R1 Ethics and Trust in the Investment Profession 01
Reading 1 - Ethics and Trust in the Investment Profession
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1. ethics describes a system of principles, beliefs,
and values that guide (or society believes
should guide) behavior
2. principles fundamental truths that form the basis for a
chain of reasoning leading to beliefs about
cause and effect and the way things should
and shouldn't be
3. ethical develop over time to guide our
principles understanding of required, acceptable, or
exemplary behavior
4. code of ethics an established guide that communicates an
organization's values and overall
expectations regarding member behavior; a
code of ethics serves as a general guide
for how community members should act
5. standards of minimally acceptable behaviors required
conduct by a group; established benchmarks that
clarify or enhance a group's code of ethics
6. rules-based category of standards of conduct that
standards apply to specific groups in specific
circumstances
7. principles- category of standards of conduct that
based apply to all members regardless of
standards situation
8. Standards of the combination of the CFA Institutes' Code
Practice of Ethics and Standards of Professional
Handbook Conduct (Code and Standards) that all
members and candidates agree to follow
9. profession a group that agrees to a common code of
ethics in serving others by using their
specialized knowledge and skills
10. customer vs while a customer simply purchases goods
client and services from a provider that the
customer may or may not completely trust,
a client usually has an ongoing fee-based
relationship with a trusted professional
11. biases the undue weight on a particular part of
the investment making decision that leads
to poor decisions and poor judgment
12. overconfidence bias that can lead one to believe their
bias ethical treatment of a client is superior
relative to the industry; as a result,
decisions may not be fully considered and
clients are treated at a less than desirable
standard
13. situational influences that arise from external rather
influences than internal inputs; generally are social,
cultural, and environmental factors that
impact our behavior and decision making,
both positively and negatively
14. bystander the situational influence that represents a
effect failure to offer help to someone when others
are nearby and not helping; points to the
tendency of people to bend the rules more
often when they believe nobody is looking,
while behave more ethically when a mirror is
placed close to them or they believe
someone is watching
15. strong can become a situational influence if ensuring
compliance compliance becomes the focus rather than
culture considering the larger picture of potential
ethical violations; these are cases that result in
leaders asking, "What can I do?" rather than
"What should I do?"
16. capital matches those who provide capital (i.e.,
markets investors, who each have specific required
mechanism returns, risk tolerance, time horizon, etc) with
those who use capital (i.e., borrowers, who
have various projects, each with a specific
projected return and risk of that return being
realized)
17. trust required amongst market participants
(investors and borrowers) in order to achieve
broad participation in the financial system,
which is necessary to attract the level of
capital required to optimize current levels of
economic activity as well as to provide
infrastructure for future growth; without this,
capital will not flow smoothy and the result
will be a suboptimal economy
18. types of specific to the financial system and requiring
trust high ethical standards by capital markets,
these are (1) the client-advisor relationship, (2)
information and knowledge asymmetries, and
(3) intangibility of investment products and
services
19. client- the dependency of clients on their financial
advisor advisors to maintain and grow their financial
relationship assets; failure to do so will lead to loss of
confidence and trust, and ultimately a loss of
clients for the firm
20. information the advantage created by advisors having
and superior knowledge and information than their
knowledge clients; it results in clients having to trust that
asymmetries advisors will use their information and
knowledge advantage in the clients' best
interest
 R1 Ethics and Trust in the Investment Profession 02

21. intangibility the reality that investment products and 27. stage three decide and act, then reflect; once an ethical
of services cannot be directly experienced with and four of decision has been made and implemented,
investment the senses, which forces investors to rely on ethical reflection on whether the outcome met
products what their advisors have told them about an decision expectations or if there were unintended
and investment and its performance rather than making outcomes or tangential consequences; it is a
services experiencing it firsthand; investors must trust critical decision-making step because it
that the information they receive, before and informs future decisions and the degree to
after the investment, is accurate, complete, and which one may need to rely on external
fair guidance to make better decisions
22. costs of type of behavior that will soon attract 28. investment clients and the investing public (i.e., investors
unethical regulatory scrutiny in most jurisdictions, which industry and/or borrowers), members and candidates
behavior in then leads to increased compliance costs, stakeholders and their employers (i.e., intermediaries), legal
capital legal fees, and possible penalties, while also and regulatory authorities, and the industry
markets damaging the firm's reputation of and society in general, all whom ethical
trustworthiness leading to massive losses of behavior seeks to benefit
assets under management (AUM) on which it
29. external act of seeking guidance (in the consideration
receives fee-based compensation; this can also
ethical stage of ethical decision making) from those
lead to diminished reputation of capital
guidance not affected by the same situational influences
markets as a whole by its participants and
or other biases, while also avoiding unethical
investors demanding greater returns to
or illegal behavior in doing so (such as rules
compensate for the additional perceived risk,
or laws against information sharing); guidance
which lowers investment and levels of
may come from (1) CFA Institute Code and
economic activity, and the advisor labor force
Standards, (2) company policies, (3) family
may be reduced as firms struggle to compete,
members, (4) mentors, (5) the company
and even those unconnected with the unethical
compliance department, or (6) outside legal
behavior may even have to close their doors,
counsel
further extending the economic consequences
23. establishing although a code of ethics should set the tone
ethical for ethical decision making within an
culture organization, it is senior executive behavior
that provides important cues that reinforce an
ethical or unethical culture
24. steps in (1) identify, (2) consider, (3) decide and act, and
making (4) reflect
ethical
decisions
25. stage one identify; requires identifying any relevant facts
of ethical specific to the situation, ethical and legal
decision obligations to stakeholders, and potential
making conflicts of interest among stakeholders that
are sensitive and perhaps difficult to reconcile
26. stage two consider; requires considering alternative
of ethical decisions and their potential outcomes as not
decision all outcomes may be optimal for all
making stakeholders, which leads to potential conflicts
of interest and consequences of stakeholder
dissatisfaction that should be considered;
involves considering potential alternatives,
situational influences, and guidance external to
the situation