Reading 2-IV: Standards of Professional Conduct & Guidanc 2011, department, research, center, class

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Session 1: Ethical and Professional Standards
Reading 2-IV: Standards of Professional Conduct & Guidance: Duties to Employers

LOS C.: Responsibilities of Supervisors.

 

 

Dixie Miller, CAIA, and Level II CFA candidate, heads the research department of a large brokerage firm. The firm has many analysts, some of whom are subjected to the CFA Institute Code of Ethics and Standards of Professional Conduct. If Miller delegates some of her supervisory duties, which statement best describes her responsibilities under the CFA Institute Code and Standards?

A) CFA Institute Standards prevent Miller from delegating supervisory duties to subordinates.

B) Miller retains supervisory responsibilities for those duties delegated to her subordinates.

C) Miller's supervisory responsibilities do not apply to those subordinates who are not subjected to the CFA Institute Code and Standards.

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Even though members may delegate supervisory duties, such delegation does not relieve members of the supervisory responsibility.

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Wanda Kirby, CFA, recently joined Allegheny Investments as a senior analyst. Because of her extensive experience in the investments business and knowledge of the Code and Standards, Allegheny's management asked her to assume supervisory responsibility. Kirby reviewed Allegheny's existing compliance system and determined that it was inadequate to allow her to clearly discharge her supervisory responsibility. According to CFA Institute Standards, Kirby should:

A) decline in writing to accept supervisory responsibility until Allegheny adopts reasonable procedures to allow her to adequately exercise such responsibility.

B) agree to accept supervisory responsibility provided that Allegheny adopts reasonable procedures to allow her to adequately exercise such responsibility.

C) agree to accept supervisory responsibility and to develop reasonable procedures to allow her to adequately exercise such responsibility.

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If Kirby clearly cannot discharge supervisory responsibilities because of an inadequate compliance system, she should decline in writing to accept supervisory responsibility until Allegheny adopts reasonable procedures to allow her to adequately exercise such responsibility.

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For years John Berger, a CFA charterholder and CEO of a company, relied upon a set of reasonable procedures for preventing violations of the Code and Standards of Professional Conduct in the firm. To not be liable for a violation of the Standards, Berger must:

A) both periodically review the procedures and ensure the procedures are monitored and enforced.

B) do nothing more than have the set of procedures in place as stated.

C) ensure the procedures are monitored and enforced.

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As a CEO, Berger is responsible for implementing and maintaining appropriate compliance procedures. He must also ensure the procedures are monitored and enforced.

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Karen Dalby, CFA, is a rising star at a major investment bank and has an extremely demanding schedule. To avoid "burning out" new hires, the bank has instituted a mandatory vacation policy which requires employees to take at least 5 days of vacation per year. At the end of the year, Dalby has taken no vacation, but is scheduled to travel to Fiji to take the mandatory 5 days. The bank’s most important client is suddenly targeted in a hostile takeover and asks specifically for Dalby to join the takeover defense team. Her supervisor, Hank Lone, CFA, asks Dalby to cancel her vacation and she complies. Lone is most likely:

A) in violation of Standard IV(C) "Responsibilities of Supervisors."

B) not in violation of the Code and Standards.

C) in violation of Standard IV(A) "Loyalty."

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Lone has a responsibility to equally enforce all firm policies to demonstrate that all rules are equally important.

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Susan Tigra, CFA, is a portfolio co-manager for the Sandia Energy pension fund. She has been contacted by Ted Garnet, a former classmate. Garnet has started his own investment management firm and would like Sandia Energy to move a portion of its assets to be managed by his firm. Tigra moves 5% of the pension fund to Garnet’s firm to help him build his assets under management. Kurt Show, CFA, is Tigra’s supervisor. Show notes the move, but does not investigate. Show is most likely:

A) not in violation of the Code and Standards.

B) in violation of Standard V(A) "Diligence and Reasonable Basis."

C) in violation of Standard IV(C) "Responsibilities of Supervisors."

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Show should review important changes to the portfolio for compliance with firm policies and procedures. The decision to work with Garnet seems arbitrary, and may not be necessary or prudent.

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Martin Tripp, CFA, is vice-president of the equity department at Walker Financial, a large money management firm. Of the twenty analysts in his department for whom he has supervisory responsibility, eight are subject to CFA Institute Standards of Professional Conduct. Tripp believes that he cannot personally evaluate the conduct of the twenty analysts on a continuing basis. Therefore, he plans to delegate some of his supervisory duties to Sarah Green, who is subject to the Standards, and some to Bob Brown, who is not subject to the Standards. According to CFA Institute Standards of Professional Conduct, which of the following statements about Tripp's ability to delegate supervisory duties is most correct?

A) Tripp cannot delegate any of his supervisory duties to either Green or Brown.

B) Tripp can delegate some or all of his supervisory duties only to Green because she is subject to the Standards.

C) Tripp can delegate some or all of his supervisory duties to Brown, even though Brown is not subject to the Standards.

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Standard IV(C), Responsibilities of Supervisors, permits Tripp to delegate supervisory duties to Green, Brown, or both, but such delegation does not relieve Tripp of his supervisory responsibility.

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For many years, John Berger, CFA, has been a mentor of Bob Chennings, a family friend, who just earned the CFA designation. Berger is the CEO of a firm that just hired Chennings, but the hiring was done at a lower level so Berger and Chennings have no direct contact in the daily operation of the firm. With respect to Standard IV(C), Responsibilities of Supervisors, Berger:

A) assumes no extra responsibility with the hiring of Chennings.

B) must both develop written procedures concerning Chennings and routinely evaluate his performance.

C) must develop a set of written procedures to prevent violations derived from his mentoring Chennings.

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As a CEO, Berger is responsible for reasonable procedures being in place for the entire firm. Since Berger is not the supervisor of Chennings, however, Berger assumes no extra responsibility upon his hiring.

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The following scenarios describe two members of CFA Institute who have supervisory responsibility.

• The president of Hawthorne Investments, a newly founded money management firm with five investment professionals, asked Rebecca Long, CFA, to be the company's compliance officer and to develop the company's compliance procedures. Long has an in-depth knowledge of the Code and Standards, but she was too busy to develop a compliance manual herself. Therefore, she copied, with written permission, the compliance manual of a large money management firm. This manual was comprehensive and covered many areas not part of Hawthorne's operations. Long gave the manual to Hawthorne's president, but did not distribute the contents of the program to other appropriate personnel.
• A co-worker at Barksdale Capital mentions to Stephen Luck, CFA, that George Trout, a candidate in the CFA Program, may have violated the CFA Institute standard involving priority of transactions. As Trout's supervisor, Luck decided to investigate this allegation but did not begin the investigation until a month after the alleged incident. Luck continued to maintain the same amount of supervision on Trout during the month before he began his investigation of Trout.

According to the CFA Institute Standards of Professional Conduct, which of the following statements about whether Long and Luck followed appropriate compliance procedures involving their responsibilities as supervisors is CORRECT?

A) Luck violated the procedures for compliance, but Long did not.

B) Both Luck and Long violated the procedures for compliance.

C) Neither Luck nor Long violated the procedures for compliance.

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Long violated the procedures for compliance involving her supervisory responsibility by not tailoring the compliance manual to Hawthorne's operations and by not distributing the contents of the program to appropriate personnel. Luck also violated the procedures for compliance by not responding promptly to the allegation that Trout violated the CFA Institute standard involving priority of transactions and by not increasing supervision on Trout pending the outcome of the investigation.

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For years, John Berger, a CFA charterholder and CEO of a company, relied upon a set of reasonable procedures for preventing violations of the Standards of Practice in the firm. The company has recently arranged to have members of CFA Institute as mid-level supervisors throughout the firm. With this arrangement Berger has delegated the supervision of employees with respect to the Code and Standards to the mid-level managers. With this action Berger:

A) is still responsible for seeing that procedures are in place to prevent violations of the Code and Standards.

B) is relieved of his obligation to supervise the employees under the mid-level supervisors.

C) has violated Standard IV(C), Responsibilities of Supervisors.

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Berger has not violated any of the Standards. He has the right to delegate supervisory duties. This delegation does not relieve him of the responsibility of making sure that procedures are in place to prevent violations of the Code and Standards.

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Which of the following statements about Standard IV(C), Responsibilities of Supervisors, is NOT correct? CFA Institute members with supervisory authority:

A) are expected to bring an inadequate compliance system to the attention of the firm's senior managers and recommend corrective action.

B) may delegate supervisory duties, which relieves them of their supervisory authority.

C) are expected to have in-depth knowledge of the Code and Standards and to apply this knowledge in discharging their supervisory responsibilities.

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Standard IV(C) permits members to delegate supervisory duties but such delegation does not relieve members of their supervisory responsibility.