Describe ethical principles
- they help guide behaviour in situations where no regulations exist or apply
- may be influenced by public opinion, consumer demand or advocacy groups, all of which may raise ethical behaviour to a level higher than the minimum standards set out by the regulators
What are the distinct 3 meanings of “ethics”?
- The standards that govern the behaviour of a particular group
- A set of moral principles or values
- The study of the general nature of morals and moral choices that individuals make.
For the purposes of this exam, ethics is defined as:
a continuous process of examining behaviour and making decisions in the context of moral principles
What are 5 values prizes by all professionals?
- Morality
- Integrity
- Trust
- Honesty
- Competency
Values have the following common characteristics:
- they are beliefs, not facts
- they are long-lasting, but no necessarily unchangeable
- they guide individual and corporate behaviour and goals
Describe ends and means values
Ends values: represent the ends towards which a person strives and influence how a person acts today to achieve tomorrows goals (ie. sense of accomplishment)
Means values: the actions taken in the present to achieve future goals (ie. ambition)
A portfolio manager’s value system will accomplish the following:
- influence their perception of situations and problems
- influence their decisions and solutions to problems
- set limits on their understanding of what constitutes ethical behaviour
- help them resist when they are being pressured to do something that they believe is wrong
Regarding “right vs wrong” dilemmas, the decision will always be clear if one of the following is present:
- one choice is illegal
- one choice lacks a basis of truth
- the negative consequences far out weigh positive results of the other choice
- the proposed action does not conform with the code of fundamental inner values that are widely shared and understood and that define what is considered to be right or wrong
Define an ethical dillemma
-exists when two or more of the possible choices pit different values against each other
What are the four primary patterns of value conflict that result in ethical dilemmas?
- Trust vs loyalty (ie. honesty vs. commitment)
- Individual vs group
- Short vs long term
- Justice vs mercy (fairness vs empathy)
What are four common rationalizations?
- if I don’t do it, somebody else will
- it does not hurt anyone
- that is the way it has always been done
- if everybody else does it, it must be okay
List four strengths of a code of ethics
- Confirms company is prepared to be explicit about ethics
- It can be a valuable, formal, and updatable expression of appropriate behaviour
- It provides a social contact for the workplace and a basis for working together in reciprocal dignity and fairness
- It supports an individual’s and firm’s responsibilities and accountabilities
List five weaknesses of a code of ethics
- It may lull mgmt and regulators into a false sense of security
- Typically deals with “right vs wrong” but not with more complex and difficult right vs right scenarios
- May focus on what to do without explaining why
- May focus on employee obligations and ignore employer obligations
- A poorly written code may contain policies inconsistent with a firm’s investment philosophies and incentive strategies
What are the four elements necessary for a code of ethics to be effective?
- Senior management must support it
- Employees at all levels must participate in its development and reinforcement
- It’s training and reinforcement must be implemented
- It should be reviewed periodically and updated when necessary
What are 3 code of ethics “best practices”?
- Good business practice (distributing code at least annually for review)
- Written personal trading guidelines
- Prior approval process
What three elements must be present for trust-based relationships to develop between portfolio managers and their clients?
- The PM has specialized knowledge that the client does not have
- The PM belongs to an industry that is well regulated
- The PM places the interests of the client before their own
The trust relationship between a discretionary portfolio manager and their client is based on what two principles?
Competence and integrity
What are four key things a discretionary portfolio manager must do when meeting with a client or prospect?
- listen intently
- not be manipulative, exploitative or deceptive
- admit when they do not know something
- perform all tasks competently
Trust is expressed by way of what three constant elements in a relationship with a client?
- Disclosure of information (free flow of information equates to trust over the long term)
- Influence over decisions (client feels information shared with the PM helps make better decisions)
- Exercising control (client feels some control)
What are 6 key traits of a good discretionary PM?
- Competence
- Awareness of client needs
- Compassion
- Fairness
- Openness
- Consistent behaviour
What are the responsibilities of being a fund’s fiduciary?
- acting solely in the interest of a funds participants and beneficiaries with the exclusive purpose of providing benefits to them
- carrying out their duties prudently
- following the funds documents or trust indenture
- diversifying a fund’s investments
- paying only reasonable fund expenses
Define and describe the prudent man rule
- originates from US common law early 1800s
- directs the fiduciary to observe how a person of prudence, discretion and intelligence manages their own affairs, not in regard to speculation, but in regards to the permanent disposition of their fund, while considering the probable income, as well as the probable safety, of the capital to be invested
A fiduciary is required to invest a client’s assets as they would invest their own property all with the following 3 key factors in mind:
- The beneficiary’s expectations with respect to their investment objectives
- The need to preserve the fund or portfolio’s capital
- The amount and regularity of income that the beneficiary requires
