UK Regulation & Ethics Flashcards

What is the CFA Institute Code of Ethics' first principle?

Answer: Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues, and other participants in the global capital markets

The first principle of the CFA Code of Ethics is to act with integrity, competence, diligence, and respect in all professional interactions. It establishes the foundational ethical character expected of CFA charterholders and candidates in their relationships with all stakeholders.

In investment ethics, what is the 'prudent investor' standard?

Answer: The obligation to invest with the care, skill, prudence, and diligence of a knowledgeable person seeking to meet beneficiaries' needs, considering the entire portfolio context

The prudent investor standard requires fiduciaries to invest and manage assets as a knowledgeable person would, considering risk tolerance, return objectives, liquidity needs, time horizon, and tax implications. It evaluates decisions in portfolio context, not in isolation.

What does 'fair dealing' require in the CFA Standards of Professional Conduct?

Answer: Treating all clients fairly when disseminating investment recommendations or taking investment actions, without discrimination

Standard III(B) Fair Dealing requires that investment professionals deal fairly and objectively with all clients when providing investment analysis, recommendations, or taking investment actions. Clients need not be treated identically, but cannot be systematically disadvantaged relative to others.

What is 'front-running' and why is it prohibited?

Answer: Trading in a security for the manager's own account ahead of executing a client's pending order in the same security, to benefit from the anticipated price impact of the client trade

Front-running involves a manager (or firm) trading for their own account knowing that a large client order is about to be placed, anticipating the price impact of that order. It exploits the client's order for personal gain, breaching fiduciary duty and constituting a form of market manipulation.

What is the duty of 'loyalty, prudence, and care' in investment management ethics?

Answer: Acting solely in the best interests of clients (loyalty), managing portfolios with the care of a prudent professional (prudence), and exercising diligence and thoroughness (care)

Standard III(A) Loyalty, Prudence, and Care requires investment professionals to act in clients' best interests, exercise appropriate care in investment decisions and due diligence, manage portfolio assets for the sole benefit of clients and not for personal gain or employer benefit at clients' expense.

What is 'soft commissions' (soft dollars) and why do they raise ethical concerns?

Answer: Arrangements where a manager directs client brokerage business to a broker in exchange for research or other services rather than the lowest available commission rate

Soft commissions involve paying higher-than-minimum brokerage commissions to receive research or other services in return. They raise ethical concerns because the cost is borne by clients (through higher transaction costs) while the benefit (research) accrues to the manager, potentially creating a conflict of interest.