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d. Disclose to clients and prospects the basic format and general principles of the investment processes by which securities are selected and portfolios are constructed and shall promptly disclose to clients and prospects any changes that might significantly affect those processes.
Compliance: Know basic nature of your client; know objectives and constraints.
IV(B.3) Fair Dealing: Members shall deal fairly and objectively with all clients and prospects when disseminating investment recommendations, disseminating material changes in prior investment recommendations, and taking investment action.
Compliance:
1. Limit the number of people privy to recommendations and changes.
2. Shorten the time frame between initiation and dissemination.
3. Publish personnel guidelines for pre-dissemination.
4. Simultaneous dissemination.
5. Establish rules about employee trading activities.
6. Establish procedures for determining material changes.
7. Maintain a list of clients and their holdings.
8. Develop trade allocation procedures.
9. Make sure one account is not being used to bail out other accounts.
10.If the firm offers differing levels of service, this fact should be disclosed to all clients.
IV(B.4) Priority of Transactions: Clients and employers shall have priority over transactions in securities or other investments of which a member is the beneficial owner so that such personal transactions do not operate adversely to their clients' or employer's interests. If members make a recommendation regarding the purchase or sale of a security or other investment, they shall give their clients and employer adequate opportunity to act on the recommendation before acting on their own behalf.
Compliance:
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1. Define personal transactions.
2. Define covered investments.
3. Limit the number of access persons. “Fire Walls” should be built to prevent the flow of information from one group or department to other groups within the firm.
4. Define prohibited transactions. The text specifically mentions equity based IPOs.
5. Establish reporting procedures and prior-clearance requirements.
6. Ensure that procedures will be enforced and establish disciplinary procedures.
IV(B.5) Preservation of Confidentiality: Members shall preserve the confidentiality of information communicated by clients, prospects, or employers concerning matters within the scope of the client-member, prospect-member, or employer-member relationship unless the member receives information concerning illegal activities on the part of the client, prospect, or employer.
Compliance: The simplest and most effective way to comply is to avoid discussing any information received from a client except to colleagues working on the same project.
IV(B.6) Prohibition against Misrepresentation: Members shall not make any statements, orally or in writing that misrepresent:
a. the services that they or their firms are capable of performing.
b. their qualifications or the qualifications of their firm.
c. the member's academic or professional credentials.
Members shall not make or imply, orally or in writing, any assurances or guarantees regarding any investment except to communicate accurate information regarding the terms of the investment instrument and the issuer's obligations under the instrument.
Compliance: Firms can provide guidance to employees who make written or oral presentations to clients or prospects by providing a written list of the firm’s available services and a description of the firm’s qualifications.
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IV(B.7) Disclosure of Conflicts to Clients and Prospects: Members shall disclose to their clients and prospects all matters, including beneficial ownership of securities or other investments, that reasonably could be expected to impair the member's ability to make unbiased and objective recommendations.
Compliance: Members should report to their employers, clients, and prospects any material beneficial interest they may have in securities, corporate directorships, or other special relationships they may have with the companies they are recommending. Members should make the disclosures before they make any recommendations or take any investment actions regarding these investments.
IV(B.8) Disclosure of Referral Fees: 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.
Compliance:
1. Disclose all agreements in writing to any client or prospect who has been referred.
2. Describe in the disclosure the nature of the consideration and the estimated dollar value of the consideration.
3. Consult a supervisor and legal counsel concerning any prospective arrangement regarding referral fees.
2-V.: Standards of Professional Conduct: V. Relationships with and Responsibilities to the Investing Public
A.: Prohibition against Use of Material Nonpublic Information
Standard: Members who possess material nonpublic information related to the value of a security shall not trade or cause others to trade in that security if such trading would breach a duty or if the information was misappropriated or relates to a tender offer. If members receive material nonpublic information in confidence, they shall not breach that confidence by trading or causing others to trade in securities to which such information relates. Members shall make reasonable efforts to achieve public dissemination of material nonpublic information disclosed in breach of a duty.
Compliance: Fire walls, minimum elements are:
1. Control over interdepartmental communications.
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2. Review employee trading against restricted lists.
3. Restrict proprietary trading while the firm is in possession of material nonpublic information.
Additional procedures:
1. Restrict personal and proprietary employee trading.
2. Place securities on a restricted list when the firm has material nonpublic information.
3. Disseminate material nonpublic information only to those with a need to know.
4. Designate a supervisor who decides when trading is appropriate.
B.: Performance presentation
Standard:
1. Members shall not make any statements, orally or in writing, that misrepresent the investment performance that they or their firms have accomplished or can reasonably be expected to achieve.
2. If members communicate individual or firm performance information directly or indirectly to clients or prospective clients, or in a manner intended to be received by clients or prospective clients, members shall make every reasonable effort to assure that such performance information is a fair, accurate, and complete presentation of such performance.
Compliance: Misrepresentation about the investment performance of the firm can be avoided if the member maintains data about the firm’s investment performance in written form. Investment accounts should be combined into composites by investment class and risk groups.
3: Standards of Practice Handbook
a: Demonstrate a thorough knowledge of the Standards of Professional Conduct by recognizing and applying the Standards to specific situations.
This is an application of many different ethics concepts to different scenarios. After having learned the ethics material in earlier learning outcomes you will be able to apply these concepts to various scenarios as you take the quizzes.
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