Reading 3: Ethics in Practice －LOS b, (Part 2) where, 2008

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CFA Institute Area 1-2: Ethical and Professional Standards
Session 2: Ethical and Professional Standards in Practice
Reading 3: Ethics in Practice
LOS b, (Part 2): Formulate corrective actions where appropriate.

hannah111

good~

1212jo

好

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Steve Reese, CFA, an equity analyst for Bison Investments, has just completed his extensive research on the long-term prospects of ThetaCorp, a small technology firm that creates medical software for hospitals and other medical clinics. Reese has determined that the economic outlook for ThetaCorp warrants issuing a buy recommendation and has reflected this long-term view in his report which is being reviewed by Bisons compliance department. The head of Bisons investment banking department, Mark Hazel, CFA, learned of the report and called Reese to suggest that he increase his recommendation to a strong-buy in an effort to support Bisons bid to be retained as the lead underwriter for an upcoming bond issue by ThetaCorp. Hazel explained that the level of risk that Reese has assigned to ThetaCorp is too high and that with a slight downward adjustment, a strong-buy recommendation would be justified. Reese agreed to the adjustment and updated his report which he then resubmitted to the compliance department which gave its official approval for distribution. According to CFA Institute Standards of Professional Conduct, which of the following is TRUE? Reese has:

A) not violated the Standards since he has reasonable basis to support a strong-buy recommendation.

B) violated the Standards by failing to deal fairly with all of Bison Investments clients.

C) not violated the Standards since the compliance department re-approved his report after speaking with Hazel.

D) violated the Standards by failing to maintain his independence and objectivity.

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Answer and Explanation

According to Standard I(B) Independence and Objectivity, members and candidates must not allow other entities to compromise the independence and objectivity of their professional activities. Reese has allowed Hazel to materially influence his research report. Hazel is the head of Bisons investment banking department which may have interests at odds with the equity research department. Ideally, the firm would build a firewall to prevent such communication between departments.

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A firm recently hired Viola Sandoval, CFA, to be a managing supervisor in the firm. Sandoval knows that all of her subordinate supervisors are members of CFA Institute and the firm has a compliance system in place with respect to the Code and Standards. Under these conditions Sandoval needs to:

A) immediately implement a new compliance system.

B) rely on the current compliance system since the subordinate supervisors are subject to the Code and Standards.

C) review the compliance system for its adequacy.

D) delegate her responsibility to a subordinate.

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Answer and Explanation

According to Standard IV(C), Responsibilities of Supervisors, Sandoval must make reasonable efforts to detect violations of the law, rules, regulations, and Code and Standards. This responsibility is not eliminated because Sandovals subordinates are CFA Institute members. Sandoval should review the compliance system and report any inadequacies to senior management.