Ethics

Question 1

Describe the Six Components of the Code of Ethics

Answer 1

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 2

The 7 Standard of Professional Conduct

Answer 2

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 3

Conduct Program

Answer 3

Inquiry can be prompted by:

1. Self disclosure
2. Written complains
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 4

Knowledge of the Law

Requirements

Answer 4

Comply with more strict law

Question 5

Knowledge of the Law

Guidance

Answer 5

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

Question 6

Knowledge of the Law

Recommended Procedures

Answer 6

1. Seek compliance/legal advice
2. Distribute laws a regs internally

Question 7

Independence and Objectivity

Guidance

Answer 7

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 8

Independence and Objectivity

Recommended Prodecures

Answer 8

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

Question 9

Misrepresentation

Guidance

Answer 9

1. Do not guarantee a return
2. No plagiarism

Question 10

Misrepresentation

Recommended Procedures

Answer 10

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

Question 11

Midconduct

Recommended Procedures

Answer 11

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

Question 12

Integrity of Capital Markets

Guidance

Answer 12

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 13

Integrity of Capital Markets

Recommendations

Answer 13

1. “Firewall” between departments
2. Review employee trades

Question 14

Loyalty, Prudence, and Care

Guidance

Answer 14

1. “Client” may be investing public
2. Make decisions based on entire portfolio
3. Vote proxies and disclose voting policies to clients
4. “Soft Dollars” must benefit client

Question 15

Fair Dealing

Guidance

Answer 15

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 16

Suitability

Guidance

Answer 16

1. Prepare IPS and update annually
2. Is leverage ok?
3. If client wants an unsuitable investment, look to change IPS or reconsider advisory relationship

Question 17

Performance presentation

Guidance

Answer 17

1. all future and former clients
2. Have to disclose illegal activities or required by law
3. May provide information to CFA for professional conduct program

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 - Loyalty

Recommendations

Answer 19

Encourage adoption of policies with:

1, Outside practice

2. Leaving employer
3. Incident report
4. Employee classification (full/part time)

Question 20

Duties to Employers - Additional Compensation

Guidance

Answer 20

Written consent from all parties involved

Question 21

Duties to Employers - Responsibility of Supervisors

Guidance

Answer 21

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 22

Duties to Employers - Responsibility of Supervisors

Recommendations

Answer 22

Compliance officer should:

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

Question 23

Diligence and Reasonable Basis

Guidance

Answer 23

1. must make decisions supported by research
2. Encourage firm to adopt policy to review quality of third-party research

Question 24

Diligence and Reasonable Basis

Recommendations

Answer 24

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 25

Communication with Clients and Prospective Clients Guidance

Answer 25

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 26

Record Retention

Answer 26

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

Question 27

Conflicts of Interest Disclosure

Answer 27

Must disclose to employer; 1. Ownership of stock 2. Board participation 3. special compesation or bonuses

Question 28

Conflicts of Interests Priority of Transactions

Answer 28

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 29

Conflicts of Interests Referral Fees

Answer 29

1. Must report any compensation to everyone 2. Must be disclosed prior to agreement

Question 30

Responsibilities as a CFA Member

Answer 30

1. Have proper conduct 2. Reference to CFA Designation/Program – be honest and tell the truth a. Do not imply superior ability b. Must be Chartered Financial Analyst or CFA c. Cannot be used as a noun

Question 31

Research Objectivity Standards Policy

Answer 31

1. Formal written policy 2. Available to clients and prospects 3. Disseminate to all employees 4. Supervisors procedures ensure compliance 5. Senior office attest annually to policy adherence (employees NOT required to sign annually)

Question 32

Research Objectivity Standards Public Appearances

Answer 32

Must disclose any personal and firms conflicts

Question 33

Research Objectivity Standards Reasonable and Adequate Basis

Answer 33

1. Research has reasonable and adequate basis 2. Designated person/group to review and approve all research

Question 34

Research Objectivity Standards Investment Banking

Answer 34

1. Must separate research from investment banking 2. Analysts cannot report to investment banking

Question 35

Research Objectivity Standards Research Analyst Compensation

Answer 35

1. Should be directly linked to quality of research 2. Not directly linked to investment banking, corporate finance activities a. Can be indirectly be linked on investment banking results by should disclose 3. Measureable criteria for research quality (accuracy over time)

Question 36

Research Objectivity Standards Relationship with Subject Companies

Answer 36

An analyst can send only factual information to the subject company for verification

Question 37

Research Objectivity Standards Personal Investments and Trading

Answer 37

1. Cannot trade personal account 30 days before and 5 days after a recommendation a. Exception: Severe hardship 2. Employee/family members cannot have prior IPO shares in the industry the analyst covers

Question 38

Test Review

Answer 38

1. Cannot communicate a rating different than what you published 2.