CFA L1_0609 - Ethics
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85 terms
Terms | Definitions |
|---|---|
 Standard VI(A), Disclosure of Conflicts | Members and Candidates must make full and fair disclosure of all matters which may impair their independence and objectivity or interfere with respective duties to their employer, clients, or prospective clients. |
| What is required under standard V(B)? | Communication With Clients and Prospective Clients. Disclose to clients and prospective clients the basic format and general principles of the investment processes used to analyze investments |
| definition of the "firm" under the GIPS standards | establishes the boundaries for what constitutes firm assets, and the set of portfolios that must be included in at least one composite |
| provisions for each section of the Global Investment Performance Standards (GIPS) are divided between . . . | requirements and recommendations |
| Under standard VI(A), what are the critical standards for disclosure | Members and Candidates must ensure that such disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively. |
| Under standard III(C), what does the analyst need to assess | suitability - time horizon, return objectives, tax considerations, and liquidity needs of a client before changing investment policy. |
| What are the requirements of standard III(A) | Loyalty, prudence, and care needed to comply with fiduciary responsibility. |
| What are the requirements of standard IV(C) | supervisors must make reasonable efforts to detect and precent violations of laws, rules, regulations, and the code and standards by anyone under their authority |
| Two necessary parts of standard III(B) | fair dealing - having well defined guidelines for pre-dissemination, limiting the number of employees privy to recommendations and changes |
| Which standard allows an analyst to leverage client resources, and under what circumstances | Standard III(A) loyalty, prudence, and care. Client must be put first, and benefits must be channeled back to the client. Members are required to act in the interest of their clients. |
| In terms of requirements and recommendations, in order to claim compliance with GIPS standards, firms must . . . | Meet all requirements, and are encouraged to adopt and implement the recommendations |
| What does standard VI(C) require? | Referral Fees, consideration includes all fees that are paid in cash, soft dollars, and in kind.Referral fees must be disclosed to the client or employer whether the consideration is received by or paid to others for the recommendation. |
| What does standard III(D) require? | Members communicate performance in a fair, accurate, and complete fashion, and covers both written and oral communication. Asking someone to advertise only one year's performance is unlikely to be representative since this constitutes a timeframe that is too short. |
| What does standard V(A) require? | Requires that a member have a "reasonable and adequate basis" before making an investment recommendation. |
| What does standard VII(A) require? | Members and Candidates must not engage in any conduct that compromises the reputation or integrity of CFA Institute or the CFA designation or the integrity, validity, or security of the CFA examinations. Includes: # Cheating on the CFA exam or any exam. # Not following rules and policies of the CFA program. # Giving confidential information on the CFA program to Candidates or the public. # Improperly using the designation to further personal and professional goals. # Misrepresenting information on the Professional Conduct Statement (PCS) or the CFA Institute Professional Development Program |
| In order to comply with GIPS, how many composites does a portfolio need to be included in? | One |
| What does standard V(C) require? | Record Retention requires that members maintain all records supporting analysis, recommendations, actions, and all other investment related communications with clients and prospects. The recommended procedures for compliance with Standard V(C) state that the record-keeping requirement is generally the firm's responsibility. |
| If regulatory standards are not in place, what is the minimum length of time that CFAI recommends for record retention? | Seven-year holding period. |
| What does standard IV(B) require? | Additional Compensation Arrangements, applies in this situation."No gifts, benefits, compensation, or consideration are to be accepted with may create a conflict of interest with the employer's interest unless written consent is received from all parties." The key words here are "written consent" - members must obtain written consent because such arrangements may affect loyalties and objectivity and create potential conflicts of interest |
| Within the Global Investment Performance Standards (GIPS) are supplemental provisions which must be applied to which of the following asset classes? | The GIPS standards do not address performance measurement or coverage of all asset classes, but sections 6 and 7 are supplemental provisions which must be specifically applied private equity and real estate. |
| Which groups does the first component of the Code of Ethics mention? | Component one mentions duties to the public, clients, prospects, employers, employees, colleagues, and other participants in the global capital markets. |
| Can a broker trade on non-public information? | Yes, as long as the information is not material. Standard II(A), Material Nonpublic Information, states "a member cannot trade or cause others to trade in a security while the member possesses material nonpublic information" A reasonable investor would need to know more to determine if the information was material. |
| What does the standard II, integrity of capital of markets, include in terms of material non-public information? | earnings; mergers, acquisitions, tender offers, or joint ventures; changes in assets; innovative products, processes, or discoveries; new licenses, patents, registered trademarks, or regulatory approval/regulation of a product; developments regarding customers or suppliers; changes in management; change in auditor notification or reliance on auditor; events regarding issuer's securities i.e. defaults, calls, repurchases, splits, dividends, rights of holders, ratings, additional sales of securities; bankruptcies; legal disputes; government reports; orders for large trades |
| What are the stipulations for standard I(A), knowledge of the law? | Members and candidates shall not knowingly participate or assist in any violation of laws, rules, regulations, or the Code and Standards. |
| What should a member do when they suspect a client or colleague is planning or engaging in ongoing illegal activities? | 1. Consult counsel to determine legality of actions in question 2. Disassociate from any illegal or unethical activity. When members have reasonable grounds to believe that a client |
| What is the target audience for GIPS standards? | he GIPS were designed to become "the" worldwide standard for all investment firms seeking to present historical investment performance. Key here is "worldwide," not just contributors from 21 countries. |
| What are the 8 major GIPS provisions? | Fundamentals of Compliance, Input Data, Calculation Methodology, Composite Construction, Disclosures, Presentation and Reporting, Real Estate, and Private Equity. |
| Under the standard for misrepresentation, when does a candidate need to cite a reference? | The Standards require members to acknowledge the author of a model, but members are not required to acknowledge information from a recognized statistical and reporting service. |
| Under what circumstances can a member use material non-public information? | Members may not use material nonpublic information for trading purposes unless, the information was developed under the Mosaic Theory. |
| What are the components of the Code of Ethics? | 1. Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets. 2. Place the integrity of the investment profession and the interests of clients above their own personal interests. 3. Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities. 4. Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession. 5. Promote the integrity of, and uphold the rules governing, capital markets. 6. Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals |
| What is the best way to determine the suitability of an investment for a client ? | Although broad in scope, the best way to determine suitability is to consider the financial situation, investment experience and investment objectives of the client. A specially designed survey DOES NOT accomplish this goal. Make a reasonable inquiry into a client's or prospective clients' investment experience, risk and return objectives, and financial constraints prior to making any investment recommendation or taking investment action and must reassess and update this information regularly. |
| Which standard covers member compliance on issues relating to corporate governance or to soft dollars ? | Fiduciary duty on issues relating to corporate governance or to soft dollars is primarily addressed by Standard III(A), Loyalty, Prudence, and Care. Exercise the prudence, care, skill, and diligence under the circumstances that a person acting in a like capacity and familiar with such matters would use. Manage pools of client assets in accordance with the terms of the governing documents, such as trust documents or investment management agreements. Make investment decisions in the context of the total portfolio. Vote proxies in an informed and responsible manner. Due to cost benefit considerations, it may not be necessary to vote all proxies. Client brokerage, or "soft dollars" or "soft commissions" must be used to benefit the client. |
| When a member is working in a foreign country, which rules and laws aplly? | The analyst is covered by the strictest of the following laws and rules: his own country's, the foreign country's or CFA Institute's Code and Standards. |
| Describe the rules for standard IIIC, performance presentation. | Standard III is suitability. When communicating investment performance information, Members or Candidates must make reasonable efforts to ensure that it is fair, accurate, and complete. Members must avoid misstating performance or misleading clients/prospects about investment performance of themselves or their firms, should not misrepresent past performance or reasonably expected performance, and should not state or imply the ability to achieve a rate of return similar to that achieved in the past. |
| What circumstances can prompt an inquiry into misconduct by the CFAI? | 1. Self-disclosure by members or candidates on their annual Professional Conduct Statements of involvement in civil litigation or a criminal investigation, or that the member or candidate is the subject of a written complaint. 2. Written complaints about a member or candidate's professional conduct that are received by the Professional Conduct staff. 3. Evidence of misconduct by a member or candidate that the Professional Conduct staff received through public sources, such as a media article or broadcast. 4. A report by a CFA exam proctor of a possible violation during the examination. |
| If a CFAI inquiry into misconduct finds a violation and issues a sanction, what are the candidates options? | In a case where the Designated Officer finds a violation has occurred and proposes a disciplinary sanction, the member or candidate may accept or reject the sanction. If the member or candidate chooses to reject the sanction, the matter will be referred to a panel of CFA Institute members for a hearing. Sanctions imposed may include condemnation by the member's peers or suspension of candidate's continued participation in the CFA Program. |
| What happens if a person rejects a CFAI stipulation agreement? | A covered person who rejects a proposed stipulation agreement may request an appeal to a hearing panel. This must be done in 30 days, or the matter will be referred automatically if no action is taken. A stipulation agreement is not relevant to a case warranting a summary suspension. |
| In order to claim GIPS compliance, how many years of data are needed? | In order to claim GIPS compliance, a firm must present at least five years of annual investment performance that is compliant with GIPS. If a firm or composite is less than five years old, the performance since the inception of the firm or composite must be presented. |
| A CFA Institute member puts the following statement on her resume: "I passed each level of the CFA exam on the first try." Is this a violation of Standard VII(B)? | The statement is not a violation because it is a fact. However, the member must not go on to claim superior performance. |
| Can a list of recommendations be sent without regard to suitability? | Yes. A list of recommendations may be sent without regard to suitability, including both safe income stocks and aggressive growth stocks, for example |
| IV(B) Additional compensation arrangements | Do not accept gifts, benefits, compensation, consideration that competes with, or creates a conflict of interest with employer's interest unless written consent is obtained from all parties involved. GUIDANCE: * compensation and benefits cover direct by client and other received from third parties. Email is acceptable form of written consent. Must also provide a description of the types of services being provided, the length of time the arrangement will last, and the compensation she expects to receive for her services. |
| Standard V(C) Record Retention. What format must the records be in (in terms of length)? | Recommendations may be brief, in capsule form, or simply a list of buy/sell recommendations. |
| IV(C) Referral fees overview. | Standard VI(C) Referral Fees indicates that members shall disclose to employers, clients, and prospects any consideration or benefits received for the recommendation of services. ust be made prior to engagement. Scope of fees must be disclosed. |
| Standard V(B) Communication with Clients and Prospective Clients overview | Members and Candidates must: 1. Disclose to clients and prospective clients the basic format and general principles of the investment processes used to analyze investments, select securities, and construct portfolios and must promptly disclose any changes that might materially affect those processes. 2. Use reasonable judgment in identifying which factors are important to their investment analyses, recommendations, or actions and include those factors in communications with clients and prospective clients. 3. Distinguish between fact and opinion in the presentation of investment analysis and recommendations. Proper communication with clients is critical to provide quality financial services. Members must distinguish between opinions and facts and always include the basic characteristics of the security being analyzed in a research report. Members must illustrate to clients and prospects the investment decision-making process utilized. The suitability of each investment is important in the context of the entire portfolio. All means of communication are included here, not just research reports. |
| Standard III(A) Loyalty, Prudence, and Care overview | Members and Candidates must always act for the benefit of clients and place clients' interests before their employer's or their own interests. Members and Candidates must be loyal to clients, use reasonable care, exercise prudent judgment, and determine and comply with their applicable fiduciary duty to clients. Client interests always come first: Exercise the prudence, care, skill, and diligence under the circumstances that a person acting in a like capacity and familiar with such matters would use. Manage pools of client assets in accordance with the terms of the governing documents, such as trust documents or investment management agreements. Make investment decisions in the context of the total portfolio. Vote proxies in an informed and responsible manner. Due to cost benefit considerations, it may not be necessary to vote all proxies. * Client brokerage, or "soft dollars" or "soft commissions" must be used to benefit the client. |
| Standard III(B) Fair Dealing overview. | Members and Candidates must deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities. Do not discriminate against any clients when disseminating recommendations or taking investment action. Fairly does not mean equally. In the normal course of business, there will be differences in the time emails, faxes, etc. are received by different clients. Different service levels are okay, but they must not negatively affect or disadvantage any clients. Disclose the different service levels to all clients and prospects, and make premium levels of service available to all who wish to pay for them. Give all clients a fair opportunity to act upon every recommendation. Clients who are unaware of a change in a recommendation should be advised before the order is accepted. Treat clients fairly in light of their investment objectives and circumstances. Treat both individual and institutional clients in a fair and impartial manner. Members and Candidates should not take advantage of their position in the industry to disadvantage clients. |
| Is private equity or venture capital one of the 8 major GIPS sections? | Private equity. |
| Standard V(A) Diligence and Reasonable Basis overview | Members and Candidates must: 1. Exercise diligence, independence, and thoroughness in analyzing 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, recommendation, or action. The application of this Standard depends on the investment philosophy adhered to, members' and candidates' roles in the investment decision-making process, and the resources and support provided by employers. These factors dictate the degree of diligence, thoroughness of research, and the proper level of investigation required. Guidance—Using Secondary or Third-Party Research See that the research is sound. Examples of criteria to use to evaluate: Review assumptions used. How rigorous was the analysis? How timely is the research? Evaluate objectivity and independence of the recommendations. Guidance—Group Research and Decision Making Even if a member does not agree with the independent and objective view of the group, he does not necessarily have to decline to be identified with the report, as long as there is a reasonable and adequate basis |
| Under Standard V(A) Diligence and Reasonable Basis does an analyst have to be perfectly familiar with a model in order to use it? | No. When a member or candidate relies on others within the firm to determine whether a model is sound, it can be used in good faith unless the member or candidate has reason to question its validity. |
| I(B) Independence and Objectivity overview | I(B) Independence and Objectivity. 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. Guidance Do not let the investment process be influenced by any external sources. Modest gifts are permitted. Allocation of shares in oversubscribed IPOs to personal accounts is NOT permitted. Distinguish between gifts from clients and gifts from entities seeking influence to the detriment of the client. Gifts must be disclosed to the member's employer in any case. Guidance—Investment-Banking Relationships Do not be pressured by sell-side firms to issue favorable research on current or prospective investment-banking clients. It is appropriate to have analysts work with investment bankers in "road shows" only when the conflicts are adequately and effectively managed and disclosed. Be sure there are effective "firewalls" between research/investment management and investment banking activities. Guidance—Public Companies Analysts should not be pressured to issue favorable research by the companies they follow. Do not confine research to discussions with company management, but rather use a variety of sources, including suppliers, customers, and competitors. Guidance—Buy-Side Clients Buy-side clients may try to pressure sell-side analysts. Portfolio managers may have large positions in a particular security, and a rating downgrade may have an effect on the portfolio performance. As a portfolio manager, there is a responsibility to respect and foster intellectual honesty of sell-side research. Guidance—Issuer-Paid Research Remember that this type of research is fraught with potential conflicts. Analysts' compensation for preparing such research should be limited, and the preference is for a flat fee, without regard to conclusions or the report's recommendations. Recommended Procedures for Compliance Protect the integrity of opinions—make sure they are unbiased. Create a restricted list and distribute only factual information about companies on the list. Restrict special cost arrangements—pay for one's own commercial transportation and hotel; limit use of corporate aircraft to cases in which commercial transportation is not available. Limit gifts—token items only. Customary, business-related entertainment is okay as long as its purpose is not to influence a member's professional independence or objectivity. Restrict employee investments in equity IPOs and private placements. Review procedures—have effective supervisory and review procedures. Firms should have formal written policies on independence and objectivity of research. |
| In order to initially claim compliance with GIPS, how many years of compliant data must the firm have? | In order to initially claim compliance with GIPS, a firm must have a minimum of five years (or since firm inception) of GIPS-compliant data. After the first compliant presentation, another year of compliant performance must be added each year until the compliant performance history reaches at least ten years. |
| Under standard Standard VI(C) Referral Fees, who needs to be notified? | Standard VI(C) Referral Fees states that members and candidates must disclose to employers and to affected clients, before entering into any formal agreement for services, any benefits received for the recommendation of services provided by the member. |
| Under standard I(B), independence and objectivity, can a CFA c/m accept charter flights and hotel accommodations?? | Yes, the key is whether or not the trip is "strictly business." While Standard I(B) Independence and Objectivity recommends that members pay their own room costs, it is not required and it is not unusual for members to accept accommodation. Charter flights are OK as well given certain circumstances. |
| How are composites aggregated under GIPS? | 1. Aggregation of all actual, fee paying, discretionary portfolios managed in accordance with the same investment objective or strategy. 2) Composites cannot be selectively choose portfolios to include/exclude in a type of composite 3) Portfolios must be assigned to composites ex-ante, prior to knowing results 4) The composite return is the asset-weighted average of the performance results of all of the portfolios within the composite |
| What are some instances of violations of standard I(C), misrepresentation? | 1. Misrepresenting qualifications or credentials 2. Misrepresenting risk of loss, preservation of capital, default risk, guaranteed returns 3. Plagiarism (written or oral) |
| What is the date cut-off for linking non-GIPS compliant performance records. | January 1, 2000 |
| What is the cutoff date for using Investment Performance Council-endorsed Country Versions of GIPS (CVG)? | Firms may include performance figures for periods prior to January 1, 2006 that were compliant with their applicable CVG, together with GIPS compliant performance figures for periods after that date, and claim GIPS compliance. |
| What is the effective date of the current version of GIPS standards? | January 1, 2006 |
| What is the paramount principle of the Code of Ethics and Standards of Professional Conduct? | Distinguishing right from wrong |
| What are the two components of the GIPS vision statement? | 1. present performance results that are readily comparable among investment management firms without regard to geographical location 2. facilitate a dialoguebetween investment managers and their prospective clients about the critical issues of how the investment management firm achieved performance results and determines future investment strategies |
| When should benchmarks and composites be created for GIPS? | ex-ante, before the fact |
| What is a GIPS composite return? | Asset-weighted average of the performance results of all the portfolios in the composite |
| What does GIPS mention in terms of disclosures? | They allow firms to elaborate on raw numbers. Provide context. Some are required, others are recommendations. "Negative assurance" language is not needed. Should be considered static information. |
| How long does a GIPS firm have to include discontinued operations? | 5 years after discontinuation |
| Do GIPS firms need to document anything? | Yes. GIPS firms must document in writing, their policies and procedures used in establishing and maintaining compliance with all the applicable requirements of the GIPS standards |
| How does GIPS define total firm assets? | Aggregate of the market value of all discretionary and non-discretionary assets under management within the defined firm. This includes both fee-paying and non-fee paying assets |
| Do GIPS firms need to include the assets of sub-advisors? | Yes. They must include performance of assets assigned to a sub-advisor in a compositeprovided the firm has discretion over the selection of the sub-advisor. |
| What does the verification disclosure of GIPS look like? | NAME has been verified for the periods DATES by VERIFIER. A copy of the verification report is available on request. |
| If there is a language translation problem with GIPS, how is it handled? | The English version of GIPS is controlling |
| Under GIPS, how does a local sponsoring organization function? | Essential for the effective implementation and on-going operation within a country. |
| How does a firm reconcile local versus GIPS standards? | Strongly encouraged to comply with GIPS as well as local requirements. Adherence to local laws does not necessarily lead to compliance with GIPS. Firms must disclose any local laws and regulations that conflict with GIPS. |
| What is the proper way to reference holding a CFA charter on letterhead or business cards? | On letterheads and business cards and in directory listings, only the mark CFA or the words Chartered Financial Analyst should appear after the charterholder's name. |
| Does the CFA institute issue fines? | CFA Institute does not impose fines. It may sanction a private censure, or refuse to allow a candidate to participate further in the program (among other sanctions possible). |
| With respect to filing complaints concerning the professional conduct of a CFA Institute member, who may register a complaint and to whom? | Anyone can write the Professional Conduct Program staff with a complaint concerning the conduct of any member. This is from page ix of the Standards of Practice Handbook. Complaints may be filed by anyone and are to be written to the Professional Conduct Program staff. |
| Under GIPS standards, if there is a conflict between local law and GIPS, what should a firm do? | Compliance requires that the firm follow local law and disclose the conflict between local law and GIPS. |
| What standard is violated if a money manager directs business to a firm that gives him personal benefits, even though it's a higher cost service? | Standard III(A) Loyalty, Prudence, and Care, members and candidates must comply with their fiduciary duty to those persons and interests by whom the duty is owed. Specifically, members must always act for the benefit of their clients and place clients' interests before their own. |
| To ensure compliance with Standard IIIB, how should firms communicate investment recommendations? | To ensure compliance with the Standard, members should seek to communicate investment recommendations to all clients who have indicated an interest and also those for whom the securities are suitable. There is no need to communicate recommendations to clients for whom the securities are deemed unsuitable. The standard does not prohibit a firm from offering various levels of service. |
| What types of misrepresentation are expressly prohibited? | Misrepresentation of qualifications, academic and professional credentials and services that can be performed by the firm are all expressly prohibited by Standard I(C). |
| Why were the GIPS created? | Recognizing the need for one globally accepted set of investment performance presentation standards, CFA Institute sponsored and funded the Global Investment Performance Standards Committee to develop and publish a single global standard by which all firms in all countries calculate and present performance to clients and prospective clients. |
| Under standard IV(A), loyalty to employers, can you make preparations to leave a firm? | Yes. Recognizing the need for one globally accepted set of investment performance presentation standards, CFA Institute sponsored and funded the Global Investment Performance Standards Committee to develop and publish a single global standard by which all firms in all countries calculate and present performance to clients and prospective clients. |
| What is a "firewall?" | To comply with Standard II(A), a fire wall provides an information barrier that prevents communication of material nonpublic information and other sensitive information from one department to another within a firm. |
| What responsibilities does a compliance officer need to have to be effective? | Compliance officers must be able to guide employee behavior and respond to employee misconduct, otherwise there will be no effective compliance procedures in place. Unless the compliance officer can effectuate compliance procedures, the compliance program has no chance of responding to or preventing violations of the Standards. |
| What does plagiarism cover? | lagiarism encompasses using someone else's work (reports, forecasts, charts, graphs, and spreadsheet models) without giving them credit. The prohibition against plagiarism applies to written materials, oral communications, and telecommunications. |
| What level of conduct is dictated by the Code and Standards? | CFA Institute's Code and Standards dictate a minimum level of conduct, that a minimum level of professional responsibility and conduct dictates that members be aware of and comply with laws, rules, and regulations governing their conduct. Standards should not be based on ethics of upper management and the board of directors of a company. Firms must comply with the strictest applicable standards, whether they be foreign or domestic laws and regulations |
| What should a member do if he feels or knows that a law has been broken? | Standard I(A) says that when a member feels a law has been broken, the member should seek advice from the firm's counsel. If the member feels the advice is unbiased and competent, the member should follow it. If the member knows a law has been violated, the member should contact a supervisor. |
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