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Code of Ethics and Standards

How many components of the Code of Ethics are there?


How many Standards in the CFA Handbook


What does the acronym GIPS stand for? What do they do?

Global Investment Performance Standards. Minimize potential for ambiguous or misleading presentations

when was the performance presentation section added to the CFA standards


What does the acronym PCS stand for? What do they do?

Professsional Conduct Program. Coupled with the DRC, they are responsible for the enforcement of the Codes and Standards

What do the acronym DRC stand for? What do they do?

Disciplinary Review Committee. Coupled with the PCS, they are responsible for the enforcement of the Codes and Standards

How many principles are there in the "Rules of Procedure"? What are they?

1. Fair process to member and candidate
2.Confidentiality of proceedings

How often is the professional conduct statement submitted by members and candidates?


Who is responsible for reviewing information in the event of a possible CFA violation?

The Designated Officer of the PCS.

What recourse does a member/candidate have if they do not accept the disciplinary actions that have been imposed upon them?

A panel hearing with the DRC

What is the AMC? Who is responsible for its contents/creation?

Asset Manager Code of Professional Conduct. The CFA.

What is the difference between the intent of the AMC and the CFA Codes and Standards?

AMC is designed for firms and financial advisors. The CFA Codes and Standards are designed for investment professionals.

How many different areas are there in the AMC? What are they?

6 total.
1. loyalty to clients
2. investment process
3. trading
4. compliance
5.performance evaluation
6. disclosure

What does the acronym SPC stand for? What do they do?

Standards of Practice Council. Maintain and interpret CFA codes and standards.

What is the difference between the intent of the CFA Codes and Standards?

Codes - set of principles expected of CFA members/candidates
Standards - outline conduct constituting fair and ethical business practices

What is meant by the term "Market Sustainability"?

Ethical practices that contribute to the long term health of the capital markets.

Why are Codes and Standards necessary?

Because regulations alone cannot guarantee sound financial markets

What are 2 publications that can be referenced to keep abreast of changes in the CFA Codes and Standards

CFA Magazine, Financial Analysis Journal

When were the CFA Codes and Standards created?


What is the first CFA Standards general topic

I. Professionalism

What CFA Standard covers "Knowledge of the law"?

Standard I(A)

What CFA standard covers "Independence and Objectivity"?

Standard I(B)

What CFA Standard covers "Misrepresentation"?

Standard I(C)

What CFA Standard covers "Misconduct"?

Standard I(D)

What is the second CFA Standards general topic

II. Integrity of Capital Markets

What CFA Standard covers "Material Nonpublic Information"?

Standard II(A)

What CFA Standard covers "Market Manipulation"?

Standard II(B)

What is the third CFA Standards general topic?

Duties to Clients

What CFA Standard covers "Loyalty, Prudence and Care"?

Standard III(A)

What CFA Standard covers "Fair Dealings"?

Standard III(B)

What CFA Standard covers "Suitability"?

Standard III(C)

How many subsections to the "Suitability" are there? What are they?

1. when advising
a. inquire into client experience and objectives
b. investment must be suitable for client in light of objectives expressed
c. suitability must mesh with client's portfolio
2. Portfolio managment must adhere to prescribed style, objectives and constraints.

What CFA Standard covers "Performance Presentation"?

Standard III(D)

What CFA Standard covers "Preservation of Confidentiality"?

Standard III(E)

How many subcomponents are there to the "Preservation of Confidentiality" Standard? What are they?

1. If Illegal can disclose
2. If required by law, disclose
3. Client permits disclosure

What is the fourth CFA Standards general topic?

Duties to Employers

What CFA Standard covers "Loyalty"?

Standard IV(A)

What CFA Standard covers "Additional Compensation Arrangements"?

Standard IV(B)

What CFA Standard covers "Responsibilities of Supervisor"?

Standard IV(C)

What is the fifth CFA Standard's general topic?

Investment, Analysis, Recommendations and Actions

What CFA Standard covers "Diligence and Reasonable Basis"?

Standard V(A)

How many supcomponents are there to the "Diligence and Reasonable Basis" Standard? What are they?

1. Thorough Analysis
2. Adequate Supporting information

What CFA Standard covers "Communication with Clients/Prospective Clients"?

Standard V(B)

How many subcomponents are there to the "Communication with Clients/Prospective Clients" standard? What are they?

1. Disclose investment style, objectives, process to client
2. Reasonably judge inclusivity of factors
3. Distinguish between fact or opinion

What CFA Standard covers "Record Retention"?

Standard V(C)

What is the sixth CFA Standard's general topic?

Conflicts of Interest`

What CFA Standard covers "Disclosure of Conflicts"?

Standard VI(A)

What CFA Standard covers "Priority of Transactions"?

Standard VI(B)

What does the "Priority of Transactions" standard state?

You must place client/employer's interest befor your own

What CFA Standard covers "Referral Fees"?

Standard VI(C)

What is the seventh CFA Standard's general topic?

Responsibilities as a CFA Institute Member/Candidate

What CFA Standard covers "Conduct as Members and Candidates?

Standard VII(A)

What CFA Standard covers "Reference to CFA Institute, Designation and Program"?

Standard VII(B)

When there are laws/regulations that contend with the CFA Standards, which do you follow? What Standard covers this?

The more strict set of guidelines. CFA Standard I(A)

If a CFA member discovers a Standards violation, what steps should be taken?

First try to raise awareness and have the violation remedied. If that doesn't work, then disassociate from the activity.

What term is used to describe the technique used by a firm to prevent groups from interacting giving rise to potential conflicts of interest? What Standard explains this issue?

Firewall. Standard I(B)

What is meant by the term material in "material nonpublic information"

any information that would have a substantive effect were it to be known.

What is the Mosaic Theory

Explains how analysts are allowed to draw material nonpublic conclusions if there were derived from material public and nonmaterial nonpublic information sources.

What are a few tools that can be used to control/watch employee trading activity. Which CFA Standard discusses these tools?

Watch, Restricted and Rumor Lists. Standard II(A)

What are the two keys to identifying whether or not market manipulation has taken place? Which CFA Standard discusses this?

1) Dissemination of false/misleading information
2) Transactions that deceive by distorting price-setting mechanisms.
Standard II(B)

What two basic types of market manipulation can occur?

- Information based manipulation
- Transaction based manipulation

Explain the difference between custody and control in regards to a clients assets. What CFA Standard covers this?

Custody - any direct/indirect access
Control - actions governed by trust document/investment management agreement.
Standard III(A)

Explain what is meant by a soft commission. What Standard covers this?

investment manager benefitting from using a specific brokerage service; kickbacks.
Standard III(A)

What term is used to describe a situation where a client specifies exactly which brokerage is to be used when managing his/her assets?

Directed Brokerage

What should an investment professional help a client draft at the beginning of their correspondence that helps identify the clients which/desires/objectives? How often should this document be updated? What CFA Standard discusses this?

IPS - Investment Policy Statement
At least annually.
Standard III(C)

What Standard should be used as a template when trying to comply with the CFA Standard that deals which performance presentation.

GIPS (principle 6)

Would a CFA member be in violatio of the CFA Standard on "preservation of confidentiality" if he/she released client information to the CFA institute upon request?

No, the CFA Institute is considered an extension of the member

Is it a violation of CFA Standards to do preparatoy work for future endeavors while still employed by a soon to be previous employer? What Standard covers this?

Standard IV(A)

When is it alright to contact former clients after leaving an employer

If you haven't signed a noncompete clause and if you obtained the clients contact information via public information sources.

If you are a member of a research team and you disagree with the conclusion that are being put into a report, are you required to disassociate? What Standard covers this?

No, as long as you are confident that the process was diligent and reasonable.
Standard V(A)

What is the CFA recommendation on how long one should maintain records? What Standard covers this?

7 yrs.
Standard V(C)

What is one of the most prevelant forms of conflict in the investment community? What Standard discussed this?

Conflict of Stock Ownership
Standard VI(A)

What is the general intention of the CFA Standard covering Referral Fees?

To ensure that hidden arrangments that may skew objectiveness and independence do not exist

What two forms of membership are their for the CFA? What is the difference between the two?

Regular - full membership
Affiliate - passed tests, paid dues, submitted PCS, still have to fulfill work experience requirement

What three requirments must be met before one can use the CFA designation?

1) Complete CFA Program
2) Work Experience
3) Maintain membership

Why were the GIPS Standards created?

To create standardization in reporting performance measures

What are 3 examples of how a firm may represent is performance in a misleading manner

-Representative Accounts
-Survivorship Bias
-Varying Time Periods

What is important to remember about compliance and the GIPS standards

All principles and standards must be followed throughout the entire firm (firm-wide)

What two groups benefit from GIPS compliance

-investment management firms
-prospective clients

How many GIPS Standards are there? What are they?

9 total
1) Fundamentals of Compliance
2) Output Data
3) Calculation Methodology
4) Composite Construction
5) Disclosure
6) Performance Presentation
7) Real Estate
8) Private Equity
9) Wrap Fees / Separately Managed Accounts (SMA)

What 3 topics are discussed in the GIPS Preamble that cover the reason for GIPS creation?

1) Standardization
2) Global Passport (Comparability)
3) Investor Confidence

What are the historic performance record requirements for compliance

Present at least 5 years in GIPS compliance form. Add a year every year until build up to 10 years. If you only have less than 5 years on record, present what you have beginning with inception.

When can you link non-GIPS compliance performance with GIPS compliance performance?

If the records are before 1/1/2000

What are the two fundamentals of GIPS compliance?

1) definition of the firm
2) firms definition of discretion

What GIPS principle covers the mandate of documenting GIPS procedures within a firm?

Principle 0.A.5

What is meant by the term "administrative fees"?

everything except trading fees and investment management fees

What is meant by the term "All-in Fee"?

bundled fees, client specific, offered by a firm with many services

Give two examples of "Bundle Fees"?

wrap fees, all-in fees

Define "Capital Employed"

the denominator of the return calculation; defined as "weighted average equity"

Define "Captial Return"

subtract capita expenditures, add net proceeds from sale; % of capital employed

Define "Carried Interest"

Profits that General Partners make from investments

Define the term "Carve Out"

portion of portfolio selected as representative of distinct strategy. After 1/1/2000, must have separate management and cash balance

Define "Closed-end Fund"

committed capital and life are fixed; no new subscriptions or redemptions. Usually have draw downs in place

Defind "Composite Creation Date"

date wehn firm groups portfolios together

Define "Composite Inception Date"

initial date of composite's first performance record

Define "Custody Fees"

administrative fee, contain asset portion and transaction portion

define "DPI"

since inception distribution / since inception paid-in capital

define "Evergreen Fund"

open-ended fund; new subscriptions/redemptions allowed.

define "external cash flow"

Capital that exits/enters a portfolio

Define "fair value"

exchange at current arms length between willing parties
-use objective, observable, unaddjusted quoted market price of identical investment
-if market price not available, make best estimate

Define "General Partner"

retain liability in limited partnership. Typically a fund manager

Define "Gross of Fees"

returns reduced by trading expesnses

Define "Income Return"

Subtract expenditures (nonrecoverable), interest on debt, and property taxes

Define "Internal Dispersion"

measure of spread of annual returns of individual portfolios

Define "Investment Multiple"

(TVPI) total value / since inception date paid-in capital

Define "Large Cash Flow"

external cash flow has distorting effect on portfolio performance

Define "Limited Partner"

Protected from legal action and losses behond committed capital

Define "Limited Partnership"

legal structure used by most private equity and real estate closed-end funds. Fixed life (usually)

Define "Mathematical Linking"

sub-period returns are geometrically combined
Period Return = [(1+R^1) * (1+R^2) - 1]

Define "Presentational Linking"

visually connected or somehow associated in presentation

Define "Net-of Fees"

Gross-of Fees minus investment Managment fees

Define "Paid-in Capital"

capital inflows to investment vehicle
-equal to committed capital drawn down
-included distributions recalled by General Partners

Define "PIC Multiplier"

since inception paid-in capital / committed capital

Define "Primary Fund"

an investment vehicle that makes direct investments

Define "Private Equity"

ventur capital, leveraged buyouts, consolidations, mezzanine, distressed debt instruments

Define "Mezzanine Investments"

3rd stage capital, later stage investment to already producing/selling company to assist in meeting critical objective

What is the European, Canadian and parts of Southeast Asia group that designates, certifies, or licenses property valuers and appraisers?

RICS, Royal Institution of Chartered Surveyors

What is the U.S. group that designates, certifies, or licenses property valuers and appraisers?

MAI 0 Member of the Appraisal Institute

Define "Public Makret Equivalent - PME

benchmark IRR of Private Equity with PME of public market index

What is the IRR?

Internal Rate of Return.

What is the Realization Multiple?

DPI - since inception distributions / since inception paid-in capital

What is the Residual Value?

remaining equity that Limited partners have

What is the RVPI

Residual Value / since inception paid-in capital

What is a "Secondary Fund"

investment vehicle buying interest in another investment vehicle

What is "Significant Cash Flow"

level in which external cash flow prevents implementation of composite strategy (specific amount or %)

What is the SI-IRR

Since Inception Rate of Return -
-IRR = implied discount rate or effective compund rate; equate present value cash inflows to present value cash outflows
-SI-IRR = special case IRR, equate present value of all cash flow with period end value

What is a "temporary new account"

an account that holds a clients directed external cash flow until it can be invested according to composite strategy or disbursed

What is the "Total Return" (non real estate)

rate of return include realized/unrealized gains/losses plus income

What is the "Total Return" (real estate)

rate of return include capital return and income return; expressed as % of capital employed over period

What is "Trade Date Accounting"

ecognize asset/liability on date of purchase/sale not on settlement date.

What is the GIPS Standard "Trading Date Accounting" window

3 days

What is a transation expense

inclusive of trading fees

What is TVPI

Total Value / Since inception paid-in capital

What is the "Unrealized Multiple"

(RVPI) Residual Value / Since inception paid-in capital

What two things must happen for GIPS Standards verification

1) Firm complied with all composite construction requirements in GIPS
2) Policies/Procedures designed to calculate and present performance in line with GIPS

What is the "Vintage Year"

Two methods of calculation:
1) Year of investment vehicle first draw down or capital call
2) Year fist committed capital from outside investors closed and legally binding

What are Wrap Fees

bundel fees, charges for investment management services, includes trading expenses that haven't been separately indentified.

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