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What is the structure of the CFA Institute Professional Conduct Program?
The CFA Insitutie Professional Conduct Program iscovered by the Bylaws and the Rules of Procedure for Proceedings Related to Professional Conduct. The Program is fair to members and candidates, and is confidential. The Disciplinary Review Commitee of the CFA Institue Board of Governors has overall responsibility for the enforcement of Code and Standars and Profesional Conduct Program
What prompts an inquiry from the Profesional Conduct Staff?
- Several circumstances prompt an inquiry:
- 1. involvement in civil litigation or criminal investigation
- 2. Writen compalint about a member or candidate
- 3.Eveidence of misconduct that the Professional Conduct Staff received through public sources (Media)
- 4. A report by a CFA exam proctor of viloations during the exam.
Once an inquiry ahs begun, the Professional Conduct staff can request what things?
- -written explanation of the subject matter
- -interview the subject
- -interview the complainant
- -collet documents and records relevant to investigation
what are the six components of the Code of Ethics?
- 1. Act with integritgity, in an ethical manner in the investment profession.
- 2.Place integrity of investment profession and interests of clients above own personal interest
- 3.Use care and judgement when making ivestment analysis, recomendations, etc.
- 4. Encourage others to practice ethically
- 5.Promote integrity and uphold rules of capital markets
- 6. Maintain and improve profesional knowledge of yourself and others.
Seven Standards of Professional Conduct?
- Integrity of Capital Markets
- Duties to Clients
- Duties to Employers
- Investment Analysis, Recommendations, and Actions
- Conflicts of Interest
- Responsibilties as a CFA member or Candidate
Namea nd describe the 4 tenets of Proffesionalism?
A. Knowledge of Law - Members must understand and comply with all applicable laws, rules, and regulations of any government, regulatory organization, licensing agency, or professional association governing their professional activities. In the event of conflict, members must acknowledge the stricter rule. Members must not k nowlingly participate or asist in and must dissociate from any violation of such laws.
B. Indepence and Objectivity - Members must use reasonable judgement to achieve and maintain independence and objectivity in professional activities. 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.
C.Misrepresentation - Members must not knowingliy make any misrepresentations relating to investment analysis, recomendations, actions, or other professional activities.
D.Misconduct - Must not engage in dishonety, fraud or deceit, or act that reflect negative on reputation, integrity, and competence.
Name and describe 2 tenets of Integrity of Capital Markets.
A. Material Nonpublic Information - Members who posses nonpublic information should not use it to invest or cause others to act
B. Market Manipulation - Members must not distort prices or inflate trading volume with the intent to mislead market participants
Describe 5 tenets of Duties to Cients?
Loyalty, Prudence, and Care - members have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgement. Members must act for the benefit of thier clients and place their clients; interests before their employer's or their own interest.
Fair Dealing - Members must deal fairly and objectivley with clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities.
- Suitability - Candiate in advisory relationship must:
- 1. Make a reasonable inquiry into a client's or prospective clients' investment experience, risk and return objectives, and financial contraints prior to making any investment recommmendation or taking investment action and must reasses and updat this information regularly.
- 2.Determine that an investment is suitable to the client's financila situation and consistent iwth ethe client's written objectives, mandates, and constraints before making an investment recommendation or taking investment action.
- 3. judge the suitability of investment in context of clients total portfolio
When candidate are managing proftolio, investments actions or recommendations must be consistent with the stated objectives and constraints of portfolio.
D. Performacne Presentation - When communicating investment performance information, Members or Candidates must make reasonable efforts to ensure that it is fair, accurate, and complete.
- E.Preservation of Confidentiatlity - Members must keep info of clients confidential unless:
- -Illegal activies on part of client
- -Disclosure is requried by law
- -Client permits disclosure
Describe 3 tenets of Duties to Employers
Loyalty - Member must act for benefit of employer and not deprive of advantage of their skills and abilities, divulge information, or harm employer.
Additonal Compensation Arrangements - Members will not accept gifts that compete with or expected to create a conflict of interest unlse employer gives written consent.
C. Responsibilities of Supervisors - Members take effort to detect and prevent violations of laws by anyone under their supervison
Describe 3 tenets of Investment Analysis, Recommendations, and actions
A. Diligence and Reasonable Basis. Candidates must 1. excercise dilligence and thoroughness in analyzing investments, researching and recomending. 2. have a reasonable basis, supported by research for any investment decision.
- B. Communication with clients and prospective clients. Candidates must: 1. Disclose the basic format and general principles of the investment process used to choose securitys and must disclose any changes that affect processes. 2. Use judgment in idintifying factors affecting anlyses, recommendations, or actions, and include in communications with clients.
- 3. Distinguish between fact and opinion in investment presentaitons.
C.Record Retention - Members must keep records to support their investment analysis, reccomenations and actions and other investment related communications iwth cliens.
Describe 3 tenets of Conflicts of Interest
A. Disclosure of Conflicts - Members must disclose all matters that could affect their objectivity or interfere with dutes with clients. Must ensure that such disclosures are prominent, delivered in plaing language, and communicated effectivley.
B.Priority of transactions - Investment decisions for clients and employers take precedence over that of your own.
C. Referal Fees - Members must disclose to clients and employers any compenssation consideration or benefit received by or paid to others for recomendation of products or services.
2 Tenets of responsibilities as a CFA institute member or CFA Candidate
A. Conduct as members and candidates in the CFA Program - Member must not engage in conduct that comprices reputation or integrity of CFA Insitute, designation, or integrity, vaidity, or security of examinations.
B. Reference to CFA Insittue, the CFA designation, and CFA Program. - Member must not misrepresent or exaggerate the meaning or implications of membership in CFA Insitute, holding the CFA Designation, or cadidcacy in the CFA Program.
Recomended Procedures for Compliance of Knowledge of Law - Members
- -Members should have procedures to keep up with changes in applicable laws, rules and regulations
- -compliance procedures should be reviewed on an ongoing basis to cmply with laws and regulations
- -Members should seek advice of counsel or compliance department when in doubt
- -members should document any violations when they dissasociate themselve from probhibited activivty
- -Members are encouraged to report other members' violations of the Code of Standards
Recomended Procedures for Compliance of Knowledge of Law - Firms
- members should encourage firms to:
- -develop and or adopt a code of ethics
- -make aviablabe to employees information highlihgting laws and regulations
- -establish written procedure for reporting suspected violations
Which one wins, code and standards or local laws?
Whichever is stricter
If you choose inaction and dissacosate but the firm keeps doing it, are you liable?
Yes. Inaction with continued association may be construed as knowing participation.
Are gifts allowed?
Yes, only modest gifts. Distinguish between gifts from clients and gifts from entities seeking influence to the detriment of clients
Recommended Procedure for compliance of Independance and Objectivity.
- -Protect integrity of opionions, make sure unbiased.
- -Create a restricted list and distribute only factual infor about companies on it.
- -Restrict special cost arrangements
- -Limit gifts - token items only.Firms should impose clear value limits on gifts.
- -Restrict employee investments in equity IPO's, require pre approval of purchases
- -Firms should appoint a compliance officer
Recompended procedures for compliance of Misrepresentation.
written list of firms available resources to clients
Employee qulaifications accurately presented
cite all sources
encourage firms to establish procedures verifygin marketing claims of third parties whose information the firm provides to clients
Recommended Procedures for Compliance of Misconducts
Develo and adopt a code of ethics and make clear unethical behaviour
-give emploeyes a list of potential violations and sactions
-check references of potential employees
How do you classify information as "material"
if its disclosrue would impact the price of a security or if reasonable investors would want the information before makign an investment decision.
Is an analyst conference call considered a Public disclosre?
Procedures for Compliance of Material Nonpublic Information
- -maek effort to achieve public dissemination of information.
- -Control of interdepartmental communications, through a clearance area
- -Review employee trades (watch, restricted, rumor lists)
- -Monitor and restrict prop trading wihile firm ihas material that is non public.
Is spreading false rumors prohibited?
Yes, it is prohibited. -Market Manipulation
Recomended procedures of compliance for Loyalty, Prudence, and Care
-Submit to clients at minimum a quarterly itemized statement showing all securities and transactions
- -Encourage firms to address topics when drafting policies and procedures regarding fiduciary responsibility -
- -Follow rules
- -Establish Investmen objectives
- -Deal fairly regarding investment actions
- -disclose conflicts and compensations
- -Seek best execution
- Place clients first
Do you need to treat all clients equally?
No. You can have premium services as that give certain advantages to particular clients as long as this is stated beforehand.
Procedures for compliance of Fair Dealing.
- Encourage firms to establish compliance procdures requiring proper dissemination of investment recommendations.
- -Limit the number of people aware that a change in recommendation will be made.
- -Shorten time frame between decision and dissemination
- -Publish personnel guidelines for pre-dissemination
- -Develop written trade allocation procedures - ensure fairness and timely and efficient order exectution
- -Disclose availbae levels of service
In advisory relationships how do you gather information on client investing needs and wants?
Investment Policy Statement (IPS)
Procedures for Compliance of Suitability
- -Put need and circustmance of client objectives into a written Investment Policy Statement (IPS)
- -Consider type of client and wheter ther are seperate beneficiaries, invest objectives, investor constraints, and performance benchmarks
- -Review investor's objectives periodically to reflect any changes in client circumstances
Recommended procedures for Compliance of Performance Presentation
-Encourage firmst to adhere to Global Investment Performance Standards-Consider the sophistication of audience to whom a performance presentation is addressed-presenting performance of weighted composite of similar portfolios rather than a single account.-Including terminated accounts as part of historical perforamcnce-Maintaing data and records used to calculate performance being presented
What is the main difference between 1C Misrepresentation and 3D Peformance Presentations?
Misrepresentation concerns False assurances and guarantees of future results and plaigarism (Using someone else's work without giveng them credit).
However they are very similar. Knowingly witholding information is misrepresentation, but is many times considered a violation of performance presentations as well.
3 Ways it is acceptable to break the preservation of Confidentiality?
- -Client or Potential client is involved in illegal activity
- -It is required by law
- -Client gives consent
When leaving an employer, what are some things that may consitute a violation?
- -Misappropriatoin of trade secrets
- -Misuse of confidential information
- -soliciting employer's clients prior to leaving
- -Misappropriation of client lists
Does taking any employer records, even those the client prepared count as a violation?
Yes. Of Duty to Client - Loyalty
Can Employers commingle compliance procedures with the firm's code of ethics?
No. This can dilute the goal of reinforcing one's ethical obligations.
Adequate Compliance procedures should:
- Be clearly written
- Be easy to understand
- Designat a compliance officer with authority clerarly defined
- Havea system of checks and balances
- Outline the scope of procedures
- Outline what conduct is permitted
- Contain procedure for reporing violations and sactions
Once compliance program is instituted, supervisor should:
- Distribute it to the proper personnel
- Update it as needed
- Continually educate staff regarding procedures
- Issue reminders as necessary
- Require professional coduct evaluations
- Review Employee actions to mintor compliance and idenitfy violations
- Enforce procedures once a violation occurs
If a member does not agree with the an independent and objective view of a comitee, yet still asks that her name be put on the report, would this violate the standards of professional conduct. Which would this be most associated with?
V(A) Diligence of Investment analysis, research, and action.
This is not a violation as long as the comitee has reasonable and adequate basis for differing opinon. The member can always ask that the name be taken off the report as well.
If no other regulatory standards are in place for Record Retention of research and due diligence done, how many years at minimum, does the CFA institue recommend the holding period to be?
- 7 years
- V(C) Record retention
Does being on the board of any organization require Disclosure?
What are the two emost common conflict which requires disclosure?
Ownership of stock in companies that the member recommends or client holds, and compensation arrangements(can potential do activities that compensate the member in the short term, and add no value for the client)
Recomended procedures for compliance of Priority of Transactions
- -Limited participation in equity IPOs. Members can avoide these conficts by not participaing in IPO's.
- -Restrictions on private placements. Strict limits should be placed on employee acquisition of these securities and proper supervisory procdures should be in place. Participation in these investments raises conflict of interest issues, simliar to IPOs.
- -Establish Blackout periods. Employees involved in investment decisionmaking should have blackout periods prior to trading for clients.
- -Reporting requirements. Supervisors should establish reporting procedures, including duplicate trade confirmations, disclosure of personal holdings/beneficial ownership position...
- -Disclosure of policies. When reqeusted, members must fully disclose to investors their firm's personal trading policies.
How often should membersprovide their employers with updates regarding referral compensation received?
Atleast once a quarter.
VI(C) Referral Fees
What is the difference between VII(A) Responsibility of CFA and VII(B) Reference to CFA INstitute
A regards test taking, expressing tips and hints about the test and using the CFA to benefit you in inapropriate ways.
B is a violation regarding falsely advertising the CFA for something it is not, and calling yourself a CFA if in fact you are not
Can you advertise that you passed in a specific amount of years? can you imply that you are superior bc you passed it in a shorter amt of time then another?
Explain why the GIPS standards were created, what parties the GIPS standards apply to, and who is served by the standards.
They came about because performance reports were misleading, at best.
Gips are a set of ethical principles based on standar, industry wide approach. These firms VOLUNTARILY follow GIPS in presentation of historical investment results to avoid misrepresentations of performance.
GIPS apply to investment management firms and are inteded to serve prospective and exiting clients of investment firms. GIPS allow clients to more easily compare performance amongst firms.
Representative accounts definition
Showing a top performing portfolio as representative of the firm's result
Survivorship bias definition
excluding "weak performance" accounts that have been terminated
Varying time periods
Showing performance for selected time periods with outstanding returns
Explaing what a composite is. Explain the construction and purpose of composites in performance reporting
A composite is a grouping of individual portfolios representing a simliar investment strategy, obejctive, or mandadate (e.g. Large Cap Growth Stocks, Investment grade domestic bonds, etc). Reporting on the performance of composites gives clients and prospects info about a given firms' success in particular securities or investment styles.
A composite must include all protfolios that the firm has managed regarding that specific strtaegy. The firm should identify before the portfolio is created, as to what the strategy should be.
Explain the requirements for verification
Verification is performed by a 3rd party, not by the firm. This verifier must attest 1. the firm has complied with all GIPS requirements for composite contruction on 2. the firm's processes and procedures are established to present performance in accordance with calculation methodology required by GIPS, data requirements of GIPS, and in format required by GIPS.
- -Firms are encouraged to pursue independent verification.
- -Verifcation applies to the entire firm, not an indiviudal composite.
- -Verified Firms should disclose language including name, date, and name of verifier to show they have been verified
Describe the GIPS Objectives
- -obtain global acceptance of calculation and presentation standards in a fair, comparable format with full disclosure
- -Ensure consistent, accurate investment performance data in areas of reporting, recors, marketing, and presentations.
- -Promote fair competition among investment management firms in all markets without unnecessary entry barriers for new firms
- -To Promote global "Self Regulation"
Key Characteristics of GIPS
- -To claim compliance, must define its "firm". Defintion should reflect distinct business entity held out to clients.
- -GIPS are ethical standards fr performance presentation which ensure fair repsresentation and full disclosure.
- -Include all actual fee-paying, discretionary portfolios in composites for a minimum of 5 years, or since firm or composite inception. After presenting five years of compliant data, firm must add anual performace each year going
- -Firms must make calculation and presentation standards and specific disclosures
- -Input data must be accurate
- -GIPS standards have both required and recommended provisions. Firms are encouraged to adopt the recommended provisions.
- -No partial compliance can be claimed. Only full
- -If GIPS conflicts with local laws, follow local law, but disclose the conflict.
Fundamentals of compliance - Definition of the firm
- -Apply GIPS firm wide
- -Firm defined as distinct business unit
- firm assets include total mrkt value of assets, including fee or non fee paying accounts.
- -Include asset performance of sub-advisors, as long as firm has discrtion over sub advisor selection
- -If firm changes organization, can not change results
- -Include broadest defintion of the firm including all geographical offices marketed under the same brand name
Fundamentals of compliance - Document policies and procedures
Document, in writing, policies and procedures firm uses to comply with GIPS
Nine major sections of GIPS Standards
- 0. Fundamentals of Compliance- a. definition of firm b. document firm policies and procedures with respect to GIPS c. Comply with GIPS updates D. claim compliance in appropriate manner
- e. appropriate verification statement when third party verifier is employed
1. Input Data - Input data should be consistent for fair presentations
2. Calculation methodology - certain methodologies required for portfolio return calcs and certain for composite return calcs. Unifromity across firm is required
3. Composite construction - composite performance is based on performance of one or more portfolios that have same investment strategy. Composite returns are the asset-weighted average (not a simple average) of returns on portfolios that are included in composite.
4. Disclosures - Firm must disclose info about firm presentation and policies adopted by firm so that raw numbers presented in report are understandable. Some disclousres all firms must make, but some may not apply to all firms. If it is not required the firm does not need to include any statement regarding it.
5. Presenation and reporting - Investment performance must be presented according to GIPS.
6. Real estate - certain provisions apply to all real estate investments regardles s of level of control firm has over mangament of investment. Provisions apply regardless of whether or not investment is producing revenue or there is leverage.
7. private equity - PE investment must be valued according to GIPS Private Equity Valuation Principles unless investment is an open-end or evergreen fund. must include all investment in companies regardless of publicly traded, or stage of business.
8. Wrap fee/seperately managed acount porftolios ?
What is a real risk-free rate?
Single-period loan with no expectation of Inflation in future periods. The only real interest is the increase in purchasing power from one period to the next (time value of money)
what is a nominal risk free rate? Give an example.
T-Bill. real risk-free rate is Expected inflation AND Real Risk-free rate (Increase in Purchasing power from one period to the next TVM)
Required rate on a security is equaled to
Nominal Interest Rate+Default Risk+Liquidity Risk+Maturity Risk
What is Effective Annual Rate(EAR)?
the annual rate of return after adjustments have been made for compoudning
what is the future value factor?
What is the difference between an ordinary annuity and an annuity due?
Ordinary Annuity is payed at the end of they period, Annuity Due is paid at the beginning
What is the Present Value Facotr/Discount Factor?
What is the equation for PV of a perpetuity?
PV perpetuity = PMT/(I/Y)