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Mary White, CFA, sits on the board of directors of XYZ Manufacturing, Inc. She discovers that management has knowingly participated in an activity she knows is illegal. According to the CFA Institute Standards of Professional Conduct, White is required to:

A) disassociate herself from the activity.

B) All of these choices are correct.

C) seek legal advice to determine what actions should be taken.

D) report the activity to the appropriate supervisory person at her firm.

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Answer and Explanation

Standard I(A), Knowledge of the Law. Prohibition against knowingly practicing or assisting in violation of laws, rules, and regulations. If White knows that someone has engaged in a possible illegal activity, she should: (1) report the finding to the appropriate supervisory person at her firm, (2) if the situation is not remedied, disassociate herself from the situation, and (3) seek legal advice to see what other actions, such as notifying the proper regulatory agency, should be taken.

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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 and Country L but not for himself.

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

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Answer and Explanation

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.

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Joan Platt, CFA, operates an investment advisory service in New York but maintains an office in Xania. Xania recently establish a stock market, which is not very efficient. None of the Xanian stocks trade in the U.S. market. Xania legally permits the use of material inside information. Platt believes that using inside information would help her compete against other Xanian investment advisors and also help some of her Xanian clients reach their investment objectives. Platt is considering adopting local investment practices in Xania. According to CFA Institute Standards of Professional Conduct, Platt may:

A) use material inside information, but only after notifying CFA Institute.

B) use material inside information because Xania legally permits this practice.

C) not use material inside information.

D) use material inside information because CFA Institute Standards apply only to countries where the use of material inside information is illegal.

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Answer and Explanation

Because applicable law involving material inside information is less strict than the Code and Standards, Platt must adhere to the Code and Standards. Standard II(A) prohibits against use of material nonpublic information.