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CAIA > 1: Ethics > Flashcards

1: Ethics Flashcards

1
Q

I(A) Knowledge of Law: Compliance for individuals

A
  1. keep informed
  2. review compliance procedures
  3. maintain current copies of laws
  4. know applicable laws
  5. seek legal advice
  6. document any violation
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2
Q

I(A) Knowledge of Law: Compliance for firms

A
  1. establish/implement a code of ethics
  2. provide employees with materials on applicable laws and regulations
  3. provide written procedures for reporting alleged violations
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3
Q

I(A) Knowledge of Law

A
  1. understand and comply with all applicable laws, rules, regulations etc.
  2. comply with stricter law
  3. disassociate from any violation and report to relevant authorities
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4
Q

I(B) Independence and Objectivity

A
  1. use reasonable care and judgment to achieve and maintain objectivity
  2. never offer, solicit or accept any gift/compensation etc that could compromise their own or another’s I&O
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5
Q

I(B) Independence and Objectivity: Procedures of compliance

A
  1. protect integrity of analysts’ opinions
  2. create restricted list
  3. restrict cost arrangements (unless commercial transport is not available)
  4. limit gifts and gratuities (i.e. token items are ok)
  5. restrict investments
  6. establish review procedures
  7. develop formal policy
  8. appoint a senior officer
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6
Q

Restricted List

A

a list of companies for which only factual information, as opposed to analysts’ judgments, is provided to the public; this list would consist of companies about which analysts have negative opinions that their firms do not want circulated

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7
Q

I(C) Misrepresentation

A

must not knowingly make any misrepresentations relating to analysis, recommendations, actions or other professional activities

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8
Q

I(C) Misrepresentation: Compliance procedures

A
  1. making accurate presentations
  2. providing qualification summary
  3. verifying outside information
  4. maintaining webpages
  5. establishing plagiarism policy (keep copies of all reports/materials used, give credit of work to source, attribute any summarized material to its source)
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9
Q

I(D) Misconduct

A

must not engage in any conduct involving dishonesty, fraud, or deceit

Sidey: personal bankruptcy, as long as it does not involve fraud or deceit, does not necessarily reflect on a person’s integrity or trustworthiness.

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10
Q

I(D) Misconduct: Compliance

A
  1. establish and/or implement code of ethics
  2. provide employees with a list of potential breaches and associated disciplinary consequences
  3. check references of prospective employees
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11
Q

II(A) Material Nonpublic Information

A

must not act or cause others to act on material nonpublic information

Sidey: information is not considered material if the effect of the information on the price of a security is unclear.

Sidey2: not all information on social media platforms is considered public as some require membership to access information. members/candidates must verify that material information obtained from membership based platforms can also be accessed from a publicly available source.

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12
Q

Mosaic theory

A

involves using many sources to collect and examine information; this process involves the use of both public and nonmaterial , nonpublic information.

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13
Q

II(A) Material Nonpublic Information: Compliance

A
  1. distribute information publicly
  2. adopt compliance procedures
  3. adopt disclosure procedures
  4. issue press releases
  5. establish firewalls
  6. formalize interdepartmental communications
  7. physically separate departments
  8. prevent overlap of staff
  9. establish a reporting system
  10. limit or prohibit personal trading
  11. maintain records
  12. establish prop trading procedures
  13. communicate with employees
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14
Q

II(B) Market Manipulation

A

must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants;

Sidey: buying/selling thinly traded securities to exploit inefficiencies is not a breach of this Standard.

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15
Q

Information-based manipulation

A
  • includes distributing false information to stimulate trading by other market participants (e.g. pumping and dumping - involves enticing others to buy a security so that its price increases and then later dumping the security)
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16
Q

Transaction-based manipulation

A
  • includes distorting market prices to imply trading activity in securities or gaining a controlling position in a security for the purpose of manipulating the security or an associated derivative security
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17
Q

III(A) Loyalty, Prudence and Care

A

have a duty of loyalty to their clients; exercise prudent judgment; act for the benefit of their clients (above employer’s or their own interests)

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18
Q

Custody

A

members/candidates who have direct/indirect access to a client’s funds are said to have custody of client assets

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19
Q

Soft commissions

A

using client brokerage to purchase research services; paying the brokerage firm through commission revenue rather than actual cash payments

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20
Q

III(A) Loyalty, Prudence and Care: Compliance

A
  1. regular account information
  2. client approval
  3. firm policies
21
Q

III(B) Fair Dealing

A

equal treatment for ALL clients when it comes to investment recommendations and investment actions

Sidey: must not support or promote “whisper numbers” - firm’s unofficial/unpublished earnings estimate

22
Q

III(B) Fair Dealing: Compliance

A
  1. limit the number of people who know that information is soon to be released
  2. reduce the time between the decision to make a recommendation and its dissemination
  3. publish guidelines for pre-release of recommendations
  4. strive for simultaneous distribution of recommendations
  5. keep a list of clients and their holdings
  6. develop and document trade allocation procedures
  7. publish trade allocation procedures
  8. establish systematic account review by supervisors
  9. disclose to clients the different levels of service offered, if they exist, whether for the same or different fees
23
Q

III(C) Suitability

A

this specifically applies to those in an investment advisory capacity;

key components include:

  1. develop an investment policy (i.e. age, occupation, risk tolerance levels, investment constraints, investment goals)
  2. understand client’s risk profile
  3. update investment policy (at least once a year)
  4. need for diversification
  5. addressing unsolicited trading requests
  6. managing to an index or mandate
24
Q

III(C) Suitability: Compliance

A
  1. Develop an Investment policy statement
  2. Make regular updates (if unable to complete a review due to circumstances beyond their control, advisors should record their attempt at doing so)
  3. Develop suitability test policies
25
Q

III(D) Performance Presentation

A

make reasonable efforts to ensure that investment performance information is fair, accurate and complete

26
Q

III(D) Performance Presentation: Compliance

A
  1. encourage firms to comply with GIPS
    other ways to comply:
  2. take into account the knowledge of the audience of the presentation
  3. use performance of the weighted composite of comparable portfolios rather than using the performance of one representative portfolio
  4. keep data on terminated accounts, including date of termination, as part of the performance history
  5. incorporate into the presentation all information needed to provide a fair and accurate representation of the performance results (i.e. use of simulated vs. actual results, pre-vs post tax results, gross vs net of fees)
  6. maintain all records of information used to calculate the results given in the presentation
27
Q

III(E) Preservation of Confidentiality

A

must keep information about current, former and prospective clients confidential unless:

  1. information concerns illegal activities on the part of the client
  2. disclosure is required by law
  3. client or prospective client permits disclosure of the information

Sidey: in vague situations, the firm’s compliance officer or legal counsel must be approached for advice before confidentiality is breached

28
Q

III(E) Preservation of Confidentiality: Compliance

A

most effective: share with no-one other than authorized fellow employees who are also working for the client

also: establish regular reviews of privacy protection measures

However, there may be circumstances where disclosure is reasonable; should determine the context in which the information was provided and if once released, it will improve service to client.

29
Q

IV(A) Loyalty (to employers)

A

entails not acting in any way that would either harm one’s employer or result in one’s employer being disadvantaged in any way

Sidey: does not, however, obligate members and candidates to forgo their personal responsibilities for the sake of their employers; also, interests of their clients always take precedence over that of their employers

30
Q

Self dealing

A

taking business opportunities away from their employers (not allowed under the Loyalty Standard)

31
Q

IV(A) Loyalty (to employers): Compliance

A
  1. competition policy
  2. termination policy
  3. incident-reporting procedures
  4. employee classification documentation
32
Q

IV(B) Additional Compensation Arrangements

A

must not accept gifts, benefits, compensation, or consideration that competes with or might reasonably be expected to create a conflict of interest with their employer’s interest unless they obtain written consent from all parties involved

Sidey: disclosure of this information enables employers to assess the objectivity of their employees as well as determine the actual cost of the services provided by them

33
Q

IV(B) Additional Compensation Arrangements: Compliance

A

require members/candidates to provide a written report to their supervisor and compliance officer with the terms of any agreement under which they propose to receive additional compensation.

the terms in the report should include the nature, approx. amount, and duration of the compensation (confirmed by the third party).

34
Q

IV(C) Responsibilities of Supervisors

A

must make reasonable efforts to detect and prevent violations

35
Q

IV(C) Responsibilities of Supervisors: Compliance

A
  1. adopt a code of ethics
  2. assign a compliance officer with clearly defined authority and duties
  3. describe the firm’s chain of command and assign supervisory duties
  4. establish a system of check and balances
  5. summarize the scope of the procedures
  6. provide a system for recording how compliance procedures are checked
  7. list acceptable conduct
  8. outline procedures for reporting breaches and penalties

Extras:

  • employers should be encouraged to provide a code of ethics to clients
  • code of ethics should be written in plain language and should be be combined with compliance procedures
36
Q

Steps for a supervisor after a violation has been detected

A
  1. react promptly to investigate the activities and determine the extent of the violation
  2. increase supervision of or put appropriate restrictions on the offender until the matter has been fully looked into
  3. review procedures for potential changes necessary to prevent future violations
37
Q

V(A) Diligence and Reasonable Basis

A
  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.
38
Q

V(A) Diligence and Reasonable Basis: Compliance

A
  1. instituting policy that mandates that the underpinnings of recommendations can be determined to be reasonable and suitable
  2. establish, in writing, due diligence procedures
  3. develop quantifiable measures for evaluating the quality of research
  4. establish, in writing, policy that specifies minimum levels of scenario testing for quantitative models used
  5. develop measures for evaluating the quality and accuracy of data provided by outside providers
  6. establish criteria for evaluating the quality of services provided by outside advisers
39
Q

V(B) Communication with clients and prospective clients

A

underscores the importance of engaging in clear, comprehensive, and frequent communication with clients and prospective clients

Sidey: one important aspect is to distinguish between fact and opinion when presenting investment analyses and recommendations

40
Q

Capacity

A

investment amount beyond which returns are adversely affected by new investments

41
Q

V(C) Records Retention

A
  • must develop and maintain appropriate records to support investment analyses, recommendations and/or actions
  • if no regulatory or firm stipulations exist, records should be kept for at least 7 years
42
Q

V(C) Records Retention

A
  • keeping supporting documents is generally the responsibility of the firm as opposed to that of individual analysts; individuals have the responsibility to help their firms adhere to the Standard
43
Q

VI(A) Disclosure of Conflicts

A

must make full and fair disclosure of all matters that could reasonably be expected to impair their independence or objectivity

underscores the importance of striving to avoid any conflicts or appearance of conflicts of interest between client interests, employer interests, and members’ and candidates’ personal interests

44
Q

VI(A) Disclosure of Conflicts: Compliance

A
  1. inform clients and prospective clients of any compensation arrangements with their employers that may conflict with client interests (i.e. incentive fees, short-term performance fees, referral fees, and commissions)
  2. for members in firms that do not allow the disclosure of compensation arrangements - they should record their request for disclosure and can contemplate not continuing the pursuit with the client
  3. firms are urged to incorporate information on compensation arrangements in their promotional literature
  4. firms should disclose to clients if PMs receive performance fees, such as payment based on capital gains
  5. if compensation packages include stock options, the amount and expiration date of the option must be included as a footnote in any report published by the firm
45
Q

VI(B) Priority of Transactions

A

investment transactions for clients/employer take precedence over personal transactions
(client > employer > personal)

46
Q

VI(B) Priority of Transactions: Compliance

A
  1. limiting purchase of IPOs
  2. restrictions on private placements
  3. establishment of blackout/restricted periods
  4. reporting requirements for personal trades
  5. disclosure of personal investing policies
47
Q

Front-running

A

placing trades for personal accounts before placing their clients’ trades or before clients have had an opportunity to do so themselves

48
Q

VI(C) Referral Fees

A

must disclose to their employer, clients and prospective clients, any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services

the disclosure should occur before members and candidates sign agreements for services with clients

the intent is to provide clients and employers with the information needed to assess (1) the full cost of services rendered and (2) any bias shown in the recommendation of services

49
Q

VI(C) Referral Fees: Compliance

A

establish a policy regarding referral fees; policies may in fact prohibit all referral compensation.

however, if it is allowed:

  • the policies should specify procedures for obtaining approval of referral compensation
  • all approved referral compensation should be disclosed to clients
  • reports documenting the amount and type of compensation exchanged should be provided to the firm at least quarterly

CAIA (9 decks)

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