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Concepts

Description

Ethics

Ethics and Trust in the Investment Profession
Ethics : a set of shared beliefs about what is good/acceptale behaviour, and what is bad/unacceptable behaviour

Code of ethics

Code of ethics : written set of moral principles that can guide behaviour by dexcribing what is considered acceptable behaviour
Profession : group of people with specialised skills and knowledge who serve others and agree to be have in accordance with a code of ethics
Role of code of ethics in defining a profession : a way to communicate to the public that its members will use their knowledfe and skills to serve their clients in an honest and ethical
manner
Code of ethics for members of CFA Institute :
- Act with integrity, competence, dilligence, respect and in ethical manner with the public, clients, employees, colleagues in the investment profession, and other participants in the
global capital markets
- Place the integrity of the investment professional and the interest of clients above their own personal interests
- Use reasonable care and exercise independent professional judgement when conducting investment analysis, making investment recommendations, taking investment actions, and
engaging in other professional activities
- Practice and encourage other to practice in a professional and ethical manner
- Promote the integrity and viability of the global capital markets for the benefit of society
- Maintain and improve their professional competence and other investment professionals

Challenge to ethical behaviour

- Individuals tend to overrate the ethical quality of their behaviour on a relative basis, and overemphasize the importance of their own personal traits in determining the ethical quality of
their behaviour
- Situational influences (loyal to employer, supervisor, organisation, etc
...
Investment advice and management are intangible products → trust
in investment professionals is very important
Consequence of ethical failure :
- Damage client wealth ; impede the success of investment firms and investment professionals
- Lack of trust in financial advisors → reduce funds entrusted to the financial advisors → ↑ cost of raising capital for
- Misallocation of capital → reduce the growth of the economy and the well-being of its people
Not all unethical actions are illegal, and vice versa
...
The framework is as follows:
- Identify : relevant facts, affected stakeholders and duties owed, ethical principles and conflict of interest among them
- Consider : Situational influences, additional guidance, alternative actions
- Decide and act
- Reflect : was the outcome as anticipated? why or why not?

Concepts

Description

1
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Knowledge of the law : understand and comply with all applicable laws, rules and regulations (must comply with the more strict law, rule and regulation)
2
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Client's gifts are acceptable, but must be disclosed to employer)
3
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Violations include :
- Do not cite the source of 3rd party researches, except from recognised financial and statistical reporting services
- Guarantee specific return on securities that have no explicit guarantee from government body or financial situation
- Select valuation service because it has the highest value on untraded security holding
- Select irrelevant performance benchmark
- Present performance data / attribution analysis that omits accounts or relevant variables
- Offer false / misleading info about capability of analyst or firm
- Using misleading 3rd party marketing materials
4
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Integrity of Capital market

1
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Market manipulation : Must not engage in practices that distort prices / artificially inflate trading volume with the intent to mislead market participants

3
...
Loyalty, prudence and care : have a duty of loyalty to clients, must act with reasonable care and exercise prudnet judgement
2
...

- Different service levels are acceptable
- Should not take advantage of their position in the industry to disadvantage clients
3
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This information must be reassessed and updated regularly
+ Determine that an investment is suitable to the client's financial situation, and consistent with the written objectives, mandates and constraints prior to making any investment
recommendation / taking investment action
+ Judge the suitability of investments in context of the client's total portfolio
- In managing a portfolio : only make recommendations / actions that are consistent with the stated objectives and constraints of the portfolio
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Performance presentation : must make reasonable efforst to ensure the investment performance communicated to client is fair, accurate and complete
5
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Duties to employers

1
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Not deprive their employer of the advantage of their skills, ability, divulge confidential information
...

2
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Responsibilities of supervisors : ensure anyone under supervision comply with applicable laws, rules, regulations and the Code of Standards

5
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Diligence and reasonable basis :
- Exercise diligence, independence, thoroughness in investment analysis, recommendation and actions
- Have reasonable, adequate, well-supported basis for any investment analysis, recommendation and actions
- List of factors need to be considered include:
+ Global and national econ conditions
+ Firm's financial result, operating history and cycle stage
+ Fees and historical result of funds
+ Limitations of any quantitative models used
+ Determination whether peer group comparisons for valuation are appropriate
2
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Record retention : maintain record to support investment analysis, recommendations and actions (minimum 7 years as in the Standard)

6
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Disclosure of Conflicts : must make full and fair diclosure all matters expected to affect the independence and objectivity, or affect their duties to clients and employer (e
...
: actual
ownership of stock that the member recommends or that client hold ; compensation/bonus structure)
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Priority of transactions : Priority of investment transactions for clients and employers > Priority of self-investment transactions
- Personal transactions could only br undertaken after client and employer have adequate opprtunity to act on a recommendation
- Family member accounts that are client accounts should be treated as any other client account
3
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Responsibilities as a CFA Institute 1
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Reference to CFA Institute : must not misrepresent / exaggerate the meaning or implications of membership of CFA Institute, holding CFA designition or candidacy in CFA program
- Sign the PCS annually
- Pay CFA Institute membership dues annually
- Do not misrepresent / exaggerate the meaning of CFA designation
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GIPS allows clients to more easily compare investment performance among investment firms and have
more confidence in reported performance

Composite

Composite : group of individual discretionary portfolios representing a similar investment strategy, objectives and mandates → give clinet informa on about the firm's result for various
types of securities / investment styles
* must include all fee-paying, current and past discretionary portfolios that the firms has managed in accordance with a particular strategy
* should identify which composite each portfolios belong to before knowing the performance

GIPS objectives

- obtain global acceptance of calculation and presentation standards in a fair, comparable format with full disclosure
- Ensure consistent, accurate investment performance data in reporting, records, marketing and presentations
- Promote fair competition among investment management firms without unnecessary entry barriers for new firms
- Promote self regulation

Key characters of GIPS Fundamentals of compliance

Comply with :
1
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Definition of the firm - Recommendation : include all geographical offices marketed under the same broad name
3
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Claim of compliance - requirements :
- Compliance statement used when GIPS requirements are met : "[Firm name] has prepared and presented this report in compliance with GIPS"
- No partial compliance
- No statements referring to calculation methodologies used in a composite presentation as "in accordance with GIPS"
- No statements referring to the performance of an individual, existing client as being "calculated in accordance with GIPS", unless reporting directly to the client
5
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Afted initial compliant performance
presentation, +1 year of compliant performance each year to minimum performance history of 10 years
* May present non-compliant periods immediately prior compliant periods if no non-compliant period is presented after 01/01/2000
...
compliant results

Key characters of GIPS - Input data Should be consistent → full, fair and comparable investment performance presenta on

Key characters of GIPS - Calculation Uniform calculation method is required → comparable results
methodology
Key characters of GIPS - Composite Composite returns - asset-weighted average of returns on the portfolios that are included in each composite
construction
Key characters of GIPS - Disclosure must disclose information about the presentation and policies adopted to make numbers presented in the report are understandable to the users

Key characters of GIPS Presentation and reporting

Investment performance : presented in accordance with GIPS requirements
Other firm-specific information not required by GIPS : should be included if appropriate

Key characters of GIPS - Real estate Certain provisions applied to all real estate investments, regardless of the level of control over management of the investment

Key characters of GIPS - Private
equity

Private equity investment : valuation according to GIPS private equity valuation principles (except open-end funds and evergreen funds)

Key characters of GIPS - Wrap fee / Some requirements and recommendations in Section 0 to 5 are supplemented/replaced by requirements in this section
Separately managed account (SMA)
portfolios



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