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41 Cards in this Set

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  • Back
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Six components of the Code of Ethics
1) Act with integrity, competence, diligence, respect & ethically in all professional settings

2) Place the integrity of the investment profession & the interest of clients above their own personal interests

3) Use reasonable care & independent judgements when making investment decisions & undergoing analysis

4) Practice & encourage others to be ethical

5) Promote integrity of capital markets & uphold governing rules

6) Maintain & improve own competence & others
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 a CFA member of candidate
Potential Client Constraints
1) Liquidity Needs
2) Expected cash flows
3) Investable funds
4) Time horizon
5) Tax considerations
6) Regulatory/Legal constraints
7) Unique circumstances/needs
Soft Dollar Standards
1) Brokerage is always the property of the client
2) Investment managers have the right to:
a) Obtain best execution,
b) minimize transactions costs;
c) use client brokerage to benefit clients
3) Cannot use client-directed brokerage for another client
Permissable Research under soft dollar standards - process to determine
1) Define the product/service
2) Determine usage - does it assist in the investment decision making process, or is it there to provide an overall benefit to the firm?
3) Mixed use analysis - determine which portion is dedicated to what bucket
Objectives of the Research Objectivity Standards
1) Prepare, research, recommendations, investment action with the client's interest first
2) Full, fair, meaningful disclosures of conflicts
3) Promote effective policies/procedures that minimize possible conflicts that could impact independence/objectivity
4) Support self-regulation
5) Provide an ethical work environment
Old Man vs. New Prudent Investor Rule
1) Use of Total Return - income + capital growth, not just preservation of principal
2) Risk Management - manage consistent with risk, return objectives, but do not avoid all risk
3) Portfolio Context - view risk in context of the entire portfolio
4) Security Restrictions - no securities are "off limits" b/c of unique risk
5) Delegation of Duty - may be the duty of the trustee to delegate
Knowledge of the Law - Professionalism
1) understand & comply with all laws, rules, and regulations - always the more strict (even if it is the CFA code of standards)
2) do not knowingly assist in violation of law
*are not required to report violations to gov't authorities, but but dissociate
3) keep informed, seek advice, and encourage others (firm) to adopt the code of ethics
Independence & Objectivity - Professionalism
1) Use reasonable care to exercise independence & objectivity in professional activities
2) do not offer, solicit or accept gifts/compensation that make compromise your I or O
3) may accept gifts from clients, but these must be disclosed
4)Protect integrity of opinions - reports should reflect unbiased opinion
5) Pay for own travel, unless commercial is unavailable
Misrepresentation - Professionalism
1) Do not misrepresent yourself, firm, your work - intent to deceive is a violation
2) Do not guarantee returns
No plagarism - written, oral, or electronic
Maintain records to prepare research reports & quote sources, except "recognized financial services"
you do not have to site others within the firm
Misconduct - Professionalism
Do not engage in activities that would reflect poorly on you, the firm, or clients - this covers activities that may not be illegal, but could adversely affect a member's ability to perform
Material Nonpublic Information
Do not act on nonpublic material information that could affect an investment's value - the def of material - info is nonpublic until is has been made available to the marketplace

Review internal firewalls to control interdepartmental communications (review employee trades)

mosaic theory is NOT a violation
Mosaic Theory
No violation when an analyst combines non-material nonpublic info with public info to reach a conclusion
Market Manipulation - Integrity of Capital Markets
1) Do not distort or artificially inflate trading with intent to mislead

2) Do not give false impression of activity/price movement, or gain dominant position in an asset to manipulate price

3) Do not distribute false misleading info
Loyalty, Prudence & Care - Duties to Clients
1) Act with reasonable care & exercise prudent judgement with the client's interest before all else
2) Make investment decisions in the context of the total portfolio - w/n IPS framework (the client may be the investing public)
3) Soft dollars must benefit the client
4) Vote proxies responsibility & disclose voting policies to clients (it may not be in the best interest of the client to vote all proxies - cost benefit analysis consideration)
Fair Dealing - Duties to Clients
1) Deal fairly & objectively with all clients when making recommendations & taking action - fair does not necessarily mean equal (can have vary levels of service)
2) Clients must all have a fair oppty to act on analyst recommendations - must notify a client of changes prior to accepting trades
3) Deviations from strict pro rata allocation of IPOs is sometimes okay (min block sizes, etc)
Suitability - Duties to Clients
Create an IPS for client suitability guidelines and update it regularly (at least annually)

Determine suitability in a portfolio context

IPS should clearly outline a clients: return objectives and risk tolerance
Performance Presentation - Duties to Clients
When communicating portfolio performance make reasonable efforts to ensure it is fair, accurate, and complete

Can be brief, but must make details available if requested

Do not miss-state or mislead clients about performance, or imply the ability to achieve a rate of return similar to what was achieved in the past
Preservation of Confidentiality - Duties to Clients
Keep current/prospective/former client info confidential unless illegal activities are suspected, disclosure is required by law, or current/prospect/former client allows disclosure

Can disclose info to CFA for an investigation under professional conduct program

Avoid disclosing any info received from a client
Loyalty - Duties to Employers
Act for the benefit of employer & do not deprive employer of the advantage of your abilities

Must notify an employer of an independent practice - must have written consent

If leaving the employer, cannot take anything without consent, records are the property of the employer

whistle-blowing cannot be done for personal gain, only to protect client or integrity of capital markets
Additional Compensation Arrangements - Duties to Employers
No gifts, benefits, compensation, or consideration are to be accepted without consent from all parties - includes direct & indirect compensation

written consent from a member's employer includes email
Responsibilities of Supervisors - Duties of Employers
Must make reasonable efforts to detect & prevent violations applicable laws, rules, regulations, and code and standards by anyone subject to your supervision or authority

Should enforce non-investment rules, as well as, continually educate staff, review actions, and promptly act if a violation has occurred
Diligence & Reasonable Basis - Investment analysis, recommendations, and action
Use diligence, independence, and thoroughness when making and analyzing recommendations and taking action

Should have reasonable & adequate basis supported by research & investigation

Review assumptions, make sure analysis is timely, evaluate objectivity & independence of recommendations
Record Retention
Maintain all records supporting analysis, recommendations, and actions to support reasons for analyst conclusions & actions

Records are property of the firm

Recommendation is to keep all records for seven years

Must recreate records if left the firm where originally produced
Priority of Transactions - Conflicts of Interest
Investment transactions for clients & employers must have priority over transactions in which a member is the beneficiary

Personal trades can only be undertaken once clients and employers have had an adequate oppty to act

Family member accounts (that are client accounts) should be treated no differently

IPO participation should be limited
Referral Fees - Conflicts of Interest
Disclosure of any compensation, consideration, benefit received from, or paid to, others for the recommendation of products/services must be disclosed prior to entering into any formal agreement for services should update referrals at least quarterly
Conduct as a member of candidate of the CFA program
Do not compromise the reputation or integrity of the CFA institute or designation or exams by:

1) cheating on exams
2) not following rules and guideline/policies of program
3) improperly using the designation to further personal & professional goals is prohibited
4) misrepresenting info on the professional conduct statement

Members are however, free to express their opinions regarding the exam program or CFA institute
Reference to the CFA institute, designation, or program
Do not misrepresent or exaggerate the meaning or implications of membership

Do not over promise competence or future results

Maintain membership by signing the PCS and paying dues annually

No partial designation is appropriate to imply

Chartered Financial Analyst and CFA marks are used after name, or as adjs (nothing else)
Proprietary Soft Dollar arrangements
Executing broker in-house research, in addition to third-party research
Broker: any person or entity that provides securities execution services
Principal Soft Dollar arrangements
research obtained through "spreads" or "discounts" generated by trades on a principal basis;

done in addition to agency basis
Allowable Research within Soft Dollar arrangements
must provide lawful and appropriate assistance to directly assist the investment manager in the investment decision-making process (not the in the management of the investment firm)
Soft Dollar disclosure requirement
must provide the member’s client with a means of evaluating the member’s soft dollar practices and how client brokerage is used, with the availability of additional information when requested by the client

Compliance with the Soft Dollar Standards is voluntary
Steps to conclude whether research is permissible; whether it can be purchased with client brokerage:
1) Does it meet the definition of allowable research?
2) Does it benefit the investment manager's client(s)? - assisting in the investment management process, not the management of the firm
3) Can the investment manager document the basis for the determinations
4) Under principal trades, does the research directly benefit the client account generating the trade

If uncertain to these points, should pay for research with firm assets, not client brokerage
Mixed Use Research
paid with client brokerage and by the investment manager - must be able to make reasonable, justifiable, and document the allocation of cost; and the portion paid by the client must go towards the investment decision making process;

reevaluate mixed use annually
Client-Directed Brokerage
brokerage is the asset of the client, not the investment manager

must not use Brokerage from another Client account to pay for a product or service purchased under the Client-Directed Brokerage arrangement
Research Objectivity Standards
a. to prepare research reports, make investment recommendations, and take investment actions and develop policies, procedures, and disclosure that always place the interests of investing clients before their employees’ or the firm’s interests
b. to facilitate full, fair, meaningful, and specific disclosures of potential and actual conflicts of interest of the firm of its employees to its current and prospective clients
c. to promote the creation and maintenance of effective policies and procedure that would minimize conflicts of interest that may jeopardize the independence and objective research
d. to support self-regulation through voluntary industry development of, and adherence to, specific, measurable, and demonstrable standards that promote and reward independence and objective research
e. to provide a work environment for all investment professionals that supports, encourages, and rewards ethical behavior and supports CFA Institute members, charter holders, and candidates in their adherence to the CFA Institute Code and Standards
Requirements of Research Objectivity Standards
a. Research Objectivity Policy – written, distributed firm-wide and to clients, supervised and attested to annually
b. Must disclose personal and firm conflicts of interest whenever possible for/during public appearances
c. Reasonable & Adequate basis – determined by a person/committee, approving each research report or recommendation
d. Investment Banking isolation – eliminated interaction, influence, or control over research
e. Research analyst compensation – should be aligned with the quality and accuracy of recommendations, not investment banking of corporate finance activities on which the analyst collaborated
f. Relationships with subject companies should remain independent – no promises or a “heads up” on ratings
g. Personal investments and trading must be managed and tracked –
i. no non-public material information should be disclosed prior to dissemination of rating changes
ii. may not trade contrary to recommendation, except in extreme financial hardship circumstances
iii. no IPO purchases for subject companies and others within the covered industry
h. Timeliness – research reports must be on a timely and regular basis
i. Compliance & Enforcement – procedures must be in place to ensure research objectivity, by having known appropriate disciplinary sanctions, and to monitor and audit the effectiveness of those procedures
i. Must maintain records of internal audits
j. Full & Fair Disclosure of all conflicts of interest for covered employees
k. Rating System must be established and considered useful for investors and for the investment decision making, providing suitable information for investors
Best Practice - Trading Allocation
a. Obtain advance indications of client interest for new issues
b. Allocate new issues by client rather than by portfolio manager
c. Adopt a pro rata or similar objective method or formula for allocating trades
d. Treat clients fairly in terms of both trade execution order and price
e. Execute orders timely and efficiently
f. Keep accurate records of trades and client accounts
g. Periodically review all accounts to ensure that all clients are being treated fairly
Basic Principles of the New Prudent Investor Rule
a. Diversification is fundamental to risk minimization and is therefore ordinarily required of trustees
b. Risk and return are so directly related that trustees have a duty to analyze and make conscious decisions concerning the levels of risk appropriate to the purposes of the trust
c. Trustees have a duty to avoid fees, transaction costs, and other expenses that are not justified by the objectives of the investment program
d. The fiduciary’s duty of impartiality requires a conscious balancing of current income and growth
e. Trustees may have a duty, as well as the authority, to delegate as prudent investors would
General fiduciary standards to adhere to as a Trustee
a. Must exercise care, skill (can outsource), and caution (protecting principal and generating a reasonable return), and must manifest loyalty and impartiality (solely in the interest of the beneficiaries)
b. Compliance is judged as of the time of the investment decision, not with the benefit of hindsight or subsequent developments, not on the outcome of his investment decisions
Key Factors to consider as a Trustee
a. General economic conditions
b. The possible effect of inflation or deflation
c. The expected tax consequences for the beneficiaries of investment decisions or strategies
d. The role that each investment or course of action plays within the overall trust portfolio
e. The expected total return from income and capital appreciation
f. The beneficiaries’ other resources
g. Needs for liquidity , regularity of income, and preservation or appreciation of capital
h. As asset’s special relationship or special value, if any, to the purposes of the trust or to the beneficiaries