Standard I Flashcards
What are the various sections for Standards of Professional Conduct?
There are 7:
I. Professionalism
II. Integrity of Capital Markets
III. Duties to Clients and Prospective Clients
IV. Duties to Employers
V. Investment Analysis, Recommendations, and Action
VI. Conflicts of Interest
VII. Responsibilities as a CFA Institute Member or CFA Candidate
What is Standard I?
Professionalism
What are the subsections of Standard I: Professionalism?
There are 4:
I-A: Knowledge of the Law
I-B: Independence and Objectivity
I-C: Misrepresentation
I-D: Misconduct
What is Standard I-A?
“Knowledge of the Law: covers laws, rules and regulations”
1:- Members and Candidates must understand and comply with all applicable
:- laws,
:-rules,
:- and regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct) of any
:-government,
:-regulatory organization,
:-licensing agency,
:- or professional association governing their professional activities.
2:- In the event of conflict, Members and Candidates must not knowingly participate or assist in and must disassociate from any violation of such laws, rules, or regulations.
What are the types of exam questions you can expect regarding applying Standard I-A?
Since Standard I-A covers laws, rules and regulations, the situations presented to test knowledge of the Standard (and whether the Standard has been violated) will likely involve some possible violation of the law, and how a CFA Member or Candidate should proceed. The following questions may apply:
1:- Did the Member seek the advice of counsel?
2:- Did the member report the violation, and to whom did the member report it?
3:- For multinational operations, which country’s laws apply to the situation at hand?
What are the types of exam questions you can expect regarding applying Standard I-A?
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1:- Did the Member seek the advice of counsel?
Consulting an attorney is typically seen as a good defense against an alleged violation of Standard I-A.
Many cases involve someone who works for a firm that has violated the law (made misleading statements on a prospectus, for example).
In these cases, look to see if the CFA member or candidate sought and followed the advice of counsel.
What are the types of exam questions you can expect regarding applying Standard I-A?
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2:- Did the member report the violation, and to whom did the member report it?
For any potential violation of a law, rule or regulation, if the situation suggests that the member
:- either went along with it,
:- did nothing, tried to cover it up or
:-was afraid to say anything for fear of losing his or her job
That is a clear sign that the Standard has been violated.
In any example, look for evidence that the CFA member tried to do the right thing.
:-If that person’s firm is potentially guilty of violating a law or regulation, he or she needs to start by reporting this situation to his or her supervisor and/or compliance officer.
:-If the situation is not remedied, he or she should distance him or herself from the potential violation and seek the advice of counsel.
What are the types of exam questions you can expect regarding applying Standard I-A?
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3:- For multinational operations, which country’s laws apply to the situation at hand?
In the real world, it can be ambiguous if an advisor is domiciled in one country and operates in another.
For the purposes of the CFA Level I exam, the candidate isn’t expected to be a lawyer and make a judgment - the exam will indicate which country’s laws apply to the situation.
If a broker or advisor operates solely or exclusively in a country, assume that those laws apply unless it’s stated otherwise.
The rule of thumb (which states it’s the law that applies if it’s stricter than the Standards; otherwise, the Standards apply) is usually going to make it easy to arrive at the right answer
How can you comply with Standard I-A?
SLICED
The Standards of Practice Handbook makes a number of suggestions to avoid violating Standard I-A.
1: -Establish Files
2: -Stay Informed -
3: -Distribution Area Laws -
4: -Legal or Illegal? -
5: -Disassociate
How can you comply with Standard I-A?
Establish Files
These files would cover all applicable laws, rules, regulations, statutes and important cases that might be relevant to any potential business situation involving the firm.
Files must be readily accessible, and a process to manage, distribute and interpret such material should be in place.
How can you comply with Standard I-A?
Stay Informed
Laws, rules and regulations frequently change, and key employees in a firm must be informed continually of such changes.
CFA members and candidates are obligated to establish, or encourage others to establish, a procedure by which everyone in a firm is kept informed and applicable changes are disseminated in a timely manner.
Usually, this procedure is the domain of the firm’s counsel or compliance department, but every situation is different. There are a number of real-world cases in which everyone just assumed that a certain person or department was taking care of it.
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How can you comply with Standard I-A?
Distribution Area Laws
In an increasingly global marketplace, members and candidates must make every effort to understand the laws of the country or region in which they operate, including those where their products or services are distributed across borders.
How can you comply with Standard I-A?
Legal or Illegal?
Certain conduct may not in fact be a violation.
Members should consult counsel in ambiguous situations.
How can you comply with Standard I-A?
Disassociate
This is such a good word and a worthwhile course of action that the CFA Institute decided to include it when it recently revised this Standard.
It is good advice: it may have been OK at some time in the past to do nothing if one witnessed illegal or unethical conduct, but in today’s environment, the Standards have changed.
One must now disassociate from any illegal activity and actively urge the firm (either an immediate supervisor or a compliance officer) to cease any conduct that violates the law or an applicable regulation or standard.
Inaction might be judged, (even in a court of law), as participating or assisting, which violates the Standard.
What is Standard I-B?
“Independence & Objectivity”
Maintain integrity and avoid conflicts of interest”
Members and Candidates must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities.
Members and Candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another’s independence and objectivity.
What are the types of exam questions you can expect regarding applying Standard I-B?
Applying Standard I-B, Complying with standards of independence and objectivity seems simple and straightforward in theory, but in practice there are many scenarios that could potentially conflict with one’s objectivity - or create the appearance of doing so. In many cases it is not so easy to define the proper course of action. Here are some of the situations that are more likely to appear on the exam:
Standard I B
Questions
1: - A company sponsors an analyst conference and picks up all the expenses.
2: - A financial firm promises to provide research coverage of a company’s stock in return for a potential business relationship.
3: -In the previous example, the relationship manager asks for a favorable recommendation for the new corporate client.
4: -A research analyst assigned to a new sector is told by the director of research not to change the investment opinion on a certain company.
5: - A portfolio manager receives an expensive vacation package from a brokerage as a sign of gratitude for all the business.
6: - A portfolio manager is sent two extra tickets to a local baseball game (face value $30 each), complements of the same brokerage.
7: - A CFA member who is also a member of the local society of financial analysts solicits corporate financial support for an investor conference and issues research reports on some of those same firms.
What are the types of exam questions you can expect regarding applying Standard I-B?
A company sponsors an analyst conference and picks up all the expenses.
Consider a situation where a firm invites all Wall Street analysts who are actively covering its company to go on an all-expenses-paid trip to tour facilities, play golf, stay in a swanky resort and so forth, all in the hopes of promoting itself and earning more favorable coverage.
For analysts bound by the Code and Standards, would this sort of outing compromise their objectivity? The answer is that it just might.
This Standard requires CFA members to assess if such an outing is possible while still maintaining objectivity - would they still be able to write an unfavorable opinion, if warranted by independent analysis?
Many firms have created policies that require attendance at such affairs to be paid by the firm and require the itinerary to be substantially business-related as a condition of attending.
No specific checklist of right and wrong is written into this Standard, but the mere appearance of conflict is a real issue in today’s environment and one must be sensitive to perception.
What are the types of exam questions you can expect regarding applying Standard I-B?
A financial firm promises to provide research coverage of a company’s stock in return for a potential business relationship.
This agreement is acceptable so long as there is absolutely no requirement to make the recommendation a favorable one. This standard requires that any conclusions be made in an independent and objective manner.
What are the types of exam questions you can expect regarding applying Standard I-B?
In the previous example, the relationship manager asks for a favorable recommendation for the new corporate client.
This case would violate Standard I-B.
If the relationship manager is concerned that an unfavorable research opinion will adversely affect the cultivation of this relationship, the research department would need to restrict the company from analyst coverage and only provide factual information without any specific recommendation.
Under no circumstances can the corporate client be seen as “buying” a favorable analyst opinion.
What are the types of exam questions you can expect regarding applying Standard I-B?
A research analyst assigned to a new sector is told by the director of research not to change the investment opinion on a certain company.
A research analyst assigned to a new sector is told by the director of research not to change the investment opinion on a certain company.
This type of supervision would violate the analyst’s requirement to reach an independent conclusion.
If the analyst is a CFA Member or Candidate, he or she should proceed by informing the supervisor that he or she is bound by the Code and Standards, and that such a restriction is not permitted by the Standard on Independence and Objectivity.
Another approach would be to study the company, reach an independent conclusion and share this opinion with the director of research, but leave it to the supervisor to decide the appropriate course of action.
- A portfolio manager receives an expensive vacation package from a brokerage as a sign of gratitude for all the business. Accepting such a perk is a violation, as it compromises the manager’s objectivity in regards to choosing brokers that suit the best interests of the clients and the firm (the broker offering the best execution, for example). This manager would be in compliance with Standards if he or she disclosed the perk in writing to his or her immediate supervisor. If the firm required this manager to refuse the vacation package, he or she would be required to abide by the decision of the firm.
- A portfolio manager is sent two extra tickets to a local baseball game (face value $30 each), complements of the same brokerage. Given the rule of thumb that gifts lower than US$100 are perceived as sufficiently modest and are thus acceptable from both clients and business partners, the portfolio manager would not be violating Standard I-B, even if the perk went unreported. At the same time, it’s a sensible practice to disclose even gifts of this nature - the Standards of Professional Conduct describe minimum standards, but staying in the habit of full disclosure should always be the preferred course of action.
- A CFA member who is also a member of the local society of financial analysts solicits corporate financial support for an investor conference and issues research reports on some of those same firms. Research opinions must be unbiased. However, when an analyst takes on an outside role, how will these secondary activities influence the research? If a firm pledges generous support to this analyst, will the analyst’s future research reports become more favorable? If another firm declines support, will a report on that company be less favorable? The best course of action would be to trade the coverage of those firms with a colleague, or to ask to be excused from seeking sponsors.
What are the types of exam questions you can expect regarding applying Standard I-B?
A portfolio manager receives an expensive vacation package from a brokerage as a sign of gratitude for all the business.
A portfolio manager receives an expensive vacation package from a brokerage as a sign of gratitude for all the business.
Accepting such a perk is a violation, as it compromises the manager’s objectivity in regards to choosing brokers that suit the best interests of the clients and the firm (the broker offering the best execution, for example). This manager would be in compliance with Standards if he or she disclosed the perk in writing to his or her immediate supervisor. If the firm required this manager to refuse the vacation package, he or she would be required to abide by the decision of the firm.
What are the types of exam questions you can expect regarding applying Standard I-B?
A portfolio manager is sent two extra tickets to a local baseball game (face value $30 each), complements of the same brokerage.
A portfolio manager is sent two extra tickets to a local baseball game (face value $30 each), complements of the same brokerage.
Given the rule of thumb that gifts lower than US$100 are perceived as sufficiently modest and are thus acceptable from both clients and business partners, the portfolio manager would not be violating Standard I-B, even if the perk went unreported. At the same time, it’s a sensible practice to disclose even gifts of this nature - the Standards of Professional Conduct describe minimum standards, but staying in the habit of full disclosure should always be the preferred course of action.
What are the types of exam questions you can expect regarding applying Standard I-B?
A CFA member who is also a member of the local society of financial analysts solicits corporate financial support for an investor conference and issues research reports on some of those same firms.
A CFA member who is also a member of the local society of financial analysts solicits corporate financial support for an investor conference and issues research reports on some of those same firms.
Research opinions must be unbiased. However, when an analyst takes on an outside role, how will these secondary activities influence the research? If a firm pledges generous support to this analyst, will the analyst’s future research reports become more favorable? If another firm declines support, will a report on that company be less favorable? The best course of action would be to trade the coverage of those firms with a colleague, or to ask to be excused from seeking sponsors.
How can you comply with Standard I-B?
The Standards of Practice Handbook provides a number of operational suggestions that one should recommend for adoption by the compliance department.
1:-Highlight the integrity of the research
2:-Disclose conflicts of interest
3:-Limit direct investments in equity or equity-related IPOs -
4:-Report holdings
5:-Establish a restricted list
6:-Cost reimbursement procedures
7:-Limit gifts - Gifts should be limited to a maximum value of US$100.
8:-Periodically review guidelines
9:-Compliance Officer
How can you comply with Standard I-B?
•Highlight the integrity of the research
•Highlight the integrity of the research -
Establish that research opinions reflect unbiased opinions, and include this wording on all written reports. Salary and bonuses should be independent of any factors that might compromise the degree of independence - i.e. don’t tie a quarterly bonus to the fees collected from corporate relationships (which can be affected by a stock recommendation).
How can you comply with Standard I-B?
•Disclose conflicts of interest
•Disclose conflicts of interest - For example, a directorship in a public company would need to be acknowledged by the employer, as this fact may affect research opinions of that company and of competitors. Research reports should disclose whether the analyst owns shares in a company and whether the analyst’s firm makes a market in that security or has underwritten the security.
How can you comply with Standard I-B?
Limit direct investments in equity or equity-related IPOs -
Limit direct investments in equity or equity-related IPOs -
Investment firms should establish formal policies relative to employee purchase of equity and equity-related IPOs and require prior approval.
How can you comply with Standard I-B?
Report holdings
Report holdings
Report holdings in all personal accounts, those of one’s immediate family and those over which the analyst has formal discretion (e.g. trusts).
How can you comply with Standard I-B?
Establish a restricted list
Establish a restricted list
This is to limit research on those firms that have a business relationship with that company. If an adverse opinion would hurt this business relationship, the company stock should be restricted from the research universe, and only factual information on the company should be disseminated.
How can you comply with Standard I-B?
Cost reimbursement procedures -
Cost reimbursement procedures -
Identify what is acceptable and what is unacceptable practice in order to avoid the appearance of a conflict. While there is no specific checklist in the Standards, the general rule of thumb is that air transport, ground transport and hotel accommodations should be the responsibility of the individual and his or her company, and should not be covered by (for example) the issuer of a security that an analyst has started to cover. The reason that no checklist has been developed is that there are always exceptions - for example, if the issuer of a preferred security is an energy company that is headquartered in a sparsely populated area (near its coal mines) and commercial transport is not available, and the only practical way to arrange a face-to-face meeting is by using a corporate jet, then an analyst can accept such an arrangement without violating this Standard.
How can you comply with Standard I-B?
Limit gifts
Limit gifts
Gifts should be limited to a maximum value of US$100.
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