Ethics - EduPristine

© EduPristine CFA L – I\ Ethics © EduPristine – www.edupristine.com/ca

Ethics

© EduPristine CFA L – I\ Ethics

Ethics

Code of Ethics Ethical Standard Global Investment Professional Standard (GIPS)

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© EduPristine CFA L – I\ Ethics 2

•Act with integrity in the global capital markets. • Integrity above personal interest. •Reasonable care in investment analysis. •Practice in Ethical Manner. •Promote the integrity of capital markets. •Maintain professional competence.

Ethics



Professionalism Integrity of Capital Markets Duties to Clients Duties to

Employer

Investment Analysis,

Recommendations & Actions

Conflicts of Interest

Responsibilities as a CFA Institute

Member or CFA Candidate

Ethics




Employer






•Knowledge of Law: Understand and comply with all applicable laws, rules, and regulations. • Independence & Objectivity: Use reasonable care and judgment to achieve and maintain independence and objectivity. •Misinterpretation: Do not make any misrepresentations knowingly. •Misconduct: Do not engage in any professional conduct involving dishonesty, fraud, or deceit.

Q: Mr. Ritesh Shah, CFA works for Lehman Brothers and is responsible for covering automobile sector across Europe. One of the automobile company that he covers has arranged analyst meet in Monte Carlo, for which company has arranged presidential suite for Mr. Shah and dinner with F1 champion driver. Is Shah in violation of CFA standards of professional conduct if he accepts the proposal? Ans: Mr. Shah has violated Standard I(B) because accepting these substantial gifts or royal treatment may impede his independence and objectivity. Basic expenses for travel and accommodations should have been paid by his employer.

Q: Rachit Jain, CFA works for an Indian arm of US based investment bank. Indian securities law allow investment bankers, fund managers in participating primary market for their own accounts, whereas US law prohibits managers from participating in IPOs. Jain has applied for shares in NMDC IPO, which is underwritten by his own bank. Is Jain in violation of code and standards of ethics, if he fails to corner any shares of NMDC? Ans: The correct answer is Violated standard I(A) Knowledge of the Law. Jain should have followed US law which is more stringent than local law.

Ethics




Employer






•Material nonpublic information: Do not act or cause others to act on the material non public information.

•Market Manipulation: Do not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.

Q: Jain, CFA is working for a multinational auditor and during the process of auditing books of account of a publicly listed company, he comes to know that particular company is misstating its revenue. Immediately next day Jain manages to offload his personal holding in that particular company. Is Jain in violation of any of the code and standards of ethics? Ans: The correct answer is Violated standard II(A) Material nonpublic information Jain should not have acted upon any material nonpublic information, which gives him advantage over any other investor.

Ethics




Employer






•Loyalty, prudence & care: Loyalty to their clients and act with reasonable care and exercise prudent judgment.

•Fair dealing: Deal fairly and objectively with all clients in all professional activities. •Suitability: Make investment recommendations that are consistent with the stated objectives

and constraints of the clients' portfolio. •Performance presentation: Communication about investment performance must be fair,

accurate, and complete. •Preservation of confidentiality: Keep information about current, former, and prospective

clients confidential unless: − The information concerns illegal activities − Disclosure is required by law − The client or prospective client permits disclosure of the information

Q: Mr. Jayant Patel, CFA is working for Neev Bank and serve Bank's HNI clients. Recently he acquired a new HNI client, to whom Mr. Patel promised shares of the latest hot IPO at the time of acquisition. Is Mr. Patel in violation of CFA standards of professional conduct? Ans: Mr. Patel has violated Standard III(B) fair dealing by offering client IPO shares at the cost of his old clients. Patel is providing investment recommendations before making inquiries about the client's financial situation, investment experience, or investment objectives. Patel is thus violating Standard III(C) – Suitability.

Ethics




Employer






•Loyalty: Act for the benefit of employer and not deprive employer of the advantage of any skills and abilities.

•Additional compensation arrangements: Must not accept gifts, benefits, compensation, or consideration that likely to create conflict of interests.

•Responsibilities of supervisors: Make reasonable efforts to detect and prevent violations of applicable laws, rules, regulations.

Q: Ms Juhi Kashyap currently works at a investment company as an equity analyst. Without notice to her employer, she registers with government authorities to start an investment company that will compete with her employer. Does registration of this competing company constitute a violation of Standard IV(A)? Ans: Juhi's preparations for the new business by registering with the regulatory authorities do not conflict with the work for her employer if the preparations have been done not at the cost of his office work.

Ethics




Employer






•Diligence & Reasonable Basis: Exercise diligence, independence and thoroughness in analyzing investments. Have a reasonable and adequate basis, supported by appropriate research and investigation.

•Communication with clients & prospective clients: Disclose to clients the basic format and general principles of the investment processes. Use reasonable judgment in identifying which factors are important to their investment analyses, Distinguish between fact and opinion.

•Record Retention: Must develop and maintain appropriate records to support their investment analysis, recommendations, actions, and other investment-related communications with clients.

Q: A portfolio manager allocates IPO shares to her sister's fee based account, after allocating shares to all other client's portfolio. Is she in violation of any of the code and standards of ethics? Ans: The correct answer is Violated standard III(B) Fair dealing. Manager should have treated her sister's account at par with her any other client.

Ethics




Employer






•Disclosure of conflicts: Full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity.

•Priority of transaction: Investment transactions for clients and employers must have priority over investment transactions in which a Member or Candidate is the beneficial owner.

•Referral Fees: Disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration received.

Q: Mr. Aditya Sarkar, CFA who covers Shivam Computers, came to know about the fraud in Co. through his personal sources, upon which he decides to sell his personal shares immediately. Is Mr. Sarkar in violation of CFA standards of professional conduct? Ans: Mr. Sarkar has not only violated Standard VI(B) by giving preference to his personal transaction over the clients' & employers' but also violated Standard II(A) by acting on the material non-public information.

Q: Members and candidates must disclose their employer and clients any consideration or benefit received for the recommendation of products or services. Members must adhere to this guideline in order to comply with: Ans: The correct answer is Standard VI(C) Referral fees

Ethics




Employer






•Conduct as members & candidate in CFA program •Refer to CFA institute, the CFA designation & CFA program

Ethics



Objective: •Global acceptance of calculation of investment

performance in a fair, comparable format. •Consistent accurate performance data. •Promote fair competition. •Self Regulation.

Characteristics: •Firm: Distinct Business Entity. •Fair Representation and Full Disclosure of results. •Composite presentation for 5 years. •Specific calculation disclosure required. •Contain both required and recommended Provisions. •No Partial Compliance. •Follow Local law; disclose conflict.

Q: Which of the following should be the course of action for a firm which is located in a country with existing performance reporting standards and these regulations conflicts with GIPS?

A. Firm must follow GIPS, because GIPS is a global standards. B. Firm must follow country specific regulations. C. Firm must follow country specific regulations but must disclose the nature of the conflict.

Ans: The correct answer is C. Firm must follow country specific regulations but must disclose the nature of the conflict.

Q: Which of the following is least likely to be included in all advertisements that include a claim of compliance with the GIPS advertising guidelines?

A. Description of the firm. B. Total return calculation methodology. C. The GIPS advertising guidelines compliance statement.

Ans: The correct answer is B. Total return calculation methodology.

Ethics



Nine Sections of GIPS Standards: •Fundamentals of compliance, − Definition − Policy Documentation − Compliance − Update Compliance − Appropriate Verification Statement •Input data, •Calculation methodology, •Composite construction, •Disclosures, •Presentation & Reporting, •Real estate, & •Private equity •Separately managed Account(SMA) Portfolios

Q: Which of the following is least likely to be true in case of representation of GIPS compliant performance composite?

1. Atleast 5 years of performance record is necessary 2. Performance record up to 10 years is required 3. Atleast 7 years of performance record is necessary

Ans: The correct answer is 3. Atleast 7 years of performance record is necessary.

Ethics



Question 1

1. Martha Ritchie, a CFA Institute member, used to work with Magnum Corp, a famous investment banking firm till last year after which she quit and joined another firm. During her time with the company, she published a research report under the name of the firm. The firm has recently issued a future report based on her work without providing attribution to her. She considers this a violation of the CFA Institute Professional Standard I(C) Misrepresentation. Which of the following future courses of action is most consistent with the CFA Institute Standards of Professional Conduct?

a) Martha should complain about the issue to the CFA Institute

b) The report belongs to Magnum under the CFA Institute Standards of Professional Conduct

c) Martha should report violation of Intellectual Property Rights with the court

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Answer

Solution: (b) The action of the firm does not represent a violation of Standard I(C) as in case of a work completed for an employer, the firm can issue future reports without providing attribution to the prior analysis.

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Question 2

2. Which of the following compensation plans for an investment analyst is most appropriate according to the CFA Institute’s Standards of Professional Conduct?

a) A flat fee of $20,000

b) A vacation package for two at an exotic resort in a resort in South Africa

c) A luxury car and 10,000 stocks of the client’s firm

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Answer

Solution: (a) Under the CFA Institute Standards of Professional Conduct, the compensation plans should be flat. Gifts like vacation package can impede the objectivity and independence of the analyst. In addition, compensation like shares of the company are not allowed under the CFA Standards as it might bias the analyst to overvalue the shares of the company to increase personal wealth.

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Question 3

3. Mr. Hudson, a CFA charter holder, is a famous Wall Street Investment advisor. He has shown consistently above market returns for the last five years and is hence a highly revered figure in the stock market. He is consistently seen to write statements like ‘A guaranteed return of more than 8% over your investment’ on his website to attract investors. Which of the following CFA Institute Standards of Professional Conduct is most likely violated by him?

a) Independence and Objectivity

b) Misconduct

c) Misrepresentation

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Answer

Solution: (c) Mr. Hudson is most likely to violate the standard of Misrepresentation under the CFA Institute Standards of Professional Conduct. This standard prevents members and clients from guaranteeing any specific return on volatile investments.

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Question 4

4. Which of the following is least likely a part of the definition of a firm according to GIPS?

a) It is held out as a distinct business entity to clients

b) It must have at least one subsidiary in the United States

c) If a firm has many geographical locations, then the definition should include all the geographical locations in which the firm is present

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Answer

Solution: (b) A firm based in any country may present GIPS compliant performance history. It is not necessary for the firm to be based in or present in the United States to claim GIPS compliance.

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Question 5

5. Stella Morgan, a CFA Level I candidate was found with the piece of paper with some formulas written on it in the examination hall during her CFA Level I examination. She said that she was not using the paper. She only brought it as a help if she forgot any formulas. But since she remembered everything, she did not need to use it. Which of the following statements is most appropriate?

a) Stella has violated the Standard pertaining to conduct as a CFA candidate

b) Stella is not in violation of any standard as she did not us the paper at all

c) Stella is in violation of the standard pertaining to disclosure of conflicts

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Answer

Solution: (a) CFA Standard pertaining to conduct as a CFA member and candidate prohibits candidates from bringing any kind of help, including formula sheets inside the examination hall. Even if she did not use it, she should have been aware of the standard and bringing the paper is a clear violation of the standard.

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Question 6

6. In countries where record retention is not required, how many years should a member maintain the records related to investment advice?

a) 2 years

b) 5 years

c) 7 years

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Answer

Solution: (c) In this case, the CFA standards will apply which require record retention for a minimum period of 7 years.

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Queston 7

7. Jill Stark has recently applied for bankruptcy protection. In the past, he has managed investments for high net worth individuals. Has Stark violated the CFA Institute Standards of Professional Conduct?

a) No, unless his financial difficulties reflect poorly on his performance as a portfolio manager

b) Yes, because a member is liable to conduct both his personal and professional business with utmost integrity while upholding reputation

c) No, but he must disclose the bankruptcy filing to his clients.

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Answer

Solution: (a) Any personal circumstances which are not likely to affect the performance as a professional are not required to be disclosed by the member.

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Question 8

8. Which of the following is least appropriate according to the standard on fair dealing? If an investment recommendation is changed, it must be communicated to

a) All the firm’s clients

b) All clients who have indicated a prior interest in the security

c) All clients who have that security in their portfolio

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Answer

Solution: (b) Recommended procedures to comply with fair dealing imply that a change in recommendation must be made available to clients who have indicated a prior in that security. However, this differentiated service is acceptable only if no client is disadvantaged from this action.

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Question 9

9. Nell Dursley attended a public lecture by a famous investment analyst. In the lecture, the analyst demonstrated his new model for estimating returns on a portfolio. The model intrigued Nell and after returning home, he recreated the model from memory and verified it using past data. Highly confident that the model will work wonders, Nell emailed all his clients that he has discovered a new model and explained in some detail the working of the model. Which of the following is most accurate?

a) Nell most likely violated the standard on communication with clients by revealing the complex details of the model

b) He violated the standard on misrepresentation by not attributing the model to the investment analyst and calling it his own discovery

c) He is not in violation of any standard since he recreated the model from his memory

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Answer

Solution: (b) Using someone else’s report without attribution results in a violation of the standard related to misrepresentation.

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Question 10

10. In case of issuer paid research, which of the following is most accurate?

a) Members should not accept such tasks

b) Members should insist on a minimal compensation for such a research

c) Members should insist on a flat compensation in such cases

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Answer

Solution: (c) In case of issuer paid research, members should insist on a flat fee instead of compensation dependent upon the result of the research.

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Question 11

11.A fund manager for a big pension fund is on the board of directors of another company, which is a part of pension fund’s portfolio. As a board member, CFA institute member receives sitting fees for attending board meetings and free membership of recreational club. The member has informed the employer about the sitting fees but not about the membership. Which of the following is most likely true? The member has

a) Violated the standard pertaining to additional compensation arrangement

b) Violated the standard pertaining to referral fees

c) Not violated any code or standards

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Answer

Solution: (a) Membership of the club is also a part of the additional compensation that the member is availing. Hence, the member should have informed the employer about the same.

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Question 12

12. Simpson Geller, CFA has been hired by Jargon Inc., to manage its pension fund. Sarah’s fiduciary duty is owed to:

a) shareholders of Jargon

b) pension plan participants and beneficiaries

c) her immediate supervisors at Jargon

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Answer

Solution: (b) Under Standard III (A) – Loyalty, Prudence & Care, members who manage a company’s pension funds owe a fiduciary to the participants and beneficiaries of the plan because they are the investors in the plan.

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Question 13

13. Herb Kutcher, CFA is a leading investment analyst. His recommendations are highly valued by the investment industry and lead to significant effect on security prices. He has huge stakes in Freeform Inc, a software firm. Recently, the share prices of Freeform dropped and to avoid suffering heavy losses to himself and his clients holding interest in the stock, he issued a buy recommendation for the stock. When the price appreciated enough, he sold his interest in the stock and also recommended his clients to sell their shares. Which of the following is most accurate?

a) Herb violated the standard on market manipulation

b) Herb did not violate any standards

c) Herb violated the standard on misrepresentation

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Answer

Solution: (a) Since the recommendations of Herb have significant effect on the market, issuing a buy recommendation lead to artificial inflation in the security prices. Thus, he violated the standard II (B) pertaining to market manipulation.

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Question 14

14. Sitwell Corp. is looking for potential investment opportunities. To identify the same, Heena Sharma has been allotted the task of preparing a recommendation report based on investments in a company manufacturing newly developed inflatable mattresses. The sale of the mattresses will be dependent on the returns on the equity index. The possible rates of returns assumed by Heena in her report are 5%, 7% and 8%. She conducted a thorough analysis of the cases and suggested a strong buy based on the assumed rate of return. Which of the following standards has she most likely violated?

a) Performance presentation

b) Misrepresentation

c) Loyalty

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Answer

Solution: (b) She has most likely violated the standard on misrepresentation since she did not consider the possibility of negative returns.

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Question 15

15. Jeremy Stone, CFA, has been given the duty of supervising a group of research associates. He discovered that the compliance system is not adequately executed regarding non-investment behavior. Since he is an investment analyst, he concerns himself only about the former and continues supervising employees. Which of the following is most accurate about Jeremy?

a) He should continue supervising employees and concern himself only about investment behavior

b) He should ask the firm to delegate the duty to someone else

c) He should ensure that the non-investment behavior is aligned to the firm’s policies

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Answer

Solution: (c) It is the duty of a supervisor to enforce the policies regarding both investment and non-investment behavior equally. If at any point, the member feels that the policies are not being followed, he should take all necessary steps to ensure that they become followed.

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Question 16

16. Salma Aldrin, CFA, is a credit analyst working with NewBank. She was asked by her supervisor to analyze the multinational drug maker Elixir and provide a report based on the same. When Elixir’s CEO came to know about this, he sent a chartered jet to call her to California and a few tickets for that season’s superball. Salma believed that it would not be a problem if she accepted the tickets. She decided against informing her supervisor about these gifts. Which of the following CFA Institute Standards of Professional Conduct has Salma most likely violated?

a) Independence and Objectivity

b) Plagiarism

c) Market Manipulation

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Answer

Solution: (a) Salma has violated Standard I(B) as accepting these substantial gifts may impede Salma’s independence and objectivity.

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