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The SEC’s new stock-trading rule has just gone into effect. The SEC will give brokers a 10-day grace period, during which violators of the rule will be immediately notified and given a chance to remedy their situation to comply with the new rule. If a CFA Institute member unknowingly violates the rule and then remedies the situation within the 10-day grace period, has the member violated Standard I(A)?

A) No, because the member remedied the situation.

B) Yes, because the member did not maintain knowledge and know of the rule.

C) No, because the member unknowingly broke the rule.

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Standard I(A) explicitly says that a member shall maintain knowledge and comply with laws, rules, and regulations. By not knowing of the rule, the member broke the standard. If a CFA Institute member accidentally breaks a rule from a careless error and remedies the situation, this would not be a violation of Standard I(A).

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Lawrence Kelly is the Chief Investment Officer at a money management company that claims it is in compliance with CFA Institute Soft Dollar Standards. For the first time, the company has purchased securities in the country of Santa Rosa. He learns that under Santa Rosen law, one of the company's soft dollar policies is forbidden, yet to conform with the law, Lawrence would have to violate the Soft Dollar Standards, but not the Standards of Professional Conduct. Lawrence:

A) should follow the Santa Rosen Law and can still claim compliance with CFA Institute Soft Dollar Standards.

B) must follow the Santa Rosen Law and cease claiming compliance with CFA Institute Soft Dollar Standards.

C) must follow the CFA Institute Soft Dollar Standards, informing the Santa Rosen regulators of his reasons.

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In cases when the Soft Dollar Standards conflict with local law, managers should follow local law

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Georgia Jones, CFA, is an analyst for Johnson, Thomas & Co. She also serves as an outside director for Dewey Manufacturing, Inc. In the course of her duties, she begins to believe that Dewey’s income statement for the most recent period may have been misstated. Georgia should do all of the following EXCEPT:

A) inform the Securities and Exchange Commission.

B) consult with Dewey Manufacturing's legal counsel.

C) consult with Johnson, Thomas' legal counsel.

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Jones must pursue her concerns about a possible misstatement, because, if material, it may be misleading to investors. Consistent with Standard I(A), Jones must not knowingly participate or assist in a regulatory violation. As long as her concerns exist, she must not validate any financial statements by voting to approve them. In addition she should seek competent legal counsel both at her own firm and at Dewey Manufacturing. She should not go to regulatory bodies until she has more certainty about the possible misstatement and has received counsel that she should proceed.

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A member who suspects that a colleague is violating the law should most appropriately:

A) report the illegal activity to the appropriate regulatory agency.

B) report the illegal activity to CFA Institute Professional Conduct Program for action.

C) consult with the company counsel to determine if in fact a law is being violated.

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Standard I(A), Knowledge of the Law, applies in this situation. According to this Standard, members shall not knowingly participate or assist in, and must dissociate from, any violation of laws, rules, or regulations.
When members suspect a client or a colleague of planning or engaging in ongoing illegal activities, members should take the following actions:

• Consult counsel to determine if the conduct is, in fact, illegal.
• Disassociate from any illegal or unethical activity. When members have reasonable grounds to believe that a client’s or employee’s activities are illegal or unethical, the members should disassociate from these activities and urge their firm to attempt to persuade the perpetrator to cease such activity.

Note:  The Code and Standards do not require that members report legal violations to the appropriate governmental or regulatory organizations, but such disclosure may be prudent in certain circumstances.

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Deloris Johnson, CFA, suspected that her intern, who was working without pay at her brokerage firm, had violated a federal securities regulation. Johnson discussed the matter with her company's legal counsel who said that the intern's conduct was illegal. According to the CFA Institute Code and Standards of Professional Conduct, Johnson can dissociate herself from this illegal activity by:

A) reporting the activity to the appropriate authorities.

B) transferring supervision of the intern to another person.

C) telling her intern to stop such conduct.

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Johnson can dissociate herself from the illegal activity by reporting the activity to the appropriate authorities. However, the Code and Standards do not require that she report legal violations to the appropriate governmental or regulatory organizations, but such disclose is prudent in this circumstance.
By transferring the intern to another supervisor this may not solve the problem of the illegal activity occurring and the company would still be held liable for it.

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CFA Institute believes:

A) that a maximum level of professional responsibility and conduct dictates that members be aware of and comply with laws, rules, and regulations governing their conduct.

B) that firms should comply with all domestic laws and regulations and that these laws also govern behavior in foreign markets, regardless of foreign laws and requirements.

C) that a minimum level of professional responsibility and conduct dictates that members be aware of and comply with laws, rules, and regulations governing their conduct.

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CFA Institute’s Code and Standards dictate a minimum level of conduct. Standards should not be based on ethics of upper management and the board of directors of a company. Firms must comply with the strictest applicable standards, whether they be foreign or domestic laws and regulations.

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Joan Platt, CFA, operates an investment advisory service in New York but maintains an office in Xania. Xania recently established 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 because Xania legally permits this practice.

B) not use material inside information.

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

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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.

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Which of the following statements about the CFA Institute Code and Standards is most accurate? The Code and Standards:

A) require members to persuade the perpetrator to cease illegal activities.

B) do not require that members report legal violations to the appropriate governmental or regulatory organization.

C) prohibit members from accepting gifts that create a conflict with their employer's interest.

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The Code and Standards do not require members to report violations to legal authorities, but such disclosure may be prudent or required in certain circumstances. They do not require members to quit their jobs or to persuade violators to cease illegal activities. They do require that members report the activities to the appropriate person(s) in their own firm and disassociate themselves from the illegal actions. Members must obtain written permission to accept gifts that create a conflict with their employer's interest.

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Robe Advisory Services operates an office in San Francisco, where it manages portfolios for its clients based in the United States. The firm also maintains an office in Tokyo, where it employs Sam Lee, CFA who researches Japanese stocks. According to the CFA Institute Standards of Professional Conduct, Lee is required to maintain knowledge of and comply with all applicable laws, rules, and regulations in:

A) both the U.S. and Japan and the CFA Institute Standards of Professional Conduct.

B) both the U.S. and Japan, but not the CFA Institute Standards of Professional Conduct.

C) Japan, but not the U.S., and the CFA Institute Standards of Professional Conduct.

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To abide by the Standards, employees who work for foreign-based firms are required to apply the stricter of the foreign (here, U.S.) law, the domestic (here, Japanese) law, or CFA Institute standards.

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Which of the following is a CORRECT statement of a member's duty under the Code and Standards?

A) A member who trades securities in a country with less strict laws, rules, regulations, or customs may follow those laws if he discloses this information to his client.

B) In the absence of specific applicable law or other regulatory requirements, the Code and Standards govern the member's actions.

C) A member is required to comply only with applicable local laws, rules, regulations, or customs even though the CFA Institute code and Standards may impose a higher degree of responsibility or a higher duty on the member.

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Members are always, at a minimum, subject to the Code and Standards.