IMC UK Regulation & Ethics 4 — Questions and Answers
Question 1: What is the CFA Institute Code of Ethics' first principle?
- 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 (Correct answer)
- Maximise returns for clients at all times
- Always disclose conflicts of interest immediately
- Place client interests ahead of employer interests in all circumstances
Correct 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.
Question 2: In investment ethics, what is the 'prudent investor' standard?
- The requirement to invest only in government securities
- 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 (Correct answer)
- The requirement to achieve positive returns in all market conditions
- The standard of always investing in line with the benchmark
Correct 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.
Question 3: What does 'fair dealing' require in the CFA Standards of Professional Conduct?
- Charging identical fees to all clients
- Treating all clients fairly when disseminating investment recommendations or taking investment actions, without discrimination (Correct answer)
- Ensuring all clients receive exactly equal investment allocations
- Matching all trades at the same price for all clients
Correct 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.
Question 4: What is 'front-running' and why is it prohibited?
- Executing client orders before the market opens
- 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 (Correct answer)
- Being the first firm to market a new product
- Submitting orders at the start of the trading day
Correct 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.
Question 5: What is the duty of 'loyalty, prudence, and care' in investment management ethics?
- Loyalty to the employer, prudence in expenses, and care in record-keeping
- 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) (Correct answer)
- Loyalty to the regulator, prudence in leveraging, and care in documentation
- Loyalty to shareholders, prudence in dividend policy, and care in accounting
Correct 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.
Question 6: What is 'soft commissions' (soft dollars) and why do they raise ethical concerns?
- Commission payments made in currency other than sterling
- 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 (Correct answer)
- Commissions paid slowly over an extended period
- Reduced commission rates for high-volume traders
Correct 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.
IMC UK Regulation & Ethics 4
What is the CFA Institute Code of Ethics' first principle?