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John Martin, an analyst and CFA charterholder, discovers that Jurix Co. has knowingly misstated information in their prospectus. To comply with CFA Institutes Code of Ethics and Standards of Professional Conduct, he should:

A) resign from his job in order to disassociate from the potentially illegal activity.

B) call the appropriate regulatory agency and report the action.

C) report the finding to the appropriate supervisory person in his firm.

D) do nothing and see if the firm corrects the problem.

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Answer and Explanation

To comply with the Code and Standards, John should notify the appropriate supervisory person in his firm of the violation.

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Maria Valdes, CFA, is an analyst for Venture Investments in the country of Newamerica, which has laws prohibiting the acceptance of any gift from a vendor if the gift exceeds US $250. Valdes has evidence that her Venture Investments colleague, Ernesto Martinez, CFA, has been receiving gifts from vendors in excess of US $250.

Valdes is obligated to:

Valdes is obligated to:

A) disassociate herself from the activity.

B) disassociate herself from the activity, urge Venture to persuade Martinez to cease the activity, and inform CFA Institute of the violation.

C) disassociate herself from the activity, urge Venture to persuade Martinez to cease the activity, and inform CFA Institute and regulatory authorities of the violation.

D) disassociate herself from the activity, and urge Venture to persuade Martinez to cease the activity.

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Answer and Explanation

Standard I(A), Knowledge of the Law requires members who have knowledge of colleagues engaging in illegal activities to disassociate from the activity and urge their firms to persuade the individual to cease such activity. Reporting to regulatory authorities may be prudent in certain circumstances, but is not required. Reporting to CFA Institute is not required

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Which of the following is least likely an example of a violation of Standard I, Professionalism, of the Code and Standards? An analyst:

A) knowingly breaks a securities law.

B) learns of a standard or law violation when acting on an outside board and takes a "wait and see" approach to the violation.

C) quietly quits his job when he learns that a client knowingly misstates information on a prospectus.

D) learns of a client's violation of a standard or law and notifies the proper supervisory person in the analyst's firm.

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Answer and Explanation

Violations must be reported to the appropriate supervisory person in the analysts firm. Although CFA Institute Standards encourage a member to disassociate from an illegal activity, quietly resigning from a job is not an effective way to deal with a clients violation. The analyst should report findings to the appropriate supervisory person in the firm, so that the firm may take appropriate action.

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Georgia Jones, CFA, is an analyst for Johnson, Thomas & Co. She also serves as an outside director for Dewey Manufacturing, Inc. In the course of her duties, she begins to believe that Deweys income statement for the most recent period may have been misstated. Georgia should do all of the following EXCEPT:

A) consult with Dewey Manufacturing's legal counsel.

B) consult with Johnson, Thomas' legal counsel.

C) refrain from voting to approve any of Dewey's financial statements that include the element in question.

D) inform the Securities and Exchange Commission.

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Answer and Explanation

Jones must pursue her concerns about a possible misstatement, because, if material, it may be misleading to investors. Consistent with Standard I(A), Jones must not knowingly participate or assist in a regulatory violation. As long as her concerns exist, she must not validate any financial statements by voting to approve them. In addition she should seek competent legal counsel both at her own firm and at Dewey Manufacturing. She should not go to regulatory bodies until she has more certainty about the possible misstatement and has received counsel that she should proceed.

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Sometimes a CFA Institute member simply feels a law has been violated by his firm, and sometimes the member knows a law has been violated. Which of the following pairs of guidelines is CORRECT with respect to the first step a member should take in each case? The member should first contact:

A) the firm's counsel if he feels a law has been violated and contact his supervisor if he knows a law has been violated.

B) his supervisor in the firm if he feels a law has been violated and contact the firm's counsel if he knows a law has been violated.

C) the SEC if he feels a law has been violated and contact the firm's counsel if he knows a law has been violated.

D) the firm's counsel if he feels a law has been violated and the SEC if he knows a law has been violated.

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Answer and Explanation

Standard I(A) says that when a member feels a law has been broken, the member should seek advice from the firms counsel. If the member feels the advice is unbiased and competent, the member should follow it. If the member knows a law has been violated, the member should contact a supervisor.

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If a CFA Institute member knows that a fellow employee has violated a law, according to Standard I(A) the member must NOT do which of the following?

A) Report the employee violating the law to the appropriate supervisor in the firm.

B) Report the employee violating the law to the SEC.

C) Disassociate from the employee violating the law.

D) Seek legal advice.

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Answer and Explanation

Standard I(A) does not require a CFA Institute member to report violations to governmental or regulatory agencies. All of the other answers are appropriate actions.

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Lawrence Kelly is the Chief Investment Officer at a money management company that claims it is in compliance with CFA Institute Soft Dollar Standards. For the first time, the company has purchased securities in the country of Santa Rosa. He learns that under Santa Rosen law, one of the company's soft dollar policies is forbidden, yet to conform with the law, Lawrence would have to violate the Soft Dollar Standards, but not the Standards of Professional Conduct. Lawrence:

A) must follow the CFA Institute Soft Dollar Standards, informing the Santa Rosen regulators of his reasons.

B) should follow the Santa Rosen Law and can still claim compliance with CFA Institute Soft Dollar Standards.

C) must follow the Santa Rosen Law and cease claiming compliance with CFA Institute Soft Dollar Standards.

D) must place all securities from Santa Rosa on its restricted list.

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Answer and Explanation

In cases when the Soft Dollar Standards conflict with local law, managers should follow local law and are still in compliance with the Standards.

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A U.S. Congressional oversight committee has concluded that investment company fees should be detailed in dollar terms each quarter and has proposed the enactment of new legislation to this end. Currently, the legal requirement is to report such data annually. In compliance with current legal requirements, Dolphin investments, a Florida-based investment firm, reports annually. Eun Shin, CFA and employee of Dolphin, learns of the proposed changes but does not convert Dolphin's reporting to a quarterly basis. This action:

A) is not a violation of the Code and Standards.

B) constitutes professional misconduct as defined in the Code and Standards.

C) is a violation of his duty to employer as defined in the Code and Standards.

D) is a violation of his responsibilities as a supervisor as defined in the Code and Standards.

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Answer and Explanation

The quarterly fee presentation is only a proposal at this stage. There is no violation if Eun is following the regulations currently in force.

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

C) 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.

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

The Code and Standards represent a minimum level of guidance for members actions, not a maximum level. The key to remember here is that whether the local area does or does not have standards governing members actions, one must follow the stricter standard environment.

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

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

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

C) to disclose to their employer in writing all monetary compensation or benefits received for services performed in addition to their company compensation.

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

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Answer and Explanation

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