Reading 2-I: Standards of Profes....Professionalism－LOS d

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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 D.: Misconduct.

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Nancy Hall, a candidate in the CFA program, is an analyst for a mutual fund. As part of her job she makes company visits to interview executives. On a recent trip she stayed with her sister instead of at a hotel. In her expenses Hall included a hotel charge of $100, which was less than the amount allowed by her employer. After receiving a check for her expenses, Hall disclosed to her supervisor that she had stayed with her sister instead of at a hotel. She also returned the $100 to her employer. According to CFA Institute Standards of Professional Conduct, which of the following statements best describes Hall's professional conduct?

A) Hall engaged in professional misconduct.

B) Hall did not engage in professional misconduct because she did not meet all of the requirements to use the CFA designation.

C) Hall did not engage in professional misconduct because she eventually disclosed this information and returned the $100 to her employer.

D) Hall did not engage in professional misconduct because the amount that she submitted for the hotel was less than that allowed by her employer.

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Answer and Explanation

Hall engaged in professional misconduct because her act involved dishonesty, fraud, and deceit.

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NQX Partners is a Los Angeles-based investment firm specializing in the equities of natural resources companies, both as an underwriter of secondary issues and as a market-maker. Paula Braman, CFA, an analyst at NQX, is putting together a research report on Melbourne Gold, an Australian firm. She is in possession of a report distributed by a little-known Brisbane brokerage firm, Ipswich, which has several CFA charter holders on the staff. Braman also uses market data available from the financial press and recognized statistical sources. In her report, she uses several unaltered paragraphs and data tables from the Ipswich report as well as financial data from the other sources. For neither of these does she provide acknowledgement of the original source.

Braman attended a lunch-time presentation put on by Melbourne Gold (MG) for representatives of NQX and other firms. During the meeting, Braman agrees to accept a trip to Australia to visit MGs operations as well as spend several days touring Australia at MGs expense. Braman had a few drinks at the lunch-time presentation. On the way back to the office, she was arrested for driving while intoxicated (DWI), and this is her second offense. There is no evidence that Braman's duties to NQX have been impaired in any way by her actions.

Braman recently hired a personal assistant who will be partly paid by her and partly paid by NQX. The assistant had passed the level one CFA exam prior to being hired. Knowing that Braman had the CFA designation, during the application process the assistant mentioned having passed the exam both on his resume and in the interview.

For the past 10 years, Braman has served as a proctor for the CFA exam. Braman tells her assistant that she normally receives the examinations on the Thursday before the exam. Given the low pass rate at Level II, Braman asks her assistant if she would like an advance copy of the next exam. Bramans assistant declines the offer. However, Bramans assistant has been very vocal about expressing opinions about the low pass rate. The assistant claims, CFA Institute is simply trying to increase its cash flow by continuing to fail candidates.

Initially, Braman only had the assistant type up routine forms, stuff envelopes, screen calls, and schedule meetings. The assistant did nothing related to analysis or decision making. Braman has been pleased with the work of the assistant and often tells associates that she has a level one CFA as an assistant. Recently, Braman has allowed the assistant to write portions of preliminary reports, which Braman reviews before incorporating them into the final reports.

With respect to the use of information in the report on MG, Braman was:

A) not in violation of the Standards.

B) in violation of the Standards in the use of the Ipswich report but not the data from the other sources.

C) in violation of the Standards in the use of all the data except that of the Ipswich report.

D) in violation of the Standards in the use of all the sources of data.

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Answer and Explanation

Braman has violated Standard I(C), Misrepresentation, by including unaltered material from the Ipswich research report without acknowledgement of its original report. The use of the financial data from the financial press and recognized statistical sources without acknowledgement is permissible.

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With respect to Bramans drinking and being arrested for a DWI, Braman was:

A) in violation of the Standards with respect to the DWI arrest but not the drinking itself.

B) in violation of the Standards with respect to the drinking but not the DWI arrest.

C) in violation of the Standards with respect to both the drinking and the DWI arrest.

D) not in violation of the Standards.

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Answer and Explanation

Braman's drinking is in violation of Standard I(D): Misconduct. Standard II(B.2) states that Members must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence. Becoming incapacitated during working hours is an obvious violation and the multiple DWIs shows a disregard for the law.

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If Braman accepts the trip to Australia as offered by MG, based on the given information, she is:

A) not in violation of the Standards and the value of the trip is not important.

B) not in violation of the Standards if the trips value is not in excess of $1,000.

C) in violation of the Standards.

D) in violation of the Standards only if she goes against the wishes of NQX.

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Answer and Explanation

The trip to MGs operations is questionable, but the extra days touring Australia clearly make accepting the trip a violation of Standard I(B): Independence and Objectivity. The extra perks of the trip could impair Bramans judgment. Note that in this case, the dollar amount of the perks is not relevant.

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There was a misuse of the CFA designation by:

A) neither Braman nor the assistant.

B) the assistant but not by Braman.

C) Braman but not the assistant.

D) neither Braman nor the assistant.

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Answer and Explanation

The assistant was within his right to mention that he had passed the level one exam in the interview and on his resume. It is a statement of fact. Without any more information, we cannot say the assistant misused the CFA designation. Braman should not have said she has a level one CFA as an assistant. This is a violation of Standard VII(B), Reference to CFA Institute, the CFA Designation, and the CFA Program.

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With respect to Standard VII(A), Conduct as Members and Candidates in the CFA Program:

A) Both Braman and her assistant are in violation of the standard.

B) Neither Braman nor her assistant are in violation of the standard.

C) Braman is in violation of the standard but her assistant is not in violation.

D) Her assistant is in violation of the standard, but Braman is not in violation.

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Answer and Explanation

According to Standard VII(A), Members and Candidates must not compromise the integrity of the CFA exam. Bramans offer to supply an advance copy of the exam is an obvious violation. However, the standard does not prohibit expressing opinions about the CFA Institute; thus, Bramans assistant is not in violation with his comments.

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Braman tells her assistant that she is writing a more favorable report on MG than is warranted to secure a big bond underwriting deal with MG in the near future. She is doing this at the order of the senior management of NQX. Braman gives the assistant her report on MG to type up for dissemination. The assistant types the report and helps in its dissemination. With respect to this:

A) neither the assistant nor Braman are in violation of the Code and Standards.

B) Braman is in violation of the Code and Standards, but the assistant is not.

C) the assistant is in violation of the Code and Standards, but Braman is not.

D) both the assistant and Braman are in violation of the Code and Standards.

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Answer and Explanation

Braman is in violation of Standard I(B) on Independence and Objectivity by composing a biased report. The assistant has been told the report is biased and violates Standard I(A) by knowingly participating and assisting in a violation of the Standards.

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An investment advisor, who is a CFA charterholder, takes a trip for which his firm will pay the expenses. Upon his return he alters some of the numbers on restaurant receipts to inflate the expenses by $64. Is this a violation of Standard I(D)?

A) No, if such a crime carries less than a one-year prison term.

B) Yes, because the amount involved is over $50.

C) No, because the amount is under $100.

D) Yes, because it reflects adversely on the charterholders professional reputation.

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Answer and Explanation

Professional conduct involving dishonesty, fraud, or deceit is a direct violation of Standard I(D), Misconduct.

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Timothy Hooper, CFA, is a security analyst at an investment firm. In his spare time, Hooper serves as a volunteer for City Pride, which collects clothes for the homeless. Hopper has occasionally given some of the clothes to his friends or sold the clothes instead of returning all of the clothing to City Pride. City Pride discovers what he has been doing and dismisses him. Later, City Pride learns that other volunteer organizations have dismissed Hooper for similar actions. Has Hooper violated Standard I(D) on professional misconduct in the CFA Institute Standards of Professional Conduct?

A) No, because Hooper volunteers his services to City Pride.

B) No, because Hooper has not been previously convicted of a misdemeanor or felony.

C) No, because Hooper's conduct is unrelated to his professional activities as a security analyst.

D) Yes.

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Answer and Explanation

Hooper violated Standard I(D) because he repeatedly engaged in conduct that involves dishonest conduct. This violation occurred despite the fact that his offenses do not relate directly to his professional activities. However, Hoopers conduct reflects poorly on his professional reputation and integrity.

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All of the following are violations of Standard I(D), Misconduct, EXCEPT:

A) conviction of a misdemeanor involving civil disobedience in support of ones personal beliefs.

B) conviction of a crime involving fraud.

C) dishonest activities that reflect negatively on professional competence even if they do not result in criminal convictions.

D) any conduct that undermines confidence that the CFA charter represents a level of achievement based on merit and ethical conduct.

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Answer and Explanation

The Code and Standards do not focus on personal conduct as long as the conduct does not reflect poorly on ones professional reputation, integrity, or competence.

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A CFA charterholder in a managerial position is in the process of hiring new analysts. If the charterholder conducts background checks on the job applicants with respect to their character, the charterholder has:

A) violated the Code of Ethics by invading the applicants' privacy.

B) complied with Standard I(D) concerning professional misconduct.

C) violated Standard III(E) concerning confidentiality.

D) complied with Standard VII(A) concerning conduct of members and candidates in the CFA Program.

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Answer and Explanation

To avoid potential problems and comply with Standard I(D), employers are encouraged to conduct background checks on potential employees.

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Which of the following does NOT violate Standard I(D), Misconduct? Roland Lawson, a CFA charterholder and a financial analyst:

A) is arrested for participating in a nonviolent protest.

B) committed perjury in connection with a lawsuit against his firm.

C) drinks excessively during business meetings with clients and returns to work under the influence of alcohol.

D) falsifies expense reports resulting from company visits needed to develop investment reports.

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Answer and Explanation

Any professional conduct that involves dishonesty, fraud, or deceit is a violation of Standard I(D), Misconduct. Members and candidates must refrain from activities that reflect poorly on integrity, reputation, trustworthiness, or professional conduct. The focus of the Standard is on professional, not personal, conduct.

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An analyst belongs to a nationally recognized charitable organization, which requires dues for membership. The analyst has worked out a deal under which he provides money management advice in lieu of paying dues. While performing services for the organization, the analyst discovers some useful computer programs that his predecessor developed and left as the property of the organization. The analyst decides to use the computer programs in his consulting business. This action is:

A) a violation of Standard III(B) concerning fair dealing.

B) appropriate since the analyst is technically an employee of the organization.

C) appropriate since the analyst is not technically an employee of the organization.

D) a violation of Standard I(D) concerning misconduct.

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Answer and Explanation

Since the programs are the property of the organization, the analyst can only use them for the organization. It does not matter whether the analyst is an employee or not. Personal use of the programs without permission from the charitable organization is dishonest and prohibited.

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A CFA charterholder who comes to work intoxicated is:

A) in violation of Standard I(D) concerning professional misconduct.

B) in violation of Standard IV(A) concerning duties to employer.

C) not in violation of the standards.

D) in violation of Standard VII(B) concerning use of the designation.

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Answer and Explanation

Being intoxicated at work is poor personal behavior. It is a violation of Standard I(D), which covers professional competence and integrity.