Reading 4/5: Ethics Cases －LOS a, (Part 2)

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CFA Institute Area 1-2: Ethical and Professional Standards
Session 2: Ethical and Professional Standards in Practice
Reading 4/5: Ethics Cases
LOS a, (Part 2): Formulate an appropriate response to actions which violate the CFA Institute Code of Ethics and Standards of Professional Conduct.

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Xenica Jones, CFA, is a portfolio manager and also follows the office equipment industry for Hynes-Gold and Co. In her June 30 discussions with the management of Zprint, she learns that an internal audit has detected irregularities in the firm's Italian operations. This fact is disclosed on July 1 in both The Wall Street Journal and The Financial Times. On July 10 Zprint's management announces that an investigation of the matter would not be completed until an external audit of all European operations was complete. This stock dropped 6 percent on the news release on the 10th. Jones places a series of sell transactions in Zprint stock on the 3rd. When she places the trades, she trades first for her clients and finishes with a trade selling short for her own account. These actions are:

A) in violation of the Standard concerning fair dealing.

B) not in violation of the Code and Standards.

C) in violation of the Standard concerning priority of transactions.

D) in violation of the Standard concerning fiduciary duties since she is not allowed to sell short under the Standard.

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Answer and Explanation

Her actions are not in violation of the Code and Standards. So long as her firm does not preclude her selling short, she is entitled to do so.

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Marc Feldman, a CFA Institute member, is treasurer of zippy.com, and is also Larry Goldman's boss. Feldman is informed of "accounting irregularities of an unknown origin" during an audit by zippy's external accounting firm. There are 3 individuals, including Goldman, handling the accounting function. According to the Code and Standards, Feldman should do all of the following EXCEPT:

A) leave the staff in their current jobs and increase supervision while the external auditors complete their work.

B) conduct a thorough investigation of activities.

C) terminate the accounting staff immediately and issue a press release describing the situation.

D) take immediate action to determine the scope of the irregularities.

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Answer and Explanation

Standard IV(C) spells out responsibilities of supervisors in the Standards of Practice Handbook. Since the investigation is ongoing, it would clearly be inappropriate to terminate the entire accounting staff until their complicity in the wrongdoing is established.

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Kenny Barrett, CFA, is working in the Australian office of American Investments Co. From an informal conversation, Barrett learns that the companys most recent investment report was based on misappropriated information. No one at the Australian office expresses concern, however, because there has been no breach of Australian law. Barrett should:

A) do nothing because the branch is outside of U.S. jurisdiction.

B) make public statements about the source of the information.

C) disassociate himself from the case with a written report to his supervisor.

D) seek advice from company counsel to determine appropriate action.

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Answer and Explanation

Kennys best choice is to seek the company counsels advice. If Kenny does nothing, he is breaching Standard I(A) Knowledge of the Law. Disassociation is not enough, and a public statement can result in a negative impact on the company.

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Calvin Moore, CFA, has been transferred from the brokerage house of the Browning Company to the portfolio management department. In portfolio management, Moore learns that clients are grouped into three divisions according to portfolio value, divided as follows:

• Group 1 up to $10,000

• Group 2 from $10,001 to $100,000

• Group 3 more than $100,000

When recommendations are announced or trades are initiated, a particular sequence is followed in communicating to these groups. At the next monthly meeting, Moore suggests that the sequencing practice is a breach of CFA Institute Standards. One of Moores co-workers replies that the grouping approach helps the company in applying the Standard regarding portfolio recommendations. He further suggests that because Brownings overall performance is more strongly affected by actions taken on the high value portfolios, that these portfolios should take priority over the small value portfolios.What should Moore do? Moore should:

A) quit his job.

B) disassociate himself from the problem and seek legal advice.

C) prepare a written report to the CEO describing the problem.

D) do nothing since there is no breach with the Standards.

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Answer and Explanation

Taking a special approach in disseminating information in relation to initiating trades is a breach of Standard III(B), Fair Dealing. Given the fact that Moore works in the department and has already unsuccessfully tried to prevent the practice from continuing, he needs to disassociate himself and seek legal advice.

Taking a special approach in disseminating information in relation to initiating trades is a breach of Standard III(B), Fair Dealing. Given the fact that Moore works in the department and has already unsuccessfully tried to prevent the practice from continuing, he needs to disassociate himself and seek legal advice.

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Futura Investments Co. decides to diversify its current portfolio with stocks from three companies in a new segment of the biotechnology industry. William Burgin, CFA, is an analyst at Futura and had previously bought shares of the same three companies for his own portfolio, well before his employer started researching them. Burgin has already disclosed the composition of his personal portfolio to Futura Investments, to be in compliance with the Code & the Standards. Which of the following actions should Burgin take?

A) Hire a full discretionary power or blind trust manager for his portfolio.

B) Transfer the account to his wife's name.

C) Diversify his personal portfolio so, in this way, these stocks will no longer represent a substantial portion of the portfolio.

D) Open an account that will be managed by someone else but will allow him to maintain his investment preferences.

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Answer and Explanation

Burgin followed Standard VI(A) and informed his employer about the potential conflict of interest. He needs to follow the CFA Institute Standards in the best interest of his employer. To prevent any future problems with conflict of interest, his best option is to discontinue the active management of his personal portfolio and use a blind trust.

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