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Chapter 2. Ethical And Compliance-Driven Behaviour > Standards Of Professional Conduct > Flashcards

Standards Of Professional Conduct Flashcards

1
Q

Standard I: Professionalism
I (A): Knowledge of the law

Briefly explain the standard I (A) for all members and candidates of CFA

A

Understand and comply with all applicable laws, rules and regulations (CFA Institute Code of Ethics and Standards of Professional Conduct) of any government, regulatory organisation, licensing agency or professional association governing their professional activities.

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2
Q

Standard I: Professionalism
I (A): Knowledge of the law

What are some of the concepts that we need to understand around standard I (A) for all members and candidates of CFA?

A
  1. Members and candidates must comply with the strictest law, rule or regulation during conflict of interest.
  2. Professionals practising across many countries must adhere to all applicable regulatory requirements, whether these are laws, rules and regulations of their own country, or those of foreign countries
  3. In the event of conflict between regulatory requirements and the code of standard, they must follow whichever is the strictest.
  4. Professionals should ensure they have appropriate knowledge of all relevant requirements and ensure they’re up-to-date with the laws.
  5. If a standard/ requirement has been violated, this should be reported to compliance or supervisor. If not, they should completely disassociate themselves from the illegal activity. (Or resign)
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3
Q

Standard I: Professionalism
I (B): Independence and Objectivity

Briefly explain the standard I (B) for all members and candidates of CFA

A
  1. MUST USE reasonable care and judgement to achieve and maintain independence and objectivity in their professional activities.
  2. MUST NOT offer, solicit or accept any gift, benefit, compensation or consider consideration that can compromise their own or another’s independence and objectivity.
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4
Q

Standard I: Professionalism
I (B): Independence and objectivity

What are some of the concepts that we need to understand around standard I (B) for all members and candidates of CFA?

A
  1. Gifts from clients are allowed as long as they are disclosed to the employer to avoid the appearance of favouring one client over another
  2. Avoid situations that look like they can cause a conflict of interest
  3. Companies should only release factual information
  4. When investment professionals visit a company/ client, they should where possible, pay for their own transport and accommodation.
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5
Q

Standard I: Professionalism
I (C): Misinterpretation

Briefly explain the standard I (C) for all members and candidates of CFA

A
  1. MUST NOT knowingly make any misinterpretations relating to investment analysis, recommendations, actions or other professional activities
  2. MISINTERPRETATION is any UNTRUE statement, or any statement that is false or misleading.
  3. This also includes OMITTING of a fact or a failure to correct a known misunderstanding
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6
Q

Standard I: Professionalism
I (C): Misinterpretation

What are some of the concepts that we need to understand around standard I (C) for all members and candidates of CFA?

A
  1. The standard is relevant to misinterpretation in any form. (email/ ad/ written material)
  2. The following should also NOT BE misinterpreted:
    A. Their qualifications/ those of the firm
    B. Services provided by the firm.
    C. Performance record of themselves or the firm
    D. Guaranteeing returns on risky investments or products.
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7
Q

The Standard of Professionalism also covers plagiarism.

What are some of the concepts around this?

A
  1. Investment professionals SHOULD NOT copy or use material prepared by another person without acknowledging them. (I.e. include name of author and source)
  2. Examples of plagiarism include:
    A. Basing a report on another person’s report.
    B. Using excerpts/ sections from an article.
    C. Using charts/ graphs without referring the original source or without required permission.
  3. Standards of plagiarism apply to written materials and oral communication e.g meetings/ presentations
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8
Q

Standard I: Professionalism
I (D): Misconduct

Briefly explain the standard I (D) for all members and candidates of CFA

A
  1. MUST NOT engage in any professional conduct involving dishonesty, fraud or deceit.
  2. MUST NOT commit any act that reflects adversely on their professional reputation, professional integrity, or competence
  3. This standard is for PROFESSIONAL CONDUCT rather than personal behaviour outside of work

E.g. excessive drinking during business hours or manipulating expense accounts - poor judgment

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9
Q

Standard I: Professionalism
I (E): Competence

Briefly explain the standard I (E) for all members and candidates of CFA

A

MUST ACT with, and maintain, the competence necessary to fulfil their professional responsibilities

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10
Q

Standard II: Integrity of capital markets
II (A): Material non-public information

Briefly explain the standard II (A) for all members and candidates of CFA

A

Those possessing material non-public information that could affect the value of an investment, MUST NOT act or cause others to act on that information

Acceptable to analyse public information and non-material non-public information to predict events that would lead to the same conclusion as receiving material non-public information. This is called “mosaic theory”

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11
Q

Standard II: Integrity of capital markets
II (A): Material non-public information

Briefly explain what “material” means

A
  1. Disclosure is likely to have an impact on the price of the security
  2. OR, reasonable investors would want to know the information before making an investment decision
  3. Reliability of the source of the information is also a factor in determining whether it’s material.
  4. Less reliable = less material
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12
Q

Standard II: Integrity of capital markets
II (A): Material non- public information

Briefly explain what “non-public” means

A
  1. Information has not been disseminated/spread in the market and investors have not had a chance to react to it
  2. If a group of analysts is given information by a company, it is still non-public until, it has been disseminated to other investors in the market
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13
Q

Standard II: Integrity of capital markets
II (B): Market Manipulation

Briefly explain the standard II (B) for all members and candidates of CFA

A

MUST NOT ENGAGE in practices that distort prices or artificially inflate trading volume in order to mislead market participants

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14
Q

Standard II: Integrity of capital markets
II (B): Market Manipulation

What are some of the violations standard II (B) mentions that we all need to understand concerning members and candidates of CFA?

A
  1. Transactions that artificially distort prices of volumes of securities traded
  2. Taking a dominant position in the security in order to manipulate the price of a related derivative (e.g. buying/ controlling a large amount of a stock to influence its price)
  3. Dissemination of false or misleading information to artificially inflate, or decrease a security price
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15
Q

Standard III: Duties to Clients
III (A): Loyalty, prudence and care

Briefly explain the standard III (A) for all members and candidates of CFA

A
  1. Members and candidates have a DUTY OF LOYALTY to clients
  2. They MUST ACT with reasonable CARE and exercise PRUDENT judgment
  3. MUST ACT for the benefit of their clients, and place their clients’ interest before the employer’s or their own interests
  4. E.g. importance of loyalty to clients is in regard to proxy voting
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16
Q

Standard III: Duties to Clients
III (B): Fair Dealing

Briefly explain the standard III (B) for all members and candidates of CFA

A
  1. MUST DEAL fairly and objectively with all clients, when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities
  2. “Fair Dealing” means - professionals MUST NOT favour one client above another when sharing recommendations or taking investment actions
  3. AND, Material changes MUST BE announced to all clients at the same time.
  4. Discretionary and non-discretionary clients MUST BE treated equally
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17
Q

Standard III: Duties to Clients
III (C): Suitability

Briefly explain the standard III (C) for all members and candidates of CFA

Part 1

A

When professionals are in an advisory relationship with a client, they must:

  1. Make a reasonable enquiry into a client’s or prospective client’s investment experience, risk and return objectives and financial constraints before making any investment recommendations or taking actions
  2. MUST reassess and update this information regularly
  3. Determine an investment is suitable to the client’s financial situation and consistent with client’s written objectives, mandates and constraints before making a investment recommendation or taking action
  4. Judge suitability of investments in the context of the client’s total portfolio
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18
Q

Standard III: Duties to Clients
III (C): Suitability

Briefly explain the standard III (C) for all members and candidates of CFA

Part 2

A

When members and candidates are responsible for managing a portfolio for a specific mandate or strategy, they MUST ONLY make investment recommendations or actions that are consistent with the stated objectives and constraints of the portfolio.

Requirements (understand the client before giving advice I.e. a fact-find for each client)

  1. Type in nature of the client and their attitude to risk
  2. Investment objectives in terms of risk and return
  3. Investment constraints like liquidity, legal requirements, time horizon, tax position, and other unique circumstances
  4. Performance measurement benchmarks
19
Q

Standard III: Duties to Clients
III (C): Suitability

Briefly explain what “discretionary” and “non-discretionary” clients mean with regard to advisory relationships

A
  1. Discretionary Advisory Relationship: The advisor has the authority to make investment decisions on behalf of the client without needing approval for each trade.
  2. Non-Discretionary Advisory Relationship: The advisor provides recommendations, but the client must approve each trade before execution.

In both cases, the advisor typically has a fiduciary duty to act in the client’s best interest.

20
Q

Standard III: Duties to Clients
III (D): Performance Presentation

Briefly explain the standard III (D) for all members and candidates of CFA

A
  1. MUST MAKE reasonable efforts to ensure that the information presented and communicated is fair, accurate and complete
  2. CFA has developed GIPS (Global Investment Performance Standard) as a common, accepted set of standards for investment management industry
  3. All performance statements must be fair, accurate and complete
21
Q

Standard III: Duties to Clients
III (E): Preservation of Confidentiality

Briefly explain the standard III (E) for all members and candidates of CFA

A

MUST KEEP Information about current, former and prospective clients confidential, unless:

  1. Information concerns, illegal activities on the part of the client or prospective client
  2. Disclosure is required by law
  3. Client or prospective client allows disclosure of the information
22
Q

Standard IV: Duties to employers
IV (A): Loyalty

Briefly explain the standard IV (A) for all members and candidates of CFA

A
  1. MUST ACT for the benefit of the employer, and not deprive the employer of the advantage of their skills and abilities, divulge/share confidential information or cause harm to their employer
  2. Employer’s interest MUST COME BEFORE employee’s own interest
  3. Independent practice is not explicitly prohibited (unless there’s conflict of interest) but, professionals need to obtain prior permission from the employer/ any other party
  4. When leaving the company, employer’s best interests should be kept in mind until resignation is effective e.g. they should not misappropriate trade secrets, client lists or misuse confidential information.
23
Q

Standard IV: Duties to employers
IV (B): Additional Compensation Arrangements

Briefly explain the standard IV (B) for all members and candidates of CFA

A
  1. MUST NOT accept gifts, benefits, compensation, or consideration that competes with or, might reasonably be expected to create conflict of interest unless, written consent is obtained from all parties involved
  2. Employers have the right to know if their employees are subject to any conflict of loyalties
  3. Additional compensation includes payments from clients or third parties
24
Q

Standard IV: Duties to employers
IV (C): Responsibilities of supervisors

Briefly explain the standard IV (C) for all members and candidates of CFA

A
  1. MUST MAKE reasonable efforts to ensure that anyone subject to the supervision or authority complies with applicable laws, rules, regulations, and the Code of Standards
  2. Supervisors are responsible for their subordinates’ ethical behaviour.
  3. Supervisors can rely on compliance procedures designed to avoid and detect any wrongdoing
  4. If suitable compliance systems are not in place, then the investment professionals should not accept the supervisory responsibility
25
Q

Standard IV: Duties to employers
IV (C): Responsibilities of supervisors

What should the compliance procedures consist of a part of standard IV (C)?

A
  1. Contained in a clearly written an accessible manual, that is easy to understand
  2. Outline permissible conduct
  3. Outline the scope of the procedures
  4. Implement a system of checks and balances
  5. Designate a compliance officer and specified authority
  6. Procedures for reporting violations and sanctions
  7. Procedures to document and test compliance procedures
  8. Describe the hierarchy of supervision and assign duties to supervisors
  9. Rules should be communicated to all employees and updated periodically
26
Q

Standard V: Investment analysis, recommendations and actions
V (A): Diligence and reasonable basis

Briefly explain the standard V (A) for all members and candidates of CFA

A
  1. Exercise diligence, independence and thoroughness in analysing investments, making investment recommendations and taking investment actions
  2. Have a reasonable and adequate basis, supported by appropriate research and investigation for any investment analysis, recommendations, or action
  3. This applies to both primary, secondary and third-party research
  4. If any information is suspected of being inaccurate, then it cannot be used
27
Q

Standard V: Investment analysis, recommendations and actions
V (A): Diligence and reasonable basis

Briefly explain what “primary”, “secondary” and “third-party “ research means with regards to standard V (A)

A
  1. Primary Research: Original research done by the analyst (e.g., financial modeling, company visits).
  2. Secondary Research: Analysis conducted by someone else in the same firm (e.g., analyst reports, financial statements).
  3. Third-Party Research: External research obtained from other firms; requires due diligence.
28
Q

Standard V: Investment analysis, recommendations and actions
V (B): Communication with clients and prospective clients

Briefly explain the standard V (B) for all members and candidates of CFA

The below pointers apply to current and prospective clients

A
  1. Disclose the nature of the services provided, along with information on the cost to the client associated with the services
  2. Disclose basic format and general principles of the investment processes, to analyse investments, select securities and construct portfolios. Also disclose changes that might materially affect those processes
  3. Disclose significant limitations and risks associated with the investment process
  4. Use reasonable judgement to identify factors that are important to their investment analyses, recommendations or actions and include those factors in communication with them
  5. Distinguish between fact and opinion in the presentations of investment analysis and recommendations
29
Q

Standard V: Investment analysis, recommendations and actions
V (C): Record Retention

Briefly explain the standard V (C) for all members and candidates of CFA

A
  1. MUST develop and maintain appropriate records to support the investment analysis, recommendations, actions and other investment related communications
  2. MUST maintain files to support their work, including sources of information, and methodology by which a recommendation or conclusion was made
  3. Records can be maintained in either hard-copy or electronically
30
Q

Standard VI: Conflict of Interest
VI (A): Disclosure of conflicts

Briefly explain the standard VI (A) for all members and candidates of CFA

A
  1. Full and fair disclosure of all matters that could reasonably be expected to impact their independence and objectivity, or interfere with the respective duties to their clients, prospective clients and employer
  2. Disclosures should be prominent, delivered in plain language and communicate the information effectively
  3. Full disclosure on conflicts of interest, so that all parties can evaluate the objectivity of advice or investment actions being taken
  4. Report any beneficial ownership they have in securities, or corporate directorships that can be considered to produce a conflict of interest
31
Q

Standard VI: Conflict of Interest
VI (B): Priority of transactions

Briefly explain the standard VI (B) for all members and candidates of CFA

A
  1. Investment Transactions for clients and employers must have priority over transactions in which a member/ candidate is the beneficial owner
  2. Family accounts that are also client accounts should be treated equally with other clients
  3. IPOs are a common area for conflicts due to stocks’ shortage, and a rise in prices anticipated. Same with private placements (should avoid these)
  4. All individuals involved in investment decision-making should observe a blackout or restricted period before trading for clients, so they cannot front-run client trades.
32
Q

Standard VI: Conflict of Interest

Briefly explain what “beneficial ownership” means with regards to standard VI

A

Beneficial Owner means the investment professional owns the shares directly or has an indirect interest in the security

33
Q

Standard VI: Conflict of Interest
VI (B): Priority of transactions

Briefly explain what “blackout” or “restricted period” means with regards to standard VI (B)

A

A set time when employees cannot trade in securities to prevent conflicts of interest and front-running client trades.

Conflict arises when employees trade for personal gain before executing client trades, potentially benefiting from price movements at the client’s expense.

34
Q

Standard VI: Conflict of Interest
VI (C): Referral Fees

Briefly explain the standard VI (C) for all members and candidates of CFA

A
  1. Disclose to the employer, clients, and prospective clients on any compensation, consideration or benefit, received from or paid to others for the recommendation of products or services
  2. Disclosure should be made before an arrangement is entered into and should include the nature of the benefit and the estimate of the monetary value
35
Q

Standard VII: Responsibilities as a CFA Institute Member or CFA Candidate
VII (A): Conduct as participants in CFA Institute Programs

Briefly explain the standard VII (A) for all members and candidates of CFA

A
  1. CFA members and candidates must not engage in any conduct that compromises the reputation or integrity of the CFA Institute or the CFA designation
  2. or the integrity, validity or security of the CFA Institute programs
36
Q

Standard VII: Responsibilities as a CFA Institute Member or CFA Candidate
VII (B):Reference to the CFA Institute, the CFA designation and the CFA program

Briefly explain the standard VII (B) for all members and candidates of CFA

A
  1. Must not interpret, or exaggerate the meaning or implications of the membership in the CFA Institute, holding the CFA designation or candidacy in the CFA program
  2. IMC is only administered by the CFA UK, and not by the CFA Institute. The awarding body should be made clear.

e.g. “John Smith, IMC” is ok BUT
“John Smith, CFA IMC” is NOT OK

37
Q

What are the seven broad categories set out by the Standards of Professional Conduct that promote fair and ethical behaviour?

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

38
Q

1/7 broad categories set out by the Standards of Professional Conduct that promote fair and ethical behaviour is PROFESSIONALISM.

What are the 5 sub-standards this standard includes?

A

IA. Knowledge of the law

IB: Independence and objectivity

IC: Misinterpretation

ID: Misconduct

IE: Competence

39
Q

2/7 broad categories set out by the Standards of Professional Conduct that promote fair and ethical behaviour is INTEGRITY OF CAPITAL MARKETS.

What are the 2 sub-standards this standard includes?

A

IIA: Material non-public information

IIB: Market manipulation

40
Q

3/7 broad categories set out by the Standards of Professional Conduct that promote fair and ethical behaviour is DUTIES TO CLIENTS.

What are the 5 sub-standards this standard includes?

A

IIIA: Loyalty, prudence and care

IIIB: Fair dealing

IIIC: Suitability

IIID: Performance presentation

IIIE: Preservation of confidentiality

41
Q

4/7 broad categories set out by the Standards of Professional Conduct that promote fair and ethical behaviour is DUTIES TO EMPLOYERS.

What are the 3 sub-standards this standard includes?

A

IVA: Loyalty

IVB: Additional compensation arrangements

IVC: Responsibilities of supervisors

42
Q

5/7 broad categories set out by the Standards of Professional Conduct that promote fair and ethical behaviour is INVESTMENT ANALYSIS, RECOMMENDATIONS AND ACTIONS .

What are the 3 sub-standards this standard includes?

A

VA: Diligence and reasonable basis

VB: Communication with clients and prospective clients

VC: Record retention

43
Q

6/7 broad categories set out by the Standards of Professional Conduct that promote fair and ethical behaviour is CONFLICTS OF INTEREST.

What are the 3 sub-standards this standard includes?

A

VIA: Disclosure of conflicts

VIB: Priority of transactions

VIC: Referral fees

44
Q

7/7 broad categories set out by the Standards of Professional Conduct that promote fair and ethical behaviour is RESPONSIBILITIES AS A CFA INSTITUTE MEMBER/ CFA CANDIDATE .

What are the 2 sub-standards this standard includes?

A

VIIA: Conduct as participants in the CFA Institute programs

VIIB: Reference to CFA Institute, the CFA, designation and the CFA program

Chapter 2. Ethical And Compliance-Driven Behaviour (6 decks)

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