Reading 2-IV: Standards of Professional Conduct & Guidanc 2011, following, examples, border

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Session 1: Ethical and Professional Standards
Reading 2-IV: Standards of Professional Conduct & Guidance: Duties to Employers

LOS C.: Responsibilities of Supervisors.

 

 

All of the following are poor examples of supervisory responsibility EXCEPT:

A) Incorporating a professional conduct evaluation as part of an employee’s performance review.

B) Proper supervision is not exercised because the supervisor's income is partially based on unsupervised or improper trading activity.

C) Poor procedures allow a portfolio manager to designate a trade to an account or portfolio after the outcome of the trade is known.

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According to Standard IV(C), supervisors must make reasonable efforts to detect and prevent violations of laws, rules, regulations, and the Code and Standards by anyone under their authority. Incorporating a professional conduct evaluation as part of an employee’s performance review is a recommended compliance procedure.

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Which of the following statements about Standard IV(C) Responsibilities of Supervisors is least accurate?

A) If a subordinate violates a securities law, her supervisor is in violation of Standard IV(C).

B) If the supervisor makes a reasonable effort to detect violations, but fails to detect a violation that occurs, she is in compliance with Standard IV(C).

C) If no effort is made to detect violations, the supervisor is in violation of Standard IV(C) even if no violations by her subordinates have occurred.

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Standard IV(C) Responsibilities of Supervisors requires members to make a reasonable effort to detect violations by their subordinates. Violations by subordinates do not necessarily mean the supervisor has violated this Standard.

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A manager has pointed out that his firm has experienced significant expansion over the past few years. Until recently, its Legal Department was responsible for the firm's compliance activities. Now, however, the legal and compliance functions have been separated. A compliance officer has been formally designated and a comprehensive compliance program has been put in place.

In order to function effectively, the compliance officer must have the authority:

A) to affect, control, and guide employee behavior and to respond to employee misconduct.

B) to hire and fire personnel.

C) which is consistent with the most senior partner or executive officer in the firm.

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Compliance officers must be able to guide employee behavior and respond to employee misconduct, otherwise there will be no effective compliance procedures in place. Unless the compliance officer can effectuate compliance procedures, the compliance program has no chance of responding to or preventing violations of the Standards.

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According to the CFA Institute Standards of Professional Conduct, which of the following statements about members with supervisory responsibility is NOT correct? Members with supervisory responsibility:

A) are relieved of their supervisory responsibility if they delegate their supervisory duties to other members of CFA Institute.

B) must make reasonable efforts to detect violation of laws, rules, regulations, and the Code and Standards.

C) are expected to have in-depth knowledge of the Code and Standards and to apply this knowledge in discharging their supervisory responsibilities.

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Although members who supervise large numbers of employees may delegate supervisory duties, such delegation does not relieve them of their supervisory responsibility.

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A firm recently hired Jill Taylor to be a managing supervisor in the firm. Taylor knows that all of her subordinate supervisors are members of CFA Institute and that they have a compliance system in place with respect to the Code and Standards. Under these conditions Taylor needs to:

A) neither of these choices.

B) rely on the current compliance system since the subordinate supervisors are subject to the Code and Standards.

C) review the compliance system for its adequacy.

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According to Standard IV(C), Responsibilities of Supervisors, Taylor must make reasonable efforts to detect violations of law, rules, regulations, and Code and Standards. This responsibility is not eliminated because the Taylor’s subordinates are CFA Charterholders. Taylor should review the compliance system and report any inadequacies to senior management.

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According to Standard IV(C), a CFA Institute member who is in a supervisory role must have which of the following?

A) Both of these.

B) A graduate degree.

C) An in-depth knowledge of the Code and Standards.

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The only requirement for a supervisor is an in-depth knowledge of the Code and Standards. Neither of the other choices are required.

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The following scenarios describe two members of CFA Institute who have supervisory responsibility.

• The president of Hawthorne Investments, a newly founded money management firm with five investment professionals, asked Rebecca Long, CFA, to be the company's compliance officer and to develop the company's compliance procedures. Long has an in-depth knowledge of the Code and Standards, but she was too busy to develop a compliance manual herself. Therefore, she copied, with written permission, the compliance manual of a large money management firm. This manual was comprehensive and covered many areas not part of Hawthorne's operations. Long gave the manual to Hawthorne's president, but did not distribute the contents of the program to other appropriate personnel.
• A co-worker at Barksdale Capital mentions to Stephen Luck, CFA, that George Trout, a candidate in the CFA Program, may have violated the CFA Institute standard involving priority of transactions. As Trout's supervisor, Luck decided to investigate this allegation but did not begin the investigation until a month after the alleged incident. Luck continued to maintain the same amount of supervision on Trout during the month before he began his investigation of Trout.

According to the CFA Institute Standards of Professional Conduct, which of the following statements about whether Long and Luck followed appropriate compliance procedures involving their responsibilities as supervisors is CORRECT?

A) Both Luck and Long violated the procedures for compliance.

B) Luck violated the procedures for compliance, but Long did not.

C) Neither Luck nor Long violated the procedures for compliance.

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Long violated the procedures for compliance involving her supervisory responsibility by not tailoring the compliance manual to Hawthorne's operations and by not distributing the contents of the program to appropriate personnel. Luck also violated the procedures for compliance by not responding promptly to the allegation that Trout violated the CFA Institute standard involving priority of transactions and by not increasing supervision on Trout pending the outcome of the investigation.

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Wanda Kirby, CFA, recently joined Allegheny Investments as a senior analyst. Because of her extensive experience in the investments business and knowledge of the Code and Standards, Allegheny's management asked her to assume supervisory responsibility. Kirby reviewed Allegheny's existing compliance system and determined that it was inadequate to allow her to clearly discharge her supervisory responsibility. According to CFA Institute Standards, Kirby should:

A) agree to accept supervisory responsibility provided that Allegheny adopts reasonable procedures to allow her to adequately exercise such responsibility.

B) decline in writing to accept supervisory responsibility until Allegheny adopts reasonable procedures to allow her to adequately exercise such responsibility.

C) agree to accept supervisory responsibility and to develop reasonable procedures to allow her to adequately exercise such responsibility.

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If Kirby clearly cannot discharge supervisory responsibilities because of an inadequate compliance system, she should decline in writing to accept supervisory responsibility until Allegheny adopts reasonable procedures to allow her to adequately exercise such responsibility.

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For years John Berger, a CFA charterholder and CEO of a company, relied upon a set of reasonable procedures for preventing violations of the Code and Standards of Professional Conduct in the firm. To not be liable for a violation of the Standards, Berger must:

A) both periodically review the procedures and ensure the procedures are monitored and enforced.

B) do nothing more than have the set of procedures in place as stated.

C) ensure the procedures are monitored and enforced.

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As a CEO, Berger is responsible for implementing and maintaining appropriate compliance procedures. He must also ensure the procedures are monitored and enforced.

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Which of the following statements about Standard IV(C), Responsibilities of Supervisors, is NOT correct? CFA Institute members with supervisory authority:

A) are expected to bring an inadequate compliance system to the attention of the firm's senior managers and recommend corrective action.

B) are expected to have in-depth knowledge of the Code and Standards and to apply this knowledge in discharging their supervisory responsibilities.

C) may delegate supervisory duties, which relieves them of their supervisory authority.

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Standard IV(C) permits members to delegate supervisory duties but such delegation does not relieve members of their supervisory responsibility.