Reading 2-III: Standards of Professional Conduct & Guid

cfaedu

CFA Institute Area 1-2: Ethical and Professional Standards
Session 1: Code of Ethics and Professional Standards
Reading 2-III: Standards of Professional Conduct & Guidance: Duties to Clients and Prospective Clients
LOS E.: Preservation of Confidentiality.

cfaedu

Greg Stiles, CFA, keeps a list of his clients birthdays and has personally sent them a birthday card each year at the appropriate time. With respect to this action, which of the following may be a violation of Standard III(E), Preservation of Confidentiality?

A) The mere act of sending a birthday card each year.

B) Hiring a company outside the firm to perform the task.

C) Sending a gift along with the card.

D) All of these.

---

Answer and Explanation

According to Standard III(E), an analyst should limit the number of persons who have access to clients personal information. Allowing a company outside the firm to send birthday cards could be a violation. Sending a birthday card is not a violation, nor is sending a gift of reasonable value.

cfaedu

While servicing his clients accounts, an analyst determines that one client is probably involved in illegal activities. According to Standard III(E), Preservation of Confidentiality, the analyst may NOT do which of the following?

A) Contact the appropriate governmental authorities about the determination.

B) There are no exceptions in this list.

C) Contact CFA Institute about the determination.

D) Both contact CFA Institute and governmental authorities.

---

Answer and Explanation

Standard III(E) allows an analyst to reveal information about a client to CFA Institute since CFA Institute will keep the information confidential. If the analyst is reasonably certain a law has been violated, an analyst may have an obligation to report the activities to the appropriate authorities. Therefore, none of the listed actions are exceptions from the analysts options.

cfaedu

Andrew Mader, CFA, is an analyst with Metro Investment Services. During lunch with some of Metro's managers, Mader is told, "There are going to be major problems at Gebco (a firm that Metro had brought public last year). I was just over there and the place is just crawling with government inspectors. Mader had just issued a report with a "buy" recommendation on Gebco last week. Mader should:

A) not do anything because to do so would violate his obligation to preserve confidentiality.

B) without further research, immediately issue a new report reversing his previous recommendation.

C) immediately issue a new report, but only after stopping by Gebco himself to corroborate the story.

D) not do anything to avoid a violation of fair dealing.

---

Answer and Explanation

Under Standard III(E), members are bound to preserve the confidentiality of information that they receive in the scope of their employment. There is nothing in the information to suggest that any illegal act had occurred. He is, therefore, obligated not to disclose the information to others until it becomes public.

cfaedu

Greg Stiles, CFA, may withhold from CFA Institute information about a client acquired in the regular performance of his duties:

A) only if Stiles is a relative of the client.

B) only if Stiles has a special confidentiality agreement with the client.

C) for none of the reasons listed.

D) if Stiles either has special confidentiality agreement with the client or the client is a relative.

---

Answer and Explanation

According to Standard III(E), Preservation of Confidentiality, Stiles may not withhold information under any of the listed reasons. The reason is that CFA Institute will keep the information confidential.

cfaedu

Standard III(E), Preservation of Confidentiality, applies to the information that an analyst learns from:

A) current clients, former clients, and prospects.

B) current clients and prospects only.

C) former clients and prospects only.

D) current clients and former clients only.

---

Answer and Explanation

According to Standard III(E), Preservation of Confidentiality, an analyst must preserve the confidentiality of information communicated by clients, former clients, and prospects.

cfaedu

Greg Stiles, CFA, CAIA, has recently liquidated most of a clients portfolio because the client is planning to buy a house. Stiles informs one of the brokers in his office who has his real estate license about the plans of his client. With respect to Standard III(E), Preservation of Confidentiality, this action:

A) is appropriate since Stiles only tells a licensed salesman.

B) violates the Standard unless the client asks Stiles to tell the licensed salesman.

C) is appropriate since Stiles waited until after the liquidation of the securities.

D) is appropriate since Stiles keeps the information in the firm.

---

Answer and Explanation

According to Standard III(E), Preservation of Confidentiality, Stiles must keep client information confidential and limit the information to those people directly related to servicing the client. Merely working in the same firm does not qualify a person for learning about the client of a fellow analyst.