What you want to know about ETHICS previous, helpful, course, errors, about

ramzes

Ok guys, by now many have read some of my posts. I hope they are helpful. I did see a previous error in my quant post. I miscalculated Root Mean Squared Error: RMSE, which is used for out-of-sample forecast error. I forgot that the denominator is simply n-k-1. Essentially, RMSE is the square root of MSE on the Anova table, which is the sum of squared errors (SSE) divided by n-k-1.
Ok, good. Onto ethics.
Last, you of course want to doublecheck my information for accuracy. I’m not omniscient, far from it actually.
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In Ethics, I’m going to list some of the concepts that I found were not intuitive. In other words, I think you’ll get the intuitive, common-sense concepts. However, I think these areas are more testable.

1(a) Knowledge of the Law - comply with the stricter law (Code & Standards vs local securities regulation), dissociate from violations and this can mean quitting your job, keep current on compliance laws via continuing ed., firms should develop a written Code of Ethics.
1(b)Independend & Objectivity - create a firmwide restricted list during quiet periods, corporate reimbursement for analyst air travel not permitted, limit use of corporate aircraft unless other transportation unavailable, limit gifts, strictly limit candidate and member IPO participation.
1(d)Misconduct - personal Bankruptcy not a violation unless circumstances involve fraud or deceit.
2(a)Material Nonpublic Info - an analyst conference call is NOT public dissemination of information, but a news conference IS. Remember the mosaic theory, if you figure out a potential acquisition because you’re just smart, good for you, just document it!
3(b)Fair Dealing - develop a written trade allocation policy for trades that don’t fill completely, disclose different levels of service (different levels of service are not a violation).
3(d)Performance Presentation - present the performance of the weighted composite of similar portfolios rather than a single account.
4(b)Additional Compensation Arrangements - get written consent for any gifts, benefits, etc that might compete with employer.
5(a)Diligence and Reasonable Basis - within group analyst research recommendations, a member should document a difference of opinion, relative to the research recommendation, with team members.
6(b)Priority of Transactions - do not participate in private placements, establish blackout and restricted periods, IPO participation should be pre-cleared even where there is no conflict of interest and no participation in over-subscribed IPOs or limited offerings.

These include principal trades (involving spreads/discounts) and agency trades (commission paid for trade).
Under the Safe Harbor theory, an investment manager can execute a trade with a broker who does not provide the lowest cost as long as the benefit is commensurate with the cost.
Mutual funds boards are the client when determining the benefits of brokerage for mutual fund managers.
Agency Trades - client brokerage CAN benefit other clients as long as, over time, that client receives a benefit from other client brokerage.
Principal Trades - as long as the trade is not subject to fiduciary recommendations (ERISA, etc.), client brokerage can benefit other clients with PRIOR consent from the said client.
*Client brokerage can be used to pay for services like the Bloomberg terminal as long as the client’s account receives a benefit from that service. Should be documented.

Research analysts must not be allowed to communicate to the researched firm anything other than factual information before the research report is published.
Employees and MEMBERS OF THEIR IMMEDIATE FAMILIES (defined as those living in the same primary residence) are prohibited from front-running, trading during blackout periods, restricted list trading, etc.

Old Man
-certain investments not allowed for trusts
-each investment must be prudent
-no delegation allowed
-investing in mutual funds is imprudent
New Investor
-diversification required
-investment decision made on RISK and RETURN analysis
-duty to avoid excessive fees, costs, etc.
-duty of impartiality requires balancing current income and growth
-duty to delegate if prudent

himanshumh

On page 144 of Ethics: Relationships with Clients, point 2 on principal trade brokerage (with no fiduciary requirements) states you must obtain written consent from the client to use principal trade brokerage to benefit other clients - THIS IS UNDER RECOMMENDED
But on the opposite page (145) under REQUIRED section point 4 the same paragraph is there under REQUIRED….so what is it!? Required or Recommended under the standards….?

kkn006

Thanks, David. Good insight.

Sunshine4ever

david young from sitko pacific, you are the man bro, thanks for the notes

bpdulog

Good summary…I’ll make a note of it.

cv4cfa

A couple points to refine here: For soft dollars only the portion that the client gets benefit from should be allocated to their brokerage, I.E. say the firm gets 80% the benefit from the terminal and 20% for client, client only gets charged 20%.
In your aircraft travel reimbursment not allowed, i don’t think that is correct. If the flights are unusual or difficult, I.E. take a charter flight, then hop a prop plain, then parachute into a jungle (ok i went too far on the last part), then they can reimburse you. Also they can pay for accomodations if it is MODEST and NECESSARY. Judgement is required here often.
For your prudent investor rule (new): diversification is not always required if it can be argued that it is prudent not to do so, and a VERY important point that is left out is that there is NO SINGLE INVESTMENT THAT IS TOO RISKY AND MUST BE AVOIDED, because the investment decision is based in the context of implications of the entire portfolio, not the asset as a standalone security.