Reading 3: Ethics in Practice －LOS a required

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CFA Institute Area 1-2: Ethical and Professional Standards
Session 2: Ethical and Professional Standards in Practice
Reading 3: Ethics in Practice
LOS a: Summarize the ethical responsibilities required by each of the six provisions of the Code of Ethics and the seven categories of the Standards of Professional Conduct.

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Roberta Conn is an investment advisor who has a client, Ernie Ray, who is a tax lawyer. At lunch, Conn noticed Ray and the Chief Financial Officer of CDH Company at the next table. She overhears them talking and ascertains that CDH is about to announce higher than expected earnings. Before the earnings release, Ray contacts Conn and asks her to purchase 3,000 shares for his portfolio. Conn:

A) must wait until after she purchases the 3,000 shares for Ray to purchase shares for her personal account.

B) can purchase shares for Ray, but cannot ever purchase shares for her personal account.

C) must refuse to purchase the shares for Ray.

D) can only purchase shares for her personal account after informing all of her clients about the potential of the increase in earnings.

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Answer and Explanation

According to Standard II(A), Material Nonpublic Information, Conn cannot act or cause others to act on material nonpublic information until the information is made public. The information overheard at lunch was material and nonpublic; therefore, Conn must wait until the information is made public before accepting Rays order.

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An analyst working at an investment firm has a client that provides income tax prep services for individuals. The client tells the analyst that as long as he is the clients analyst, he will prepare the analysts income tax return free of charge. The analyst needs to:

A) inform his supervisor in writing of the offer.

B) explicitly refuse such an offer.

C) do nothing since the offer is not linked to the performance of the client's portfolio.

D) do nothing since the offer is only verbal and he has not yet accepted the offer.

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Answer and Explanation

Standard IV(B), Additional Compensation Arrangements, requires that members disclose to their employer, in writing, all benefits that they receive in addition to their regular compensation for services they perform on behalf of their employer.

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Jim Bennett, CFA, leases office space to his best friend, Steve Waters. Bennett is an independent investment advisor specializing in high net worth clients and Waters is a licensed life insurance underwriter. In lieu of paying rent, Waters refers his insurance clients to Bennett, but only with the clients permission. For clients referred by Waters, Bennett:

A) must disclose the terms of the lease arrangement.

B) need not disclose the terms of the lease arrangement because Waters obtained the clients permission for the referral.

C) need not disclose the referral fee if Waters discloses the lease arrangement to the clients first.

D) must disclose the terms of the lease arrangement only if required by state insurance law.

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Answer and Explanation

Standard VI(C), Referral Fees, requires members to disclose to clients and prospects any consideration or benefit received by the member or delivered to others for the recommendation of any services to the client or prospect. Bennett has delivered a benefit (free rent) to Waters, which must be disclosed to the clients referred by Waters. Bennett must not rely on Waters to make the disclosure.

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CFA Institute members are required to do all of the following, EXCEPT:

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

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

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

D) disclose, in writing, all observed violations of security laws and regulations to the proper regulatory authorities.

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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.

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All of the following are violations of conduct as members and candidates in the CFA Program, EXCEPT:

A) disregarding the rules related to the administration of the CFA examination.

B) expressing opinions in disagreement with CFA Institute advocacy positions.

C) improperly using the CFA Designation to further professional goals.

D) providing confidential program information to the public.

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Answer and Explanation

Members and Candidates are allowed to express their opinions about the CFA Institute and CFA Program without violation of any Standards. All of the other choices are in direct violation of Standard VII(A), Conduct as Members and Candidates in the CFA Program.

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Kevin Lowell, CFA, manages a pension plan for a national grocery retailer. All of the following are required as a part of Lowells fiduciary duties, EXCEPT:

A) act in a prudent and judicious manner.

B) act solely in the interest of the ultimate beneficiaries.

C) place the clients interest before the employers interest.

D) support the sponsor's management during proxy fights.

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Answer and Explanation

Members are required to act in the interest of their clients. In voting proxies, the clients interest must prevail over managements interest.