Reading 2-IV: Standards of Professional Conduct & Guidanc 2011, following, examples, border

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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.

 

 

All of the following are poor examples of supervisory responsibility EXCEPT:

A) Incorporating a professional conduct evaluation as part of an employee’s performance review.

B) Proper supervision is not exercised because the supervisor's income is partially based on unsupervised or improper trading activity.

C) Poor procedures allow a portfolio manager to designate a trade to an account or portfolio after the outcome of the trade is known.

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According to Standard IV(C), supervisors must make reasonable efforts to detect and prevent violations of laws, rules, regulations, and the Code and Standards by anyone under their authority. Incorporating a professional conduct evaluation as part of an employee’s performance review is a recommended compliance procedure.

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1215

Edwin McNeill, CFA, is a senior trader for Grey Securities. In his monthly review of his team’s activity, McNeill notices a series of suspicious trades by one of the traders. McNeill consults his manager, who agrees that these trades are a potential violation. McNeill informs the trader that her duties will be restricted while these trades are being investigated and refers the matter to Grey’s compliance officer for further action. McNeill has:

A) violated Standard IV(C) – Responsibilities of Supervisors by restricting the trader’s duties before the investigation is completed.

B) violated Standard IV(C) – Responsibilities of Supervisors by failing to prevent a potential violation.

C) not violated the Standards.

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By reviewing the employee’s conduct, restricting the employee’s activities while investigating a potential violation, and referring the matter to his manager and compliance officer, McNeill acted properly according to Standard IV(C) – Responsibilities of Supervisors. Wrongdoing by a subordinate does not mean the manager has violated Standard IV(C) as long as adequate procedures to detect and prevent violations are in place and the manager enforces them.

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

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

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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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Carmen Jorgensen, CFA, is the chief compliance officer for Dalton Financial Network, a regional brokerage firm. Dalton is divided into three regions, each of which has a regional compliance officer. Martin Lund, CFA, is the regional compliance officer for Dalton’s South Region.

Dalton has established procedures for proper allocation of trades to all clients. In October, Fred Curry, CFA, a broker in the South Region, misallocated a trade in favor of certain of his clients and to the detriment of others. It became evident that Lund had failed to review the trades on a timely basis as called for in Dalton’s Procedures Manual.

After an investigation, it was concluded that Curry violated the Code and Standards by failing to allocate trades properly and Lund violated the Code and Standards by failing to supervise appropriately. It should also conclude that Jorgensen:

A) did not violate the Code and Standards because adequate procedures were in place, even though they weren't being followed.

B) violated the Code and Standards by failing to adequately supervise her regional compliance officer, Lund.

C) violated the Code and Standards by failing to establish proper procedures.

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Standard IV(C) is violated when a supervisor does not take reasonable steps to implement an effective compliance system. Even though the system employed by Dalton may be adequate, Jorgensen is responsible to see that her regional compliance officers follow it.

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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) not in violation of the Code and Standards.

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

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

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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 IV(C) "Responsibilities of Supervisors."

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

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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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Bill Fence, CFA, supervises a group of research analysts, none of whom have earned the CFA designation or are CFA candidates. On several occasions he has attempted to get his firm to adopt a compliance system to ensure that applicable laws and regulations are followed. However, the firm's principals have never adopted his recommendations. Fence should most appropriately:

A) decline in writing to accept supervisory responsibility until reasonable compliance procedures are adopted.

B) resign from the firm, because no other alternative will keep him in compliance with the Code and Standards.

C) take no further action, because by encouraging his firm to adopt a compliance system he has fulfilled his obligations under the Code and Standards.

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According to Standard IV(C), Responsibilities of Supervisors, if the member cannot discharge supervisory responsibilities because of a poor or nonexistent compliance system, the member should decline in writing to accept supervisory responsibility until the firm adopts an adequate system. The standard does not require Fence to resign.

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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 to Brown, even though Brown is not subject to the Standards.

C) Tripp can delegate some or all of his supervisory duties only to Green because she is 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.