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137 terms

CFA Vol 1 Session 1_bwc

Code of Ethics and Standards
STUDY
PLAY
How many components of the Code of Ethics are there?
6
How many Standards in the CFA Handbook
7
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
1992
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?
annually
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?
1960's
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?
two.
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?
Three.
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?
Two.
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?
Three.
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?
No
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.