89. Investment Ethics: Standards and Conduct

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Questions and Answers

Which of the following statements about a code of ethics is most accurate? A code of ethics:

  • must include principles-based standards of conduct.
  • must include rules-based standards of conduct.
  • does not need to include standards of conduct. (correct)

Which of the following statements about legal and ethical standards is most accurate?

  • Legal standards are a subset of ethical standards.
  • Ethical standards are a subset of legal standards.
  • Ethical and legal standards often intersect, but not always. (correct)

A requirement that investment professionals act in the best interests of their clients is a:

  • fair dealing standard.
  • fiduciary standard. (correct)
  • suitability standard.

A framework for ethical decision making is most appropriately applied to:

<p>aid decision makers in considering alternatives and their potential impacts. (C)</p> Signup and view all the answers

A requirement that investment professionals recommend securities that match their clients' requirements and constraints is a:

<p>suitability standard. (B)</p> Signup and view all the answers

Unethical behavior by individuals in the investment industry is most likely to:

<p>decrease the rate of economic growth. (A)</p> Signup and view all the answers

Standards of conduct are most accurately described as:

<p>giving members of a group a minimum level of acceptable behavior. (C)</p> Signup and view all the answers

Unethical behavior by a financial professional harms:

<p>clients, other employees, and society. (C)</p> Signup and view all the answers

Unethical behavior by financial professionals:

<p>increases risk and the cost of capital. (C)</p> Signup and view all the answers

Ethics are most accurately defined as:

<p>the study of moral principles. (A)</p> Signup and view all the answers

Ethics least likely refers to:

<p>a person's beliefs about right and wrong behavior. (C)</p> Signup and view all the answers

CFA Institute Standards of Professional Conduct are most accurately described as being based on:

<p>a code of ethics. (B)</p> Signup and view all the answers

Which of the following statements about legal and ethical standards is most accurate?

<p>Some illegal acts are considered ethical. (C)</p> Signup and view all the answers

Which of the following best describes elements of a framework for ethical decision making?

<p>Identify relevant facts; consider influences and alternatives; decide and act; reflect on outcomes. (B)</p> Signup and view all the answers

A code of ethics:

<p>may be rules-based or principles-based. (C)</p> Signup and view all the answers

Establishing standards of ethical behavior and monitoring professional conduct are best described as ways that professions:

<p>establish trust. (B)</p> Signup and view all the answers

A profession is most accurately described as an occupational group that requires its members to:

<p>have specialized expert knowledge. (A)</p> Signup and view all the answers

Challenges to ethical behavior are most likely to arise from:

<p>situational influences. (A)</p> Signup and view all the answers

An ethical decision-making framework:

<p>considers alternative actions and unintended consequences. (B)</p> Signup and view all the answers

Which of the following characteristics distinguishes a profession from an occupation? Members of a profession:

<p>abide by a code of ethics. (A)</p> Signup and view all the answers

Flashcards

Code of Ethics Standards

A code of ethics may include standards of conduct, but does not require them.

Ethical vs. Legal Standards

Ethical and legal standards often intersect but aren't subsets of each other; some legal actions may be unethical, and vice versa.

Fiduciary Standard

A fiduciary standard requires professionals to act in the best interests of their clients, using their expertise.

Ethical Decision-Making Framework

Framework helps decision-makers consider alternatives and their stakeholder impacts.

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Suitability Standard

Referring to matching client return requirements and risk tolerances with the characteristics of the securities recommended.

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Impact of Unethical Behavior

It can divert capital from its highest-valued uses, decreasing the growth rate of the economy and discouraging potential clients from using financial services.

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Standards of Conduct

Giving members of a group a minimum level of acceptable behavior.

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Harm from unethical behavior?

Can harm clients, other financial services employees, and society by increasing the perceived risk of investing, increasing the cost of capital, and affecting the allocation of capital for the entire economy.

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Definition of Ethics

Ethics refers to the study of moral principles.

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CFA Institute Standards Basis

Based on principles stated in the CFA Institute Code of Ethics.

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Legality vs. Ethicality

Some illegal acts, such as acts of civil disobedience, are considered ethical by many people. All unethical behavior is not necessarily illegal.

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Challenges to Ethical Behavior

Situational influences, which are factors external to a decision maker, are the most likely source of challenges to ethical behavior.

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Defining Profession

One of the defining characteristics of a profession according to the Level I CFA curriculum is that its members agree to abide by a common code of ethics.

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Study Notes

Code of Ethics

  • A code of ethics may optionally include standards of conduct
  • Ethical and legal standards frequently overlap, but not always.
  • Actions that are legal may be unethical, and vice versa.

Fiduciary Standard

  • A fiduciary standard requires investment professionals to use their expertise to serve clients' best interests.

Ethical Decision-Making Framework

  • An ethical decision-making framework aids decision makers by considering options and their effects on stakeholders.

Suitability Standard

  • A suitability standard involves recommending securities that align with a client's needs, return expectations, and risk tolerance.

Unethical behavior

  • Unethical conduct in the investment sector can divert capital from its most productive uses, slowing economic growth
  • Over time, unethical actions reduce financial service firms' profits by deterring potential clients.
  • Distrust in the investment industry causes savers and investors to reduce capital supply and demand higher returns, which raises the cost of capital for businesses.

Standards of Conduct

  • Standards of conduct specify minimum levels of expected behavior in various situations
  • A code of ethics communicates the values and expectations for professional behavior
  • Standards of conduct are not a required component of code of ethics

Harm from unethical behaviour

  • Unethical behavior harms clients, employees, and society by decreasing trust in the financial services profession
  • It also increases investment risk, raises capital costs, and distorts capital allocation across the economy.

How unethical behavior affects capital

  • Unethical behavior escalates risks and capital expenses
  • In the long term, unethical conduct diminishes public confidence and reliance on financial experts, which reduces their earnings.
  • Unethical actions, can negatively impact how financial capital is allocated.

Ethics

  • Ethics refers to the study of moral principles
  • Ethics is broader than specific beliefs or written rules

CFA curriculum

  • Within the Level I CFA curriculum, an individual's beliefs do not constitute ethics
  • Ethics can be defined as accepted good and bad behavior principles, including the study of them.

CFA Institute Standards

  • CFA Institute Standards of Professional Conduct are based on the CFA Institute Code of Ethics
  • Some illegal acts, like civil disobedience, can be considered ethical by some.
  • Not all unethical behavior is necessarily illegal.

Framework for ethical decision-making

  • An ethical decision-making framework includes identifying facts, stakeholders, ethical principles and conflicts of interest
  • Consider alternative actions, situational influences, and the need for additional guidance
  • Decide and act and reflect on outcomes.

Features of code of ethics

  • A code of ethics can be rules-based or principles-based
  • A code of ethics does not ensure total compliance
  • A group adhering to a code of ethics can, however, present a positive image to clients.

Profession's trust

  • Professions build trust by setting high standards for expertise, knowledge, and skill
  • By establishing standards of ethical behavior, monitoring conduct, promoting continuing education, focusing on clients' needs, and providing mentorship.

Profession definition

  • A profession needs members with specialized knowledge
  • A profession often focuses on ethical behavior and service to the wider community/society
  • Professions require members to put clients first or serve the wider community, these aren't what defines a profession however

Challenges to ethical behavior

  • Challenges to ethical behavior most often arise from situational influences (external factors)

Ethical decision-making framework

  • An ethical decision-making framework is designed to consider alternative actions and any potential unintended consequences.

Profession

  • One characteristic that differentiates a profession from an occupation is the agreement to adhere to a code of ethics.

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