Reading 2-I: Standards of Professional Conduct & Guidan

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Which of the following is a CORRECT statement of a member's duty under the Code and Standards?

A) A member is required to comply only with applicable local laws, rules, regulations, or customs even though the CFA Institute code and Standards may impose a higher degree of responsibility or a higher duty on the member.

B) A member who trades securities in a foreign securities market where no applicable local laws or stock exchange rules regulate the use of material nonpublic information may take investment action based on this information.

C) In the absence of specific applicable law or other regulatory requirements, the Code and Standards govern the member's actions.

D) A member who trades securities in a country with less strict laws, rules, regulations, or customs may follow those laws if he discloses this information to his client.

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Answer and Explanation

Members are always, at a minimum, subject to the Code and Standards.

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CFA Institute Area 1-2: Ethical and Professional Standards
Session 1: Code of Ethics and Professional Standards
Reading 2-I: Standards of Professional Conduct & Guidance: Professionalism
LOS A.: Knowledge of the Law.

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Mega Securities, a multinational investment advisor based in the United States, employs the following analysts who practice in multiple jurisdictions.

• Melissa Black, CFA, resides in Country N, which has no securities laws or regulations, but does business in Country L, which has securities laws and regulations that are less strict than the Code and Standards.
• Tom White, a CFA Institute member, resides in Country L, but does business in Country S, which has securities laws and regulations that are stricter than the Code and Standards.

According to the CFA Institute Code and Standards, which of the following statements about Black and White is TRUE?

Black must adhere to the:

White must adhere to the

A) law of Country N law of Country L

B) law of Country L law of Country S

C) Code and Standards law of Country S

D) law of Country L Code and Standards

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Answer and Explanation

Because the applicable law in Country L is less strict than the Code and Standards, Black must adhere to the Code and Standards. Because the applicable law is stricter than the Code and Standards, White must adhere to the more strict applicable law of Country S.

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Robe Advisory Services operates an office in San Francisco, where it manages portfolios for its clients based in the United States. The firm also maintains an office in Tokyo, where it employs Sam Lee, CFA, who researches Japanese stocks. Lee is required to maintain knowledge of and comply with all applicable laws, rules, and regulations in:

A) both the U.S. and Japan and the CFA Institute Standards of Professional Conduct.

B) both the U.S. and Japan, but not the CFA Institute Standards of Professional Conduct.

C) the U.S., but not Japan, and the CFA Institute Standards of Professional Conduct.

D) Japan, but not the U.S., and the CFA Institute Standards of Professional Conduct.

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Answer and Explanation

Members who work for foreign-based firms are required to apply the stricter of the foreign (here, U.S.) law, the domestic (here, Japanese) law, or CFA Institute standards.

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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) 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.

B) is held responsible for violations by others when the analyst is unaware of the facts giving rise to the violation.

C) 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.

D) 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.

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Answer and Explanation

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

1. Determine the legality of the activities. Consult your supervisor and legal counsel.
2. 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.

1. Determine the legality of the activities. Consult your supervisor and legal counsel.
2. 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.

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

1. Determine the legality of the activities. Consult your supervisor and legal counsel.
2. 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.

1. Determine the legality of the activities. Consult your supervisor and legal counsel.
2. 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.

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Janet Green, CFA, provides investment advice and other services to clients in several countries. She resides in Country A whose securities laws and regulations are less strict than the Code and Standards. She also conducts business with clients in Country B, which has no securities laws or regulations, and in Country C, which has securities laws and regulations that are stricter than the Code and Standards. Which of the following statements is TRUE? According to CFA Institute Standards of Professional Conduct, Green must adhere to the Code and Standards in:

A) Country A and Country B but the law in Country C.

B) Country A but the law in Country B and Country C.

C) Country B but the law in Country A and Country C.

D) Country A, Country B, and Country C.

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Answer and Explanation

Green needs to follow Standard I(A) -- Knowledge of the law. In Country A, Green must adhere to the Code and Standards because Country As laws are less strict. In Country B, Green must also adheres to the Code and Standards because Country B has no securities laws. Because Country Cs applicable law is stricter than the requirements of the Code and Standards, Green must adhere to the laws of Country C.

Green needs to follow Standard I(A) -- Knowledge of the law. In Country A, Green must adhere to the Code and Standards because Country As laws are less strict. In Country B, Green must also adheres to the Code and Standards because Country B has no securities laws. Because Country Cs applicable law is stricter than the requirements of the Code and Standards, Green must adhere to the laws of Country C.

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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) Maintain current files on applicable statues, rules, and regulations.

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

D) Rely on past practices followed within his firm.

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Answer and Explanation

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

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Jason Blackwell, CFA, works as an investment manager for Mega Capital, a large multinational brokerage firm. He resides in a country whose applicable law is stricter than the Code and Standards but does business with clients in a country whose applicable law is less strict than the Code and Standards. Blackwell decides to follow the Code and Standards for clients in the less strict country. While Blackwell is still employed at Mega, Lego Associates verbally asks Blackwell to review client portfolios during evenings and weekends for a fee. Blackwell gets consent from his immediate supervisor at Mega to undertake this independent activity for a one-month trial basis.

Which of the following statements about Blackwells actions involving Standard I, Professionalism, and Standard IV(A), Loyalty is most accurate? Blackwell:

A) did not violate either Standard I or Standard IV(A).

B) violated both Standard I and Standard IV(A).

C) violated Standard I but did not violate Standard IV(A).

D) did not violate Standard I but violated Standard IV(A).

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Answer and Explanation

Blackwell violated Standard I, Professionalism. Because the applicable laws were stricter than the Code and Standards, he must adhere to the more strict applicable law.

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What is the rule of thumb for members, CFA charterholders and candidates in the CFA program when weighing the requirements of the CFA Institute Code and Standards and the requirements of local laws? If the applicable laws are:

A) more strict, they must still follow the Code and Standards.

B) more strict, they must adhere to the applicable laws.

C) less strict, they must still follow the local country laws.

D) less strict, they should make a judgment call on which to follow, the Code and Standards or the local laws and requirements.

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Answer and Explanation

The rule of thumb for members, CFA charterholders and candidates in the CFA program requires that they adhere to the applicable laws if the applicable laws are more strict than the requirements of the Code and Standards. If there are no laws or the laws are less strict, they must adhere to the Code and Standards.

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CFA Institute believes:

A) that a maximum level of professional responsibility and conduct dictates that members be aware of and comply with laws, rules, and regulations governing their conduct.

B) that a minimum level of professional responsibility and conduct dictates that members be aware of and comply with laws, rules, and regulations governing their conduct.

C) companies should set standards based on the ethics of upper management and the board of directors.

D) that firms should comply with all domestic laws and regulations and that these laws also govern behavior in foreign markets, regardless of foreign laws and requirements.

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Answer and Explanation

CFA Institutes Code and Standards dictate a minimum level of conduct. Standards should not be based on ethics of upper management and the board of directors of a company. Firms must comply with the strictest applicable standards, whether they be foreign or domestic laws and regulations.