Ethics

Question 1

CFA Institute Professional Conduct Program

Answer 1

1. Overseen by Disciplinary Review Committee
2. Professional Conducts Staff conducts inquires

Question 2

Describe the Six Components of the Code of Ethics

Answer 2

i. Act in an ethical manner
ii. Integrity is paramount and clients always come first
iii. Use reasonable care; be independent
iv. Be a credit to the investment profession
v. Uphold capital market rules and regulations
vi. Be competent

Question 3

The 7 Standard of Professional Conduct

Answer 3

1. Professionalism
2. Integrity of Capital Markets
3. Duties to Clients
4. Duties to employers
5. Investment Analysis, Recommendations
6. Conflicts of interests
7. Responsibility as a CFA member

Question 4

Conduct Program

Answer 4

Inquiry can be prompted by:

1. Self disclosure
2. Written complaints
3. Evidence of misconduct
4. Report by a CFA exam proctor

Discipline

1. Cautionary letter
2. Sanctions; public sanction of suspension of CFA program

Question 5

Knowledge of the Law

Requirements

Answer 5

Comply with more strict law

Question 6

Knowledge of the Law

Guidance

Answer 6

1. First, notify supervisor or compliance
2. May confront wrongdoer directly
3. Dissociate if needed
4. No requirement to report to government

Question 7

Knowledge of the Law

Recommended Procedures

Answer 7

1. Seek compliance/legal advice
2. Distribute laws and regs internally
3. No requirement to report wrongdoers

Question 8

Independence and Objectivity

Guidance

Answer 8

1. Gifts from clients ok, must disclose
2. No gifts from vendors (modest gifts OK)
3. For issuer-paid research, flat fee is preferred; must disclose
4. Users must be aware of credit ratings conflict

Question 9

Independence and Objectivity

Recommended Prodecures

Answer 9

1. Research is unbiased
2. Restricted list
3. Recommend but do not require travel expenses paid by employer

Question 10

Misrepresentation

Guidance

Answer 10

1. Do not guarantee a return
2. No plagiarism

Question 11

Misrepresentation

Recommended Procedures

Answer 11

1. Must maintain record used for research
2. Except for recognized places (e.g. bloomberg)

Question 12

Midconduct

Recommended Procedures

Answer 12

1. Adopt a code of ethics
2. Provide a list of potential violations and punishments

Question 13

Professionalism

Recommendations for Firms

Answer 13

1. Have a code of ethics
2. Provide employees info on laws, rules, and regs
3. Have procedures for reporting suspected violations

Question 14

Independence and Objectivity

Recommendations for Firms

Answer 14

1. Research compensation aligns with unbiased opinions
2. Restricted securities list (no opinions only facts)
3. Limit and require prior approval for employee IPOs
4. Establish supervisory procedures for review of actions
5. Appoint a senior officer to oversee compliance and ethics

Question 15

Integrity of Capital Markets

Guidance

Answer 15

1. cannot act or cause someone else to act
2. If an analyst knows information but the public doesn’t, still can’t act

Question 16

Integrity of Capital Markets

Recommendations for Firms

Answer 16

1. “Firewall” between departments
2. Develop procedures for each strategy
3. Review employee trades
4. Train and communicate rules

Question 17

Fair Dealing

Guidance

Answer 17

1. Fair does not mean equal
2. Can have different level of service (must disclose)
3. All clients must have fair chance to act
4. Disclose written allocation procedures

Question 18

Duties to Employers - Loyalty

Guidance

Answer 18

1. Encouraged to give employer code of ethics
2. With other work: disclose to employer time, services, compensation
3. Cannot solicit current clients prior to leaving

Knowing client names etc. is ok

4. Whistleblowing; ok if benefits clients, NOT for personal gain

Question 19

Duties to Employers - Responsibility of Supervisors

Guidance

Answer 19

1. must make an effort to ensure people under you follow all laws
2. Must try to detect violations
3. Obligation to indebntify compliance flaws (would decline role until they are good)

Question 20

Duties to Employers - Responsibility of Supervisors

Recommendations

Answer 20

Compliance officer should:

1. Distribute and update procedures
2. Educate staff
3. Review employee actions
4. Limit the wrongdoer until investigation is done

Question 21

Diligence and Reasonable Basis

Recommendations

Answer 21

1. Develop measurable criteria for assessing quality of research
2. Review/approve research reports prior to circulation
3. Procedure to evaluating outside information providers

4. Do not need to dissociate from group research for a disagreement

Question 22

Communication with Clients and Prospective Clients

Guidance

Answer 22

1. Promptly disclose any changes that may affect research
2. Distinguish between fact and opinion
3. Disclose risks and limitations
4. Inform clients of changes in investment processes

Question 23

Record Retention

Answer 23

1. If no regulatory or firm policy, CFA recommends 7 years
2. Cannot recreate record from memory. Must use public sources

Question 24

Conflicts of Interest

Disclosure

Answer 24

Must disclose to employer;

1. Ownership of stock
2. Board participation
3. special compensation or bonuses

Question 25

Conflicts of Interests Priority of Transactions

Answer 25

1. Family members that are clients are treated same 2. Limit participation in oversubscribed IPOs 3. Establish blackout/restricted periods 4. Disclose policies on personal investing to clients

Question 26

AMC Components

Answer 26

A) Loyalty to Clients. B) Investment Process and Actions. C) Trading. D) Risk Management, Compliance, and Support. E) Performance and Valuation. F) Disclosures.

Question 27

AMC Details

Answer 27

1. For the firm and is voluntary (Code of Standards is for individuals and mandatory) 2. Can claim compliance with AMC

Question 28

AMC Loyalty to Clients

Answer 28

Required: 1. Client's interest ahead of firm's 2. Maintain client confidentiality Recommended: 1. Align compensation to avoid COI

Question 29

AMC Investment Process and Actions

Answer 29

For specific styles or strategies; do not have to evaluate the suitability to a given client

Question 30

AMC Disclosures

Answer 30

Make sure to disclose; 1. Regulatroy/disciplinary actions 2. Investment process (strategy, risk, etc) 3. Trade allocation 4. Signigicant personnel changes

Question 31

From Questions

Answer 31

1. Opinions with return is OK 2. Cannot trade until written approval 3. Must analyze trades on case by case basis 4. Subsciption clients and portfolio management clients should get reports at the same time 5. Compliance cannot be handed off, must be supervised by compliance officer