Ethical and Professional Standards 【Reading 2】Sample industry, standards, regulatory, his

prashantsahni

Nicholas Brynne, CFA, is a fixed-income analyst who trades in mortgage-backed securities (MBS). The MBS industry has seen sweeping regulatory changes since Brynne took his current position, and he now feels his understanding of applicable laws and regulatory standards is dated. Brynne must:

A) update his understanding of applicable laws and regulatory standards relating to his position.

B) have all trades reviewed by his compliance department until he has obtained an expert level of knowledge in compliance.

C) rely on his firm’s policies and procedures for guidance on legal and regulatory standards.

---

See Standard I(A) "Knowledge of the Law." Brynne should update his understanding of applicable laws and regulatory standards relating to his position, although he is not required to be an expert in compliance. Relying only on firm policies and procedures is not sufficient.

prashantsahni

The CFA Institute Standards of Practice Handbook requires CFA Institute members to do all the following EXCEPT:

A) receive written permission from both their employer and outside clients to engage in investment consulting outside the firm.

B) to inform employer, clients, and potential clients of benefits received for recommending products or services.

C) to disclose in writing to the proper regulatory authority all observed violations of the securities laws and regulations.

---

Members are not required to report violations of others to regulatory authorities, either verbally or in writing, but such reporting may be prudent.

prashantsahni

WEB, an investment-banking firm, is the principal underwriter for MTEX's upcoming debenture issue. Wendy Berry, CFA, an analyst with WEB, has found out from an employee in MTEX's programming department that a serious glitch was recently discovered in the software program of their major new product line. In fact, the glitch is so bad that most of their orders have been canceled. Berry checked the debenture's prospectus and found no mention of this development. The red herring prospectus has already been distributed. Berry's best course of action is to:

A) notify potential investors of the omission on a fair and equitable basis.

B) inform her immediate supervisor at WEB of her discovery.

C) keep quiet since this is material non-public inside information.

---

Berry should report this information only to her immediate supervisor. Subsequently, she and her supervisor may consult with legal counsel concerning the competing issues in this situation. For the present, she should avoid disclosure to colleagues who do not need to know the information and she should also avoid disclosure to clients.

prashantsahni

Josh LeBlanc, a CFA charterholder, is an investment analyst for a small stock brokerage firm. He wants to acquire and maintain knowledge about applicable laws, rules, and regulations relating to his professional activities. According to the CFA Institute Standards of Professional Conduct, which of the following ways is least likely to meet compliance procedures?

A) Review written compliance procedures on a regular basis.

B) Rely on past practices followed within his firm.

C) Keep informed about changes in applicable laws, rules, and regulations.

---

LeBlanc should follow the compliance procedures under Standard IA -- Knowledge of the law. Relying on his firm’s past practices may be insufficient for LeBlanc to stay current with changes in applicable laws, rules, and regulations.

prashantsahni

Don Roberts, a CFA Institute member, resides in Country L, where the securities laws and regulations are less strict than the CFA Institute Code and Standards. Roberts also does business in Country N, which has no securities laws or regulations. Thus, Country N has no laws prohibiting the use of material nonpublic information. Roberts has clients in both Country L and N. Country L's law states that the law of the locality where business is conducted governs. According to CFA Institute Standards of Professional Conduct about the use of material nonpublic information, Roberts may:

A) take investment action based on this information for clients in both Country N and Country L and for himself.

B) not take investment action on the basis of this information.

C) take investment action based on this information only for his clients in Country N but not for his clients in Country L or himself.

---

Because applicable law states that the law of the locality where the business is conducted governs and local law is less strict than the Code and Standards, the member must adhere to the Code and Standards. Standard II(A) prohibits the use of material nonpublic information.

prashantsahni

According to the CFA Institute Standards of Professional Conduct, Standard I(A), Knowledge of the Law, members shall not knowingly participate or assist in any violations of laws, rules, or regulations. An analyst:

A) is held responsible for participating in illegal acts when the law is evident to anyone knowing the law and is held responsible for violations by others when the analyst is unaware of the facts giving rise to the violation.

B) must report all legal violations to the proper regulatory commission and is held responsible for participating in illegal acts when the law is evident to anyone knowing the law.

C) is held responsible for participating in illegal acts when the law is evident to anyone knowing the law and can participate in a violation by having knowledge of the violation and taking no action to stop it or disassociate from it.

---

If you suspect someone is planning or engaging in illegal activities, you should:

• Determine the legality of the activities. Consult your supervisor and legal counsel.
• Take appropriate action. Disassociate, attempt to persuade the perpetrator to stop. CFA Institute does not require you to report them to the authorities, but the law might.

prashantsahni

Deloris Johnson, CFA, suspected that her intern, who was working without pay at her brokerage firm, had violated a federal securities regulation. Johnson discussed the matter with her company's legal counsel who said that the intern's conduct was illegal. According to the CFA Institute Code and Standards of Professional Conduct, Johnson can dissociate herself from this illegal activity by:

A) reporting the activity to the appropriate authorities.

B) transferring supervision of the intern to another person.

C) telling her intern to stop such conduct.

---

Johnson can dissociate herself from the illegal activity by reporting the activity to the appropriate authorities. However, the Code and Standards do not require that she report legal violations to the appropriate governmental or regulatory organizations, but such disclose is prudent in this circumstance.
By transferring the intern to another supervisor this may not solve the problem of the illegal activity occurring and the company would still be held liable for it.

prashantsahni

Jane Dawson, CFA, an analyst at a New York brokerage firm, suspects that Bob Boatman, CFA, another analyst at the same firm, has violated a state securities law. According to the CFA Institute Standards of Professional Conduct, Dawson is:

A) required to report the suspected violation to CFA Institute.

B) NOT required to report the violation to the appropriate governmental or regulatory organizations.

C) required to report the suspected violation to the appropriate state regulatory agency.

---

The Code and Standards do not require that members report legal violations to the appropriate governmental or regulatory organizations, but such disclosure may be prudent in certain circumstances. Dawson should consult legal counsel and disassociate from the activity.

prashantsahni

If an analyst suspects a client or a colleague of planning or engaging in ongoing illegal activities, which of the statements about the actions that the analyst should take is most correct? According to the CFA Institute Standards of Professional Conduct, the analyst should:

A) disassociate from any illegal or unethical activity if the member has reasonable grounds to believe that the activity is illegal or unethical.

B) consult counsel to determine the legality of the activity.

C) consult counsel to determine the legality of the activity and disassociate from any illegal or unethical activity if the member has reasonable grounds to believe that the activity is illegal or unethical.

---

According to the procedures for compliance involving Standard I(A), CFA Institute members should determine legality and disassociate from any illegal or unethical activity.

prashantsahni

Bob Smith, CFA, is an outside board member of Atlantic Technologies, but is not paid by the firm for his services. An employee at Atlantic informs Smith that Atlantic has improperly timed the booking of contracts to achieve the desired quarterly financial results. The misleading financial statements would turn losses into profits. Smith confers with the firm's legal counsel who indicates that this conduct is, in fact, illegal. Smith urges Sharon White, Atlantic's chief operating executive, to change the financial statements, but she refuses to do so. According to CFA Institute Standards of Professional Conduct, which of the following statements best describes what Smith should do in this situation?

A) Smith should immediately make CFA Institute aware of the situation at Atlantic.

B) Smith should wait until the next board meeting, which is scheduled in two weeks, to make other board members aware of the situation.

C) Smith should promptly disassociate himself from Atlantic's actions by resigning as a director or by reporting the activities to the appropriate authorities.

---

Smith should disassociate from any illegal activity by resigning as a director or by reporting the activities to appropriate authorities. Inaction combined with continuing association with Atlantic's illegal conduct may be construed as participation, or assistance, in the illegal conduct.