Ethical and Professional Standards 【Reading 2】 industry, standards, regulatory, his

Mechanic

Nicholas Brynne, CFA, is a fixed-income analyst who trades in mortgage-backed securities (MBS). The MBS industry has seen sweeping regulatory changes since Brynne took his current position, and he now feels his understanding of applicable laws and regulatory standards is dated. Brynne must:

A) have all trades reviewed by his compliance department until he has obtained an expert level of knowledge in compliance.

B) update his understanding of applicable laws and regulatory standards relating to his position.

C) rely on his firm’s policies and procedures for guidance on legal and regulatory standards.

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See Standard I(A) "Knowledge of the Law." Brynne should update his understanding of applicable laws and regulatory standards relating to his position, although he is not required to be an expert in compliance. Relying only on firm policies and procedures is not sufficient.

Mechanic

A government committee has concluded that investment company fees should be disclosed to clients each quarter and has proposed new legislation to require this. Currently, the legal requirement is to report such data annually. In compliance with current legal requirements, Dolphin Investments discloses its fees annually. Eugene Shin, CFA, Dolphin's compliance officer, learns of the proposed changes but does not convert Dolphin's reporting to a quarterly basis. Shin's decision not to act:

A) constitutes professional misconduct as defined in the Code and Standards.

B) is not a violation of the Code and Standards.

C) is a violation of his duty to employer as defined in the Code and Standards.

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The potential change in the law is only a proposal at this stage. There is no violation as long as Dolphin is following the regulations currently in force.

Mechanic

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) consult with Dewey Manufacturing's legal counsel.

B) inform the Securities and Exchange Commission.

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.

Mechanic

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

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

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

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

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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.

Mechanic

Mega Securities, a multinational investment advisor based in the United States, employs the following analysts who practice in multiple jurisdictions.

• Melissa Black, CFA, resides in Country N, which has no securities laws or regulations, but does business in Country L, which has securities laws and regulations that are less strict than the Code and Standards.
• Tom White, a CFA Institute member, resides in Country L, but does business in Country S, which has securities laws and regulations that are stricter than the Code and Standards.

According to the CFA Institute Code and Standards, which of the following statements about Black and White is CORRECT?

Black must adhere to the

White must adhere to the

A) Code and Standards law of Country S

B) law of Country L law of Country S

C) law of Country N law of Country L

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Because the applicable law in Country L is less strict than the Code and Standards, Black must adhere to the Code and Standards. Because the applicable law is stricter than the Code and Standards, White must adhere to the more strict applicable law of Country S.

Mechanic

A CFA Institute member conscientiously maintains records of changes in security regulations. The member notices that his colleagues do not, and does NOT say anything. Is this a violation of Standard I(A)?

A) Yes, and the member should disassociate from these colleagues.

B) Yes, because the member is bound by the Code of Ethics.

C) No, as long as the colleagues do not violate the new rules.

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The last bullet point of the Code says that a member shall “Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.” Ignoring the neglect of rule changes of others would clearly be incongruent with this component. As long as the colleagues do not violate the laws, the member does not have to disassociate himself from the colleagues.

Mechanic

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

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

B) 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.

C) A member who trades securities in a foreign securities market where no applicable local laws or stock exchange rules regulate the use of material nonpublic information may take investment action based on this information.

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The Code and Standards represent a minimum level of guidance for members’ actions, not a maximum level. The key to remember here is that whether the local area does or does not have standards governing member’s actions, one must follow the stricter standard environment.

Mechanic

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

B) should follow the Santa Rosen Law and can still claim 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 and are still in compliance with the Standards.

Mechanic

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

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

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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.

Mechanic

If a CFA Institute member knows that a fellow employee has violated a law, according to Standard I(A) the member is NOT required to do which of the following?

A) Report the employee violating the law to the appropriate governmental authority.

B) Seek legal advice.

C) Report the employee violating the law to the appropriate supervisor in the firm.

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Standard I(A) does not require a CFA Institute member to report violations to governmental or regulatory agencies. The other answers are appropriate actions.