangements: must not accept gifts, benefits, compensation or consideration that competes with, or might reasonably be expected to create a conflict of interest with the employer’s interest unless they get written consent from all parties involved
- Responsibilities of Supervisors
Investment Analysis, Recommendations and Actions
- Diligence and Reasonable Basis
- Communication with Clients and Prospective Clients
- Record Retention
Conflicts of Interest
- Disclosure of conflicts
- priority of transactions
- referral fees
Responsibilities as CFA Institute Member/ Candidate
- Conduct as Participants in CFA Institute Program
- Reference to CFA Institute, the CFA Designation and the CFA Program
Mosaic Theory
Reaching an investment conclusion through perceptive analysis of public information combined with non-material nonpublic information is not a violation of the standard
What is the minimum frequency of statements to be sent to the clients?
quarterly
Are different levels of service allowed?
They are acceptable, but they must not negatively affect or disadvantage any clients. Disclose the different service levels to all clients and prospects and make premium levels of service available to all those willing to pay for them.
How frequently should IPS be reviewed?
annually
Protocol for additional compensation arrangements and a gift from a client
- If a client offers a bonus that depends on the future performance of her account’s past performance, this is a gift that required disclosure to the member’s employer to comply with Standard of Independence and Objectivity
Is it wrong to say about US Treasury bonds that “payment of bonds is guaranteed by the US government, therefore, the default risk of the bonds is virtually zero”
No
Tie in Agreement
Tie in Agreement exists when an underwriter requires the investing client to purchase additional shares of the new issue in the secondary market in exchange for the ability to purchase the IPO shares. The effect is to artificially increase demand and increase the share price on day one of trading.
can client brokerage commissions be directed to pay for the investment manager’s operating expenses?
No
Paper was recently terminated as one of a team of five managers of an equity fund. The fund had two value-focused managers and terminated one of them to reduce costs. In a letter sent to prospective employers, Paper presents, with written permission of the firm, the performance history of the fund to demonstrate his past success.
Paper has violated Standard III(D)—Performance Presentation by not disclosing that he was part of a team of managers that achieved the results shown. If he had also included the return of the portion he directly managed, he would not have violated the standard
Townsend was recently appointed to the board of directors of a youth golf program that is the local chapter of a national not-for-profit organization. The program is beginning a new fund-raising campaign to expand the number of annual scholarships it provides. Townsend believes many of her clients make annual donations to charity. The next week in her regular newsletter to all clients, she includes a small section discussing the fund-raising campaign and her position on the organization’s board.
Townsend has not provided any information about her clients to the leaders or managers of the golf program; thus, she has not violated Standard III(E)—Preservation of Confidentiality. Providing contact information about her clients for a direct-mail solicitation would have been a violation.
A former hedge fund manager, Jackman, has decided to launch a new private wealth management firm. From his prior experiences, he believes the new firm needs to achieve US$1 million in assets under management in the first year. Jackman offers a $10,000 incentive to any adviser who joins his firm with the minimum of $200,000 in committed investments. Jackman places notice of the opening on several industry web portals and career search sites. Which of the following is correct according to the Code and Standards?
Standard IV(A)—Loyalty discusses activities permissible to members and candidates when they are leaving their current employer; soliciting clients is strictly prohibited. Thus, answer A is inconsistent with the Code and Standards even with the required disclosure
Jurgen is a portfolio manager. One of her firm’s clients has told Jurgen that he will compensate her beyond the compensation provided by her firm on the basis of the capital appreciation of his portfolio each year. Jurgen should:
Obtain permission from her employer prior to accepting the compensation arrangement.
Scott works for a regional brokerage firm. He estimates that Walkton Industries will increase its dividend by US$1.50 a share during the next year. He realizes that this increase is contingent on pending legislation that would, if enacted, give Walkton a substantial tax break. The US representative for Walkton’s home district has told Scott that, although she is lobbying hard for the bill and prospects for its passage are favorable, concern of the US Congress over the federal deficit could cause the tax bill to be voted down. Walkton Industries has not made any statements about a change in dividend policy. Scott writes in his research report, “We expect Walkton’s stock price to rise by at least US$8.00 a share by the end of the year because the dividend will increase by US$1.50 a share. Investors buying the stock at the current time should expect to realize a total return of at least 15% on the stock.” According to the Standards:
A.Scott violated the Standards because he used material inside information.
B.Scott violated the Standards because he failed to separate opinion from fact.
C.Scott violated the Standards by basing his research on uncertain predictions of future government action.
The correct answer is B. This question relates to Standard V(B)—Communication with Clients and Prospective Clients. Scott has issued a research report stating that he expects the price of Walkton Industries stock to rise by US$8 a share “because the dividend will increase” by US$1.50 per share. He has made this statement knowing that the dividend will increase only if Congress enacts certain legislation, an uncertain prospect. By stating that the dividend will increase, Scott failed to separate fact from opinion.
The information regarding passage of legislation is not material nonpublic information because it is conjecture, and the question does not state whether the US representative gave Scott her opinion on the passage of the legislation in confidence. She could have been offering this opinion to anyone who asked. Therefore, statement A is incorrect. It may be acceptable to base a recommendation, in part, on an expectation of future events, even though they may be uncertain. Therefore, answer C is incorrect.
Jamison is a junior research analyst with Howard & Howard, a brokerage and investment banking firm. Howard & Howard’s mergers and acquisitions department has represented the Britland Company in all of its acquisitions for the past 20 years. Two of Howard & Howard’s senior officers are directors of various Britland subsidiaries. Jamison has been asked to write a research report on Britland. What is the best course of action for her to follow?
This question involves Standard VI(A)—Disclosure of Conflicts. The question establishes a conflict of interest in which an analyst, Jamison, is asked to write a research report on a company that is a client of the analyst’s employer. In addition, two directors of the company are senior officers of Jamison’s employer. Both facts establish that there are conflicts of interest that must be disclosed by Jamison in her research report.