Cfa Level Iii - Study Session 2

Front 1

What makes a profession as opposed to a business or trade?

Back 1

1. Body of knowledge
2. Commitment to a broader good than practitioner's self-interest
2i. Greater good A: Investment analysis promotes fair and efficient capital markets.
2ii. Greater good B: Investment analysis promotes client's financial well being.

Front 2

Professional Ethics and the Law

Back 2

It's not just enough to obey the law, you have to be ethical on top of that.

You can still be unethical whilst holding the note of the law.

The Code and Standards detail out the general principles to guide people.

Front 3

Code of Ethics

Back 3

Six Provisions
1. Act with integrity, competence, diligence, respect and in an ethical manner.
2. Put the profession and the clients interests above their own personal interests.
3. Reasonable care and independent professional judgment.
4. Practice and encourage others to practice professionally and ethically, like those under their supervision and their managers.
5. Promote integrity of capital markets. This is a 'greater good' of being a profession.
6. Maintain and improve competence, like continuing education

i. Details out who is bound by it
ii. Mentions sanctions for any violators.
iii. Members have to submit a PCS (Professional Conduct Statement) each year.
iv. Code applies to individuals not the investment companies.

Front 4

Global Investment Performance Standards (GIPS)

Back 4

Aim is to achieve 'fair representation and full disclosure' of performance information.
1. Use accurate input data
2. Approved calculation methods
3. Present performance record in prescribed format.
4. Make certain disclosures

NOTE: You can't choose to satisfy some requirements of the GIPS but not others. GIPS apply to firms, not individuals.

Front 5

Case Discussion - The Consultant

(Code of Ethics)

Back 5

You can deal with conflicts of interest in two ways
1. Avoidance. Don't invest in energy stocks if you personally hold a pf heavily invested in energy.
Selling your pf is a drastic step that you don't need to make.
Could just buy a mutual fund of energy stocls to avoid having a vested interest in one.
2. Disclosure. Real or perceived conflict. Disclose in plain language. Even if it is immaterial, it is up to the client to decide that.
If you submit your holdings to the regulatory authority, then this counts as public disclosure so you don't have to do more.
3. Compliance Programs: Have to have communication, education and procedures to read. Maybe have an annual certification for employees, certification and/or memberships to professional bodies?
4. Have a respectable corporate culture, that self-governs to the chosen values.

Front 6

Case Discussion - Pearl Investment Management

Young unwary analyst slipping into questionable actions.

(Code of Ethics)

Back 6

1. Knowledge of the Law: the dude, his supervisor and all employees at Pearl. Compliance department should educate new employees. His supervisor should monitor him more closely and the firm should have a policy statement.
2. Responsibility of Supervisors: Boss should make a reasonable attempt to detect and prevent violations of laws by anyone under them.
3. Trading in client securities for Personal Accounts: Be careful here with priority of transactions and fair dealing.
4. Conveying Confidential Client Information: New guy can't take his employers proprietary info and tell everyone because this is breaching the duty to his employer.

Front 7

Case Discussion
(A rush job)

Pearl Investment Management

Back 7

1. A regular employee is just bound by companies code, but a CFA candidate is bound by the higher level. He should tell his employer about the CFA codes.
2. Dealing with clients: Actions solely for client given the know facts and circumstances. Deal fairly, not just IPOs to large client accounts. IPOs should be given out pro-rata (it's okay to have a minimum transaction size).
3. Bearing the risk for errors in client accounts: When trades are made in error or misallocated, the burden must be absorbed by the firm. Firm should have a policy statement to declare that they will cover errors.

Front 8

Asset Manager Code of Professional Conduct

General Principles of Conduct

Back 8

Six Components:
1. Act in a professional and ethical manner at all times
2. Act for the benefit of clients
3. Act with independence and objectivity
4. Act with skill, competence, and diligence.
5. Communicate with clients in a timely and accurate manner
6. Uphold the rules governing capital markets.

Front 9

Asset Manager Code of Professional Conduct

Back 9

A. Loyalty to Clients
B. Investment Process and Actions
C. Trading (can't use MNPI, show any priority, use soft-dollars not for the client)
D. Compliance and Support (have an officer, maintain records, have enough technology and a BCP plan)
E. Performance and Valuation (fair, accurate, timely and complete)
F. Disclosures (communicate on an ongoing and timely basis, shareholder voting policies, trade allocation policies)