CFA ethics / GIPS
6 components of code of ethics
1.Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets. 2.Place the integrity of the investment profession and the interests of clients above their own personal interests. 3.Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities 4.Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession. 5.Promote the integrity and viability of the global capital markets for the ultimate benefit of society. 6.Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.
The Investment Performance Council (IPC) is composed of 36 members from 15 countries and serves as the global committee responsible for the Global Investment Performance Standards (GIPS). The principal goal of the IPC is to have: A) all countries worldwide adopt the GIPS standards as the standard for investment firms presenting historical performance. B) all firms in the IPC-represented countries adopt the GIPS standards as the standard for investment firms presenting historical performance. C) all countries with developed financial markets adopt the GIPS standards as the standard for investment firms presenting historical performance and become members of the IPC.
All countries worldwide adopt GIPS standards as the standard for investment firms presenting historical performance.
John Hill, CFA, has been working for Advisors, Inc., for eight years. Hill is about to start his own money management business and has given his two-week notice of his resignation from Advisors. A few days before his resignation takes effect, a former client of Advisors calls Hill at his home about his new firm. The former client says that he is very happy that Hill is leaving Advisors because now he and Hill can resume a professional relationship. The client says that he would never become a client of Advisors again. Hill promises to call the client back after he has left Advisors. Hill does not tell his employer about the call. Hill has most likely:
Based on the information here, Hill has done nothing wrong. He took a call at his home, presumably on his own time, and the client made it clear that he would never be a client of Advisors. Therefore, there was no breach of loyalty to Advisors by Hill, nor is there a conflict of interest.
Dan Jeffries is a portfolio manager who is being sued by one of his clients for inappropriate investment advice. The Professional Conduct Program of CFA Institute is investigating Jeffries for the same offense. Jeffries settles the lawsuit with the client while the Professional Conduct Program investigation is ongoing. When the Professional Conduct Program staff questions Jeffries about the problematic investment advice, Jeffries claims he cannot talk about it because doing so would violate the confidentiality of his client. Jeffries has
Because the Professional Conduct Program will maintain client confidentiality, Standard III(E) Preservation of Confidentiality does not permit members to refuse to cooperate with a PCP investigation because of confidentiality concerns. The Standards do not require members to delay dealing with related legal matters while a PCP investigation is in progress.
Ned Brenan manages two dozen pension accounts, one of which earned over 25% during the past two years. Brenan tells prospective clients that based on past experience they can expect a 25% return on their funds. Which of the following statements is CORRECT?
Brenan violated Standard of Professional Conduct III(D) by using only one portfolio's results to create a false impression of all the portfolios, and Brenan violated Standard of Professional Conduct I(C) by creating the impression that a certain return was assured (he should have used the words "might" or "could" instead of "can").
which of the following is NOT an important characteristic of how a firm defines itself? The firm definition establishes the: A) set of portfolios that must be included in at least one of a firm's composites. B) boundaries for what is included when measuring the total firm's assets. C) entity to which local securities laws apply when they exceed the GIPS requirements.
C. When a firm claims compliance with GIPS, it must be compliant on a firm-wide basis. The definition of the "firm" under the GIPS standards establishes the boundaries for what constitutes firm assets, and the set of portfolios that must be included in at least one composite.
A money manager, who is a member of CFA Institute, suggests during phone calls to his clients that, "I hope you will relay to your friends the great returns I earned for you this past year." The manager had generated above average returns in the past year. Is this a violation of Standard III(D), Performance Presentation? A) Yes, because the Standard forbids members asking their clients to say anything about how well the member has done. B) Not if it is true. C) Yes, because the intended message fails the test of completeness as required under the standard
C. standard III(D) requires that members communicate performance in a fair, accurate, and complete fashion, and covers both written and oral communication. Asking someone to advertise only one year's performance is unlikely to be representative since this constitutes a timeframe that is too short.
Jean Davis and Brian Taylor were recently hired by a local brokerage. Davis is registered for the Level II CFA exam and does not reference the CFA designation on her business card. In her marketing materials, Davis factually describes CFA requirements and notes that she expects to pass in June. Taylor passed the Level II exam and has not yet registered for the Level III CFA exam. Taylor also does not reference the CFA designation on his card and writes in his marketing materials that he passed both Levels I and II of the CFA exam on his first try, which is true. Have Davis or Taylor violated any CFA Institute Standards of Professional Conduct
Davis violated Standard VII(B) Reference to the CFA Institute, the CFA Designation, and the CFA Program because she stated a future date in which she expected to pass. Candidates who imply partial designations or expected completion dates violate this Standard. Stating a fact about having passed each of the first two levels on the first try does not violate the Standard.
Describe the nine major sections of the GIPS standards
Fundamentals of Compliance: These are issues for firms to consider when claiming GIPS compliance (e.g., firm definition). Input Data: Input data should be consistent in order to establish full, fair, and comparable investment performance presentations. Calculation Methodology: Certain uniform methodologies are required for portfolio and composite return calculations. Composite Construction: Creation of meaningful, asset-weighted composites is important to achieve a fair presentation. Disclosures: Certain information must be disclosed about the presentation and the policies adopted by the firm. Presentation and Reporting: Investment performance must be presented according to GIPS requirements, and when appropriate, other firm-specific information should be included. Real Estate: These provisions apply to all real estate investments regardless of the level of control the firm has. Private Equity: These must be valued according to the GIPS Private Equity Valuation Principles, unless it is an open-end or evergreen fund (which must follow regular GIPS). Wrap Fee/Separately Managed Account (SMA) Portfolios: Certain special GIPS standards apply to these.
To prepare a GIPS-compliant performance presentation, a firm must
GIPS Section 0, "Fundamentals of Compliance," states that firms: •Must provide a complete list of the firm's composites, including those that have been discontinued within the last five years, to any prospective client who requests one. •Must not claim any partial compliance with GIPS or state that a specific calculation is in compliance with GIPS. •Must not alter historical performance of composites based on a change in the firm's organization.
The GIPS standards: (1) do not require managers to include non-fee-paying accounts in composites, and (2) require five years (or since inception) of GIPS compliant history in a firm's initial GIPS-compliant performance presentation.
GIPS are ethical principles that firms can follow voluntarily where local or country-specific law, regulation, or industry standards may not exist for investment performance presentation.
With respect to reporting investment results, Global Investment Performance Standards (GIPS) require a minimum of..
GIPS require a minimum of five years of conforming historical performance results
Roger Halpert, CFA, prepares a company research report in which he recommends a strong "buy." He has been careful to ensure that his report complies with the CFA Institute Standard on research reports. According to CFA Institute Standards of Professional Conduct, which of the following statements about how Halpert can communicate the report is most correct? Halpert can transmit his report by computer on the Internet. Halpert can make his report in person, by telephone, or by computer on the Internet. Halpert can make his report in person
Halpert can make his report in person, by telephone, or by computer on the Internet A report can be made via any means of communication, including in-person recommendation, telephone conversation, media broadcast, and transmission by computer such as on the Internet
Lee Hurst, CFA, is an equity research analyst who has recently left a large firm to start independent practice. He is able to re-create several of his previous recommendation reports from memory, based on sources obtained at his previous employer. He publishes the reports and obtains several new clients. Hurst is most likely:
Hurst is most likely in violation of Standard V(C) "Record Retention" because the supporting documentation is unavailable. He needs to recreate the supporting records based on information gathered through public sources or the covered company
Deloris Johnson, CFA, suspected that her intern, who was working without pay at her brokerage firm, had violated a federal securities regulation. Johnson discussed the matter with her company's legal counsel who said that the intern's conduct was illegal. According to the CFA Institute Code and Standards of Professional Conduct, Johnson can dissociate herself from this illegal activity by:
Johnson can dissociate herself from the illegal activity by reporting the activity to the appropriate authorities. However, the Code and Standards do not require that she report legal violations to the appropriate governmental or regulatory organizations, but such disclose is prudent in this circumstance. By transferring the intern to another supervisor this may not solve the problem of the illegal activity occurring and the company would still be held liable for it.
Francisco Perez, CFA, CPA, is a portfolio manager for an investment advisory firm. Due to the prominence of his position, he is often invited to attend free marketing and educational events hosted by firms which seek to inform the investment community about their investment processes. One such firm, Unlimited Horizons, has invited Perez to attend free educational events which qualify for Continuing Education credits which could help Perez maintain his CPA designation. Perez should most likely:
Perez should decline the invitation as it creates the impression of lack of independence. If he does not accept the free continuing education courses, he would have to pay for them some other way so the free courses are a form of compensation. Nothing in the vignette suggests the free classes are illegal.
access person
Persons with access to information during the normal preparation of research recommendations are subject to Standard VI(B). An independent auditor is not involved in the normal preparation of research recommendations
Standard V(A) requires that a member have a "reasonable and adequate basis" before making an investment recommendation. Extrapolating on the basis of the conjecture of one member of the management team, without independent corroboration, is clearly in violation of this Standard
She is also in violation of Standard V(B) concerning the use of reasonable judgment regarding what is included or excluded in a communication with a client or prospective client.
A CFO who is a CFA Institute member is careful to make his press releases-some of them containing material and previously undisclosed information-clear and understandable to his readers. While writing a new release, he often has his current intern proofread rough drafts. He also sends electronic copies to his brother, an English teacher, to get suggestions concerning style and grammar. With respect to Standard II(A), Material Nonpublic Information, the CFO is
Standard II(A), Material Nonpublic Information, says that a member must be careful about handling material non-public information. As a member of CFA Institute, the CFO must limit the people who see important information before it is released. It would not be appropriate to involve an intern or a relative in the process
Question ID: 412670 Patricia Young is an individual investment advisor who uses a computer model to place each of her clients into an appropriate portfolio. The model analyzes a range of simulated portfolios and computes for each the probabilities of achieving various levels of return. Young then selects the portfolio that provides the highest probability of achieving the clients' minimum required return. By using this process, Young is: A) violating Standard I(C) - Misrepresentation. B) not violating the Standards. C) violating Standard III(C) - Suitability
Standard III(C) Suitability requires that Young select investments that are consistent with clients' risk and return objectives. However risk tolerance is not adequately addressed by Young's process
Sue Parsons, CFA, works full-time as an investment advisor for the Malloy Group, an asset management firm. To help pay for her children's college expenses, Parsons wants to engage in independent practice in which she would advise individual clients on their portfolios. She would conduct these investment activities only on weekends. She is currently only in the preparation stage and has not started independent practice yet. Which of the following statements about Standard IV(A), Loyalty to Employer, is most accurate? Standard IV(A):
Standard IV(A), Loyalty to Employer, requires that Parsons obtain written consent only from her employer before she undertakes independent practice that could result in compensation or other benefit in competition with Malloy. It is not required to get permission from your employer when only preparing to go into independent practice.
The applicable Standard, VI(C), does not require a member to disclose the percentage of their business that comes from referrals
Standard VI(C) states, "Members shall disclose to clients and prospects any consideration or benefit received by the member or delivered to others for the recommendation of any services to the client or prospect." Appropriate disclosure means telling the client or prospect, before agreeing to perform services, of any benefit given or received for recommending the member's services.
If a CFA Institute member knows that a fellow employee has violated a law, according to Standard I(A) the member
The most appropriate action is to seek advice about the potential violation. Standard I(A) does not require a CFA Institute member to report potential violations by others.
Describe objectives of market regulation.
The objectives of market regulation are to: •Protect unsophisticated investors. •Establish minimum standards of competency. •Help investors to evaluate performance. •Prevent insiders from exploiting other investors. •Promote common financial reporting requirements so that information gathering is less expensive. •Require minimum levels of capital so that market participants will be able to honor their commitments and be more careful about their risks
The purpose of composites in a GIPS-compliant performance presentation is to
The purpose of composites is to give clients and prospects information about a firm's past performance managing investments in various asset classes.
Trude Front, CFA, is a portfolio manager. While in the normal course of her duties, she happens to overhear material non-public information concerning the stock of VTT Bowser. She purchases several exchange traded funds which contain VTT Bowser, while shorting similar exchange traded funds which do not contain VTT Bowser. This is most likely:
This is a violation of Standard II(A) "Material Non-Public Information" irrespective of whether Front is simultaneously shorting the funds which do not contain VTT Bowser. Her trades are motivated by material non-public information.
The Investment Performance Council (IPC) is composed of 36 members from 15 countries and serves as the global committee responsible for the Global Investment Performance Standards (GIPS). The principal goal of the IPC is to have
all countries worldwide adopt the GIPS standards as the standard for investment firms presenting historical performance. The IPC envisions the GIPS compliance as a "passport" that allows firms to enter the investment arena, which will level the playing field on a global basis
Which of the following are recommended procedures of compliance according to Standard I(D), Misconduct? A) Refer to the Professional Conduct Program for arbitration of disputes with other members or candidates. B) Enroll employees in a continuing education program that would provide updates on required ethical behavior. C) Conduct background checks on potential employees to ensure that they are of good character.
conduct background checks on potential employees to ensure that they are of good character.
If an analyst suspects a client or a colleague of planning or engaging in ongoing illegal activities, which of the statements about the actions that the analyst should take is most correct? According to the CFA Institute Standards of Professional Conduct, the analyst should: consult counsel to determine the legality of the activity and disassociate from any illegal or unethical activity if the member has reasonable grounds to believe that the activity is illegal or unethical. disassociate from any illegal or unethical activity if the member has reasonable grounds to believe that the activity is illegal or unethical. consult counsel to determine the legality of the activity.
consult counsel to determine the legality of the activity and disassociate from any illegal or unethical activity if the member has reasonable grounds to believe that the activity is illegal or unethical. According to the procedures for compliance involving Standard I(A), CFA Institute members should determine legality and disassociate from any illegal or unethical activity.
May Frost, CFA, is concerned about the comments and activities of several of her coworkers and feels both ethical and legal violations are routinely overlooked. According to the Code and Standards, a recommended first step would least likely be to: contact industry regulators. provide her supervisor with a copy of the Code and Standards. review the company's policies and procedures for reporting ethical violations
contact industry regulators See Standard IV(A) "Loyalty." Frost should begin by reviewing the company's policies and procedures for reporting ethical violations and provide her supervisor with a copy of the Code and Standards to highlight the high level of ethical conduct she is required to follow.
Paul Drake is employed by a company to provide investment advice to participants in the firm's 401(k) plan. Company stock is one of the investment options in the plan. Drake feels that the stock is too risky for employees to own in their 401(k) plan and starts advising them to pull out of the stock. The Treasurer of the company calls Drake and tells him that he will be fired if he continues making such advice because he is violating his fiduciary duty to the company. Drake should: A) tell employees that he cannot provide advice on company stock because of a conflict of interest. B) make sell recommendations but point out that the company Treasurer has a differing and valid point of view. C) continue to advise employees to sell their stock.
continue to advice cemployees to sell their stock Although Drake is paid by the company, his fiduciary duty is to the plan participants. His advice cannot be compromised by business considerations, otherwise he will be violating the Standard on loyalty, prudence, and care.
he Konkol Company implements a new methodology for portfolio valuation that is licensed to them by ABC Statistics. Konkol complies with the CFA Institute Code and Standards by: A) discussing the new methodology with the clients, in its entirety. B) discussing the new methodology with clients only when a change in the security selection process is involved. C) not discussing the new methodology with clients because there is no need to, as it will not change their risk and yield preferences.
discussing the new methodology with the clients, in its entirety.
Dave Kline, CFA, is a personal investment advisor. After a dispute with a coworker on margin policy, he formally resigns his position by giving suitable notice. However, he does not follow his firm's established "Transition and Exit Policies" regarding discussion of the reason for his departure. During his final two weeks of employment, Kline routinely discusses the margin policy dispute, stating "...anyone who would lend that much money on securities of such low quality does not belong in this business..." Kline's statements are in direct violation of the firm's "Transition and Exit Policies," but he considers it a free-speech issue. Kline is most likely
in violation of Standard IV(A) "Loyalty" recommended procedures for failing to follow the employer's policies and procedures related to termination policy. Kline is in violation of Standard IV(A) "Loyalty" recommended procedures for failing to follow the employer's policies and procedures related to termination policy. Members and candidates should understand and follow their employer's policies and operating procedures. Also, members and candidates planning to leave their current employer must continue to act in the employer's best interest.
Brian Williams is a portfolio manager with Santo Capital and works on the Banks Company's account. Santo has a policy against accepting gifts over $500 from clients. The Banks' portfolio has a fantastic year, and in appreciation, a Banks manager sends Williams a rare bottle of wine that he estimates is worth $300. Williams must:
inform his supervisor in writing that he received additional compensation in the form of the wine The Standards require that he inform his supervisor in writing about the gift.
according to Standard IV(A) loyalty to employer,..
it is the employee's duty to inform the employer about any type of outside consulting service, including duration and any compensation. Only after receiving permission from her employer, can she proceed.
Recommended procedures to comply with the Standard concerning priority of transactions are least likely to include
limited front-running by employees Standard VI(B) Priority of Transactions. Front-running is the purchase or sale of securities in advance of client trades to take advantage of knowledge of client activity and should be completely prohibited, not simply limited. Blackout periods and pre-clearance of employee trades are ways of accomplishing this.
Standard I(A), Knowledge of the Law requires
members who have knowledge of colleagues engaging in illegal activities to disassociate from the activity and urge their firms to persuade the individual to cease such activity. Reporting to regulatory authorities may be prudent in certain circumstances, but is not required. Reporting to CFA Institute is not required.
Ron Vasquez is registered to sit for the Level II CFA exam. Unfortunately, Vasquez has failed the exam the past two years. In his frustration, Vasquez posted the following comment on a popular internet bulletin board: "I believe that CFA Institute is intentionally limiting the number of charterholders in order to increase its cash flow by continuing to fail candidates. Just look at the pass rates." Which of the following statements regarding Vasquez's conduct is most accurate? Vasquez is
not in violation of Standard I(D) Misconduct or Standard VII(A) Conduct as Participants in CFA Institute Programs Standard VII(A) Conduct as Participants in CFA Institute Programs does not prohibit expressing opinions about the program or the CFA Institute. Thus, Vasquez is not in violation. Nothing in the facts indicates a violation of Standard I(D, Misconduct. Standard I(D) deals with professional conduct involving dishonesty, fraud, or deceit
Janine Walker is an individual investment advisor with 200 individual clients. When she first obtains a client, Walker solicits personal data that helps her formulate an investment recommendation, including tax status, income, expenditure needs, and risk tolerance. The Standards:
require Walker to update the data regularly
The provisions for each section of the Global Investment Performance Standards (GIPS) are divided between
requirements and recommendations must meet all requirements in order to claim compliance with the GIPS standards, and are encouraged to adopt and implement the recommendations
Paul Thomas, CFA, is designing a new layout for research reports his firm writes and issues on individual stocks. In his design, Thomas includes a stock chart on the first page of each report. He does not reference that the charts are copied from an unrecognizable Finance web site. Thomas has:
violated CFA Institute Standards of Professional Conduct because he did not state the source of the charts
Millie Walker, CFA, established an aggressive growth portfolio for her client, Jesse Wilmer, over three years ago. Wilmer was placed on Walker's employer's client mailing list, and received monthly account statements and the firm's newsletter, which regularly informed clients that they should contact their account representative with any change in their personal circumstances or investment objectives. As of January, of this year, Walker had not spoken to Wilmer nor received any correspondence from Wilmer since the account was established. Walker has: violated the Code and Standards because the manager has not performed an update of Wilmer's financial situation and investment objectives. not violated the Code and Standards because Wilmer has been reminded regularly about the opportunity to inform Walker about any changes. not violated the Code and Standards because there has been regular correspondence from Walker's firm to Wilmer.
violated the standards
A CFA Institute member conscientiously maintains records of changes in security regulations. The member notices that his colleagues do not, and does NOT say anything. Is this a violation of Standard I(A)? Yes, and the member should disassociate from these colleagues. Yes, because the member is bound by the Code of Ethics. No, as long as the colleagues do not violate the new rules.
yes, because the member is bound by the CoE. The last bullet point of the Code says that a member shall "Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals." Ignoring the neglect of rule changes of others would clearly be incongruent with this component. As long as the colleagues do not violate the laws, the member does not have to disassociate himself from the colleagues.
