Ethical and Professional Standards 【Reading 5】 investor, corporate, accounting

kim226

Marc Feldman, CFA, is manager of corporate investor relations for a high-tech startup, zippy.com, in Boise, Idaho. Feldman learns that Larry Smith, controller, is altering the accounting records. Knowing the data is incorrect, Feldman releases Smith's financial data to investors. This action:

A) constitutes a violation of the Standard concerning duty to employer.

B) constitutes a violation of his fundamental responsibilities under the Code and Standards.

C) constitutes a violation of Standard III(D) concerning performance presentation.

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As a CFA Institute member, Feldman is bound, under Standard I(A), not to "knowingly participate or assist in any violation of such laws, rules, or regulations." Since it should be clear that releasing bogus financial information is in contravention of laws, rules, and regulations, and since he knows that the data is purposely distorted, he must not release the data to the public. Doing so places him in violation of the Code and Standards.

kim226

Kimberly Olson has recently become a CFA charterholder, and has just started a new job at Securities Online as a junior analyst. After preparing her first research report, Olson decides to consult with one of the senior analysts who make minor corrections to improve the content of the report. Olson makes changes to the report according to the senior analyst. Upon presentation of the report, Olson finds that statements made by the senior analyst contained incorrect information. Which of the following statements is CORRECT?

A) Olson did not need to check the additional comments.

B) Olson should have checked the accuracy of the comments.

C) If Olson attributes those comments to the senior analyst, she cannot be held responsible for incorrect information.

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It is the responsibility of the analyst to confirm that information provided is accurate. The fact that the person editing the report is a senior analyst is irrelevant.

kim226

All of the following would be effective components of a formal compliance system EXCEPT:

A) seminars and conferences may be paid for using soft dollars only if the activity qualifies as research.

B) allocation of trades should first be to certain large client accounts with similar investment objectives and constraints and then to other suitable client accounts.

C) the firm should disclose any soft-dollar arrangements to clients.

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Standard III(B) – Fair Dealing requires that members treat all clients and prospects fairly when taking investment action. Giving priority to certain large accounts violates Standard III(B). An appropriate statement complying with the standard would be: “Allocation of trades shall be on a fair and equitable basis for all portfolios with similar investment objectives and constraints.”

kim226

All of the following would be effective components of a formal compliance system EXCEPT:

A) managers and brokers should pay careful attention to risk tolerance in determining an appropriate investment policy statement for each client.

B) employees who receive material nonpublic information should communicate that information to the company's compliance officer without discussing the information with co-workers.

C) members with supervisory responsibility can rely on the compliance manual and the compliance department to prevent and detect violations.

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Standard IV(C) – Responsibilities of Supervisors states that members with supervisory responsibility must make reasonable efforts to detect violations of laws, rules, regulations, and the Code and Standards. Once a compliance program is in place, supervisors should take such actions as reviewing the compliance material with employees personally, periodically updating procedures, reviewing the actions of employees to ensure compliance and identify violators, and take the necessary steps to enforce the procedures once a violation has occurred.

kim226

Kenny Barrett, CFA, is working in the Australian office of American Investments Co. From an informal conversation, Barrett learns that the company’s most recent investment report was based on misappropriated information. No one at the Australian office expresses concern, however, because there has been no breach of Australian law. Barrett should:

A) do nothing because the branch is outside of U.S. jurisdiction.

B) seek advice from company counsel to determine appropriate action.

C) disassociate himself from the case with a written report to his supervisor.

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Kenny’s best choice is to seek the company counsel’s advice. If Kenny does nothing, he is breaching Standard I(A) Knowledge of the Law. Disassociation is not enough.

kim226

While copying some of her research materials at work, Mary Jones comes across a few incomplete research notes written by one of her colleagues. As a result of reading the notes, and without further review, Jones immediately changes one of her stock recommendations from sell to buy. Which of the following CFA Institute Standards has Jones violated?

A) Standard V(A), Diligence and Reasonable Basis.

B) Standard III(A), Loyalty, Prudence, and Care.

C) Standard I(B), Independence and Objectivity.

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Jones has violated Standard V(A) by failing to exercise diligence and thoroughness.

kim226

Futura Investments Co. decides to diversify its current portfolio with stocks from three companies in a new segment of the biotechnology industry. William Burgin, CFA, is an analyst at Futura and had previously bought shares of the same three companies for his own portfolio, well before his employer started researching them. Burgin has already disclosed the composition of his personal portfolio to Futura Investments, to be in compliance with the Code & the Standards. Which of the following actions should Burgin take?

A) Hire a full discretionary power or blind trust manager for his portfolio.

B) Diversify his personal portfolio so, in this way, these stocks will no longer represent a substantial portion of the portfolio.

C) Open an account that will be managed by someone else but will allow him to maintain his investment preferences.

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Burgin followed Standard VI(A) and informed his employer about the potential conflict of interest. He needs to follow the CFA Institute Standards in the best interest of his employer. To prevent any future problems with conflict of interest, his best option is to discontinue the active management of his personal portfolio and use a blind trust.

kim226

Williams and Fudd is a major London-based brokerage and investment banking firm. Heritage Group, a money management firm, is the first, second, or third largest holder of each of the securities listed on Williams & Fudd's "PrimeShare #10" equity security list.On Tuesday morning, August 22, Williams & Fudd released a research report recommending the purchase of Skelmerdale Industries to the public and to its clients. On Wednesday afternoon, August 23, Heritage Group bought 1.5 million shares of Skelmerdale. This action is:

A) a violation of the Standard concerning fair dealing.

B) a violation of the Standard concerning disclosure of conflicts.

C) in accordance with the CFA Institute Code and Standards.

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These actions are in accordance with both Standards III(B), Fair Dealing, and VI(B), Priority of Transactions. There is no violation.

kim226

Marc Feldman, CFA, is manager of corporate investor relations for a high-tech startup, zippy.com, in Boise, Idaho. Feldman is well-known in the high tech community in Boise, and Dragon.com has asked if he will help them organize their investor relations function on a consulting basis. They offer him an all-expenses-paid two-week holiday for two on Australia's Gold Coast in payment. Regarding this offer as a CFA Institute member Feldman is:

A) allowed to accept the offer only with written approval from zippy and from Dragon.

B) allowed to accept the offer only with written approval from zippy.

C) not allowed to accept such an offer since it effectively places him in competition with his employer.

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Under Standard IV(A) Loyalty to Employer, and Standard IV(B) Additional Compensation Arrangements, Feldman is allowed to accept the offer, but only with written permission from both zippy and Dragon.

kim226

Adam Core, CFA, is a supervisor at a brokerage firm. Recently he discovered a complicated mechanism that brokers are using to obtain referrals of new clients in exchange for reduced commissions and other benefits to existing clients. The new clients are not aware of this practice. Core consults with compliance counsel and initiates an investigation. Which of the following actions violates CFA Institute Standards?

A) Core starts collecting information and records on the case, as well as interviewing all involved employees. He decides against immediate limitations on their work, to insure the work of the company will continue undisturbed.

B) Core makes sure that everybody in the company has a copy of the CFA Institute Code and Standards and a copy of the internal compliance system. He starts organizing special seminars on compliance with CFA Institute requirements.

C) Core's first goal is to identify all violators.

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Given the possibility of a violation, Core must impose limitations on the normal activities of the suspected employees until the investigation is complete, as explained in Standard IV(C), Responsibilities of Supervisor.