Cfa Level Iii - Study Session 2

Front 1

Case Discussion - The Consultant

(Code of Ethics)

Back 1

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 2

Case Discussion - Pearl Investment Management

Young unwary analyst slipping into questionable actions.

(Code of Ethics)

Back 2

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 3

Case Discussion
(A rush job)

Pearl Investment Management

Back 3

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 4

Asset Manager Code of Professional Conduct

General Principles of Conduct

Back 4

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 5

Asset Manager Code of Professional Conduct

Back 5

A. Loyalty to Clients (client first; confidentiality; I&O)

B. Investment Process and Actions (prudence&care; not engage in market manipulation; clients who pay for added service ok as long as disclosed, available to all; adequate, reasonable basis = 3rd party research ok as long as verified )

C. Trading (can't use MNPI; prioritize client; soft-dollars not for the client's benefit; best execution; fair, equitable trade alloc)

Front 6

Asset Manager Code of Professional Conduct

Back 6

D. RM, Compliance & Support (policies and procedures; appoint compliance officer; accurate and complete ie audited portfolio info; maintain records: CFAI min 7 yrs; sufficient human&technology resources; BCP plan; firm-wide risk mgmt process)

E. Performance and Valuation (fair, accurate, timely and complete)

Front 7

Asset Manager Code of Professional Conduct

Back 7

F. Required Disclosures (communicate on an ongoing and timely basis)
1. conflicts of interest
2. disciplinary action against mgr
3. investment process
4. mgmt fees, any soft/bundled commissions
5. client investment performance;
6. valuation methods used
7. shareholder voting policies
8. trade allocation policies
9. Audit/review results
10. significant personnel/org changes at the Mgr
11. Risk mgmt process