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25 Cards in this Set

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Describe the structure of the CFA Institute Professional Conduct Program and the process for the enforcement of the Code and Standards.
The Disciplinary Review Committee of the CFA Institute of Governors has overall responsibility for the PCP and enforcement.

Inquiry Prompts:
1. Self-disclosure on PCS of involvement in civil litigation or criminal investigation
2. Written complaints
3. Evidence of misconduct received through public sources
4. Report by CFA exam proctor of possible violation during examination.

Professional conduct staff may:
1. Interview subject
2. Interview complainant or other third parties
3. Collect documents and records

Designated officer may decide:
1. No disciplinary sanctions
2. Issue cautionary letter
3. Discipline the member
State the six components of the Code of Ethics.
1. Act with integrity, competence, diligence, respect, and in an ethical manner to public, clients, etc.
2. Place the investment profession and clients' interest above their own personal interests.
3. Use reasonable care and exercise independent judgment.
4. Practice, and encourage others to practice, in a professional and ethical manner.
5. Promote the integrity of, and uphold the rules governing, capital markets.
6. Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.
State the seven Standards of Professional Conduct.
1. Professionalism
2. Integrity of Capital Markets
3. Duties to Clients
4. Duties to Employers
5. Investment analysis, recommendations, and actions
6. Conflicts of Interest
7. Responsibilities as CFA member or candidate
"Parties In Denmark Don't Include Coldplay Records"
Knowledge of Law: Recommended Procedures for Compliance - Members (6)
- Members should have procedures to keep up with changes
- Compliance procedures should be reviewed on an ongoing basis
- Members should maintain current reference materials for employees to access
- Members should seek advice of counsel or their compliance department when in doubt
- Members should document any violations when they disassociate themselves from prohibited activity and encourage their employers to bring an end to such actions
- No requirement under the Standards to report violations to government authorities, but may be advisable
Knowledge of Law: Recommended Procedures for Compliance - Firms (3)
- Develop and/or adopt a code of ethics
- Make available to employees information that highlights applicable laws and regulations
- Establish written procedures for reporting suspected violations of laws, regluations, or company policies
Independence and Objectivity: Recommended Procedures for Compliance (7)
- Unbiased opinions
- Create restricted list and distribute only factual information
- Restrict special cost arrangements
- Limit gifts - token items only
- Restrict employee investments in equity IPOs and private placement
- Review procedures
- Firms should have formal written policies on independence and objectivity of research
True or False: Information from recognized financial and statistical reporting services need NOT be cited.
True. No requirement to cite.
Misconduct: Recommended Procedures for Compliance (3)
- Develop and adopt a code of ethics
- Give employees list of potential violations and sanctions
- Check references of employees
Define "material" and describe the "Mosaic Theory."
- Information is material if its disclosure would impact the price of a security or if reasonable investors would want the information before making an investment decision.

- Mosaic Theory: No violation when a perceptive analyst reaches an investment conclusion about a corporate action or event through an analysis of public information together with items of non-material non-public information.
Integrity of Capital Markets: Recommended Procedures for Compliance
Make reasonable efforts to achieve public dissemination of the information.

"Firewall" with elements including:
- Substantial control of relevant interdepartmental communications
- Review employee trades - maintain "watch," "restricted," and "rumor" lists
- Monitor and restrict proprietary trading while a firm is in possession of material non-public information
Duties to Clients: Guidance (Clients) (5)
- Exercise the prudence, care, skill, and diligence
- Manage pools of client assets in accordance with the terms of the governing documents
- Make investment decisions in the context of the total portfolio
- Vote proxies in an informed and responsible manner
- Client brokerage, or "soft dollars" or "soft commissions" must be used to benefit the client
Duties to Clients: Recommended Procedures for Compliance (10)
Submit to clients, at least quarterly, itemized statements showing all securities in custody and all debits, credits, and transactions.

Encourage firms to address these topics:
- Follow applicable rules and laws
- Establish investment objectives of client. Consider suitability.
- Diversify
- Deal fairly with all clients
- Disclose compensation
- Disclose conflicts
- Vote proxies in best interest of clients and ultimate beneficiaries
- Maintain confidentiality
- Seek best execution
- Place clients' interest first
Fair Dealing: Recommended Procedures for Compliance (9)
- Limit number of people aware of change in recommendation
- Shorten time between decision and dissemination
- Publish personal guidelines for pre-dissemination (no 'front running')
- Simultaneous distribute to all who have expressed interest or for whom investment is suitable
- Maintain a list of clients and holdings
- Develop written trade allocation procedures
- Disclose trade allocation procedures
- Establish systematic account review
- Disclose available levels of service
Suitability: Recommended Procedures for Compliance (3)
Members should:
- Put the needs and circumstances of each client into a written investment policy statement (IPS)
- Consider the type of client
- Review investor's objectives and constraints periodically
Performance Presentation: Recommended Procedures for Compliance (5)
Encourage firms to adhere to GIPS.

- Considering the sophistication of audience
- Presenting performance of weighted composite of similar portfolios rather than a single account
- Including terminated accounts as part of historical performance
- Including all appropriate disclosures to fully explain results
- Maintaining data and records used to calculate the performance being presented
Members and Candidates must keep information about current, former, and prospective clients confidential unless:
1. Information concerns illegal activities on the part of the client or prospective client
2. Disclosure required by law
3. Client or prospective client permits diclosure
4. Members and candidates are cooperating with the CFA Institute Professional Conduct Program investigation
True or False: Independent practice for compensation is allowed if a notification is provided to employer fully describing all aspecvts of the services, including compensation, duration, and the nature of the activities.
False: Notification AND the employer must consent to all terms of the proposed independent practice
True or False: Members and candidates must make an immediate written report to employer detailing proposed compensation services, if additional to that provided by employer.
True under the Duties to Employers: Additional Compensation Arrangements.
Adequate compliance procedures should (Responsibilities of Supervisors Recommended Procedures for Compliance) (7):
- Be clearly written
- Be easy to understand
- Designate a compliance officer with authority clearly defined
- Have a system of checks and balances
- Outline scope of procedures
- Outline what conduct is permitted
- Contain procedures for reporting violations and sanctions
Once the compliance program is instituted, the supervisor should (7):
- Distribute it to the proper personnel
- Update it as needed
- Continually educate staff regarding procedures
- Issue reminders as necessary
- Require professional conduct evaluations
- Review employee actions to monitor compliance and identify violations
- Enforce procedures once a violation occures
Investment Analysis, Recommendation, and Action: Guidance--Using Secondary or Third-Party research.
- Review assumptions used
- How rigorous was the analysis
- How timely is the research
- Evaluate objectivity and independence of the recommendation
Investment Analysis, Recommendation, and Action: Recommended Procedures for Compliance
- Have a policy requiring that research reports and recommendations have a basis that can be substantiated as reasonable and adequate
- Have detailed, written guidance for proper research and due diligence
- Have measurable criteria for judging the quality of research, and base the compensation on such criteria
Record Retention. State the recommended holding period if no other regulator standards are in place.
7 years; generally is the firm's responsibility
Priority of Transactions: Recommended Procedures of Complaince (5):
- Limit participation in IPOs
- Restrictions on private placements
- Establish blackout/restricted periods (no 'front running')
- Reporting requirements
- Disclosure of firm's personal trading policies
Members must satisfy what requirements to maintain membership in CFA Institute?
1. Sign PCS annually
2. Pay CFA Institute membership dues annually