Mechanic

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, but not the CFA Institute Standards of Professional Conduct.

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

C) both the U.S. and Japan 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.

Mechanic

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.

Mechanic

If an analyst suspects a client or a colleague of planning or engaging in ongoing illegal activities, which of the statements about the actions that the analyst should take is most correct? According to the CFA Institute Standards of Professional Conduct, the analyst should:

A) consult counsel to determine the legality of the activity and disassociate from any illegal or unethical activity if the member has reasonable grounds to believe that the activity is illegal or unethical.

B) disassociate from any illegal or unethical activity if the member has reasonable grounds to believe that the activity is illegal or unethical.

C) consult counsel to determine the legality of the activity.

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According to the procedures for compliance involving Standard I(A), CFA Institute members should determine legality and disassociate from any illegal or unethical activity.

Mechanic

Bob Blanford, CFA, is an investment analyst for a large global brokerage firm. He recently moved to Ragatan, a developing country with few securities laws and regulations. As part of conducting a company analysis, Blanford interviews Ravi Shanti, vice-president of finance at Starr Industries. Starr is a major industrial firm in Ragatan and a client at Blanford’s firm. Based on his analysis, Blanford suspects that Shanti may have deliberately overstated Starr’s current earnings and its earnings for the past several quarters. If this information becomes public, Blanford believes that Starr’s stock price will drop substantially. Blanford suspects that Shanti may have violated Ragatan’s securities laws. Which of the following statements is least likely to comply with Standard I, Professionalism? Blanford should:

A) determine the legality of the activity, possibly by consulting counsel.

B) take no action.

C) disassociate himself from the client, if the activity is illegal or unethical.

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Because Blanford suspects Shanti of engaging in ongoing illegal activities, Blanford should take action by determining the legality of the suspected action, disassociating from any illegal activity, and urging his firm to attempt to persuade Shanti to cease such conduct if such an activity is illegal or unethical.

Mechanic

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) not use material inside information.

B) use material inside information because Xania legally permits this practice.

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.

Mechanic

Mary White, CFA, sits on the board of directors of XYZ Manufacturing, Inc. She discovers that management has knowingly participated in an activity she knows is illegal. According to the CFA Institute Standards of Professional Conduct, White is required to:

A) both of these choices are correct.

B) disassociate herself from the activity.

C) seek legal advice to determine what actions should be taken.

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Standard I(A), Knowledge of the Law. Prohibition against knowingly practicing or assisting in violation of laws, rules, and regulations. If White knows that someone has engaged in a possible illegal activity, she should: (1) report the finding to the appropriate supervisory person at her firm, (2) if the situation is not remedied, disassociate herself from the situation, and (3) seek legal advice to see what other actions, such as notifying the proper regulatory agency, should be taken.

Mechanic

Michael Bellow, CFA, CAIA, is an investment banker who is involved with an initial public offering (IPO) of NewCo. Because this is Bellow’s first involvement in an IPO, he reports to an experienced supervisor. While reviewing past financial statements provided by NewCo, Bellow suspects that NewCo deliberately overstated its earnings for the past several quarters. Bellow seeks the advice of his firm’s highly competent general counsel and follows the advice given without deviation. Based on the general counsel’s advice, Bellow consults his immediate supervisor about the suspected overstatement of earnings. After reviewing the situation, Bellow’s supervisor explains why NewCo’s calculations of its earnings are correct. Bellow realizes that his inexperience and exuberance initially led him to an incorrect conclusion about NewCo’s earnings.
Which of the following statements about Bellow’s actions involving Standard I(A), Knowledge of the law, and Standard I(C), Misrepresentation, is CORRECT? Bellow:

A) did not violate either Standard I(A) or Standard I(C).

B) violated both Standard I(A) and Standard I(C).

C) violated Standard I(A) but did not violate Standard I(C).

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Bellow did not violate Standard I(A), Knowledge of the law, because he sought advice of counsel and followed that advice. Bellow did not violate Standard I(C), Misrepresentation, because he made reasonable and diligent efforts to ensure the accuracy of the information and to avoid any material representation.

Mechanic

A CFA Institute member is also a member and the portfolio manager of an environmentalist group. In its charter, the environmentalist group lists a group of companies its members should boycott. The CFA Institute member would violate Standard I(A) concerning obeying all rules and regulations if the member:

A) purchases stock of a boycotted firm for the group's portfolio.

B) performs either of the activities listed here.

C) actively protests against a publicly traded firm boycotted by the group.

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Standard I(A) says the member must be guided by all applicable rules and regulations of professional associations governing the member’s professional activities. Purchasing the stock for the firm would be a violation because it involves the member’s professional activities and the rules of a group to which the member belongs and works for. Actively protesting would not be covered by that standard.

Mechanic

The Standards of Professional Conduct explicitly outlines responsibilities to four groups. Which of the following is NOT a group mentioned in that list?

A) The Federal Reserve.

B) The investing public.

C) The profession.

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The Standards explicitly mention responsibilities to the profession, employers, clients, prospects, and the investing public. The Federal Reserve is not mentioned.

Mechanic

Maria Valdes, CFA, is an analyst for Venture Investments in the country of Newamerica, which has laws prohibiting the acceptance of any gift from a vendor if the gift exceeds US $250. Valdes has evidence that her Venture Investments colleague, Ernesto Martinez, CFA, has been receiving gifts from vendors in excess of US $250.Valdes is obligated to:

A) disassociate herself from the activity, and urge Venture to persuade Martinez to cease the activity.

B) disassociate herself from the activity, urge Venture to persuade Martinez to cease the activity, and inform CFA Institute of the violation.

C) disassociate herself from the activity, urge Venture to persuade Martinez to cease the activity, and inform CFA Institute and regulatory authorities of the violation.

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Standard I(A), Knowledge of the Law requires members who have knowledge of colleagues engaging in illegal activities to disassociate from the activity and urge their firms to persuade the individual to cease such activity. Reporting to regulatory authorities may be prudent in certain circumstances, but is not required. Reporting to CFA Institute is not required.