Reading 2-IV: Standards of Professional Conduct & Guidanc center, recognized, 2011, class, membership

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

LOS A.: Loyalty.

 

 

An analyst belongs to a nationally recognized charitable organization, which requires dues for membership. The analyst has worked out a deal where he provides money management advice in lieu of paying dues. Which of the following must the analyst do?

A) Resign from the position because the relationship is a conflict with the Standards.

B) Must treat the charitable organization as his employer.

C) Nothing since he is not an employee of the charitable organization.

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An employee/employer relationship does not necessarily mean monetary compensation for services. If the analyst is performing services for the organization, then the analyst must treat the position as if he were an employee.

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Francisco Perez, CFA, is an equity research analyst for a long-term investment fund. The fund is seeking new clients, so Perez contacts old clients he knew through his former employer. Which of the following is most accurate?

A) Perez is not prevented from soliciting clients as long as he is working from memory and publically available information rather than a list generated while he was still with the former employer.

B) Perez cannot solicit clients from a former employer.

C) Perez can only solicit clients after notifying his former employer.

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According to Standard IV(A), Perez is not prevented from soliciting clients as long as he is working from memory and publically available information rather than a list generated while he was still with the former employer.

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Nicholas Brynne, CFA, develops a trading model while working for CE Jones, an investment management firm. By working on the model at home from his personal computer, Brynne is able to devote additional work hours. Although the trading model is successful, Brynne losses his job in a company restructuring, and decides to start his own practice using the trading model. Nicholas is most likely:

A) not in violation of the Standards because the trading model was created using his home computer.

B) in violation of the Standards because he did not have permission to build the trading model using his home computer.

C) in violation of the Standards because he did not receive permission from his employer to keep or use the files after employment ended.

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Brynne is in violation of Standard IV(A) "Loyalty." Employer records include items stored in any medium including home computers.

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Dave Kline, CFA, is a personal investment advisor with 200 individual, family, and corporate accounts. After a dispute with a coworker on margin policy, he formally resigns his position by giving suitable notice. However, he does not follow his firm’s established "Transition and Exit Policies" regarding his accounts. The firm’s stated policies require him to notify each client of his planned departure and personally introduce them to their new account representative, Greg Potter. Kline sees Potter as a rival and states "...let Potter do his own work and find his own clients." Kline is most likely:

A) in violation of Standard IV(A) "Loyalty" for failing to follow the employer’s policies and procedures related to notifying clients of his departure.

B) in violation of Standard I(D) "Misconduct" for leaving clients subject to an account representative he does not find suitable.

C) not in violation of the Code and Standards.

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Kline is in violation of Standard IV(A) "Loyalty" for failing to follow the employer’s policies and procedures related to notifying clients of his departure.

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Dave Kline, CFA, is a personal investment advisor. After a dispute with a coworker on margin policy, he formally resigns his position by giving suitable notice. However, he does not follow his firm’s established "Transition and Exit Policies" regarding discussion of the reason for his departure. During his final two weeks of employment, Kline routinely discusses the margin policy dispute, stating "...anyone who would lend that much money on securities of such low quality does not belong in this business..." Kline’s statements are in direct violation of the firm’s "Transition and Exit Policies," but he considers it a free-speech issue. Kline is most likely:

A) in violation of Standard IV(A) "Loyalty" recommended procedures for failing to follow the employer’s policies and procedures related to termination policy.

B) in violation of Standard IV(A) "Loyalty" recommended procedures for failing to notify regulators of the dangerous margin policy.

C) not in violation of the Code and Standards.

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Kline is in violation of Standard IV(A) "Loyalty" recommended procedures for failing to follow the employer’s policies and procedures related to termination policy. Members and candidates should understand and follow their employer’s policies and operating procedures. Also, members and candidates planning to leave their current employer must continue to act in the employer’s best interest.

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May Frost, CFA, is an equity research analyst for a "precious metals mining" exchange traded fund which has recently started significantly outperforming its benchmark after several years of stagnation. Upon investigating the source of the outperformance, Frost learns that the fund has experienced severe style drift, and now has a significant proportion of its resources invested in technology and Internet stocks. Frost reviews the fund’s prospectus and learns the current sector weighting violates multiple prospectus covenants. Frost contacts her supervisor and the fund’s compliance department and is told the portfolio weighting is not her responsibility and that she should not pursue the matter further. Frost reviews the firm’s whistleblower policy, contacts personal legal counsel, and then contacts regulatory authorities regarding the style drift and prospectus violations. Frost 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 III(E) "Preservation of Confidentiality."

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Standard IV(A) "Loyalty" does not necessarily prohibit Frost from whistleblowing actions. Frost has properly contacted her supervisor and the compliance department, and has reviewed her firm’s whistleblower policy.

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May Frost, CFA, is concerned about the comments and activities of several of her coworkers and feels both ethical and legal violations are routinely overlooked. According to the Code and Standards, a recommended first step would least likely be to:

A) contact industry regulators.

B) provide her supervisor with a copy of the Code and Standards.

C) review the company’s policies and procedures for reporting ethical violations.

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See Standard IV(A) "Loyalty." Frost should begin by reviewing the company’s policies and procedures for reporting ethical violations and provide her supervisor with a copy of the Code and Standards to highlight the high level of ethical conduct she is required to follow.

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John Hill, CFA, has been working for Advisors, Inc., for eight years. Hill is about to start his own money management business and has given his two-week notice of his resignation from Advisors. A few days before his resignation takes effect, a former client of Advisors calls Hill at his home about his new firm. The former client says that he is very happy that Hill is leaving Advisors because now he and Hill can resume a professional relationship. The client says that he would never become a client of Advisors again. Hill promises to call the client back after he has left Advisors. Hill does not tell his employer about the call. Hill has most likely:

A) not violated the Standards.

B) violated the Standard concerning disclosure of conflicts.

C) violated the Standard concerning loyalty to employer.

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Based on the information here, Hill has done nothing wrong. He took a call at his home, presumably on his own time, and the client made it clear that he would never be a client of Advisors. Therefore, there was no breach of loyalty to Advisors by Hill, nor is there a conflict of interest.

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John Hill, CFA, has been working for Advisors, Inc., for eight years. Hill is about to start his own money management business and has given his two-week notice of his resignation from Advisors. A few days before his resignation takes effect, on his lunch hour, he takes out a loan from a bank on behalf of his new business and uses the money to buy some office equipment for his new business. Since he engaged in these transactions while still an employee of Advisors, Hill violated Standard IV(A), Loyalty to Employer, by:

A) engaging in a financial transaction, like taking out a loan, only.

B) neither of these actions.

C) both taking out the loan and purchasing the office equipment.

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The Standards of Practice under IV(A) expressly says that a departing employee is “generally free to make arrangements or preparations to go into a competitive business before terminating the relationship with the employee’s employer provided that such preparations do not breach the employee’s duty of loyalty.” Neither of these actions are in conflict with the interests of Advisors, and Hill performed them on his own time.

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Brian Bellow, a CFA Institute member, is a portfolio manager for Progressive Trust Company. Several friends asked Bellow to review their investment portfolios. On his own time, Bellow examined their portfolios and made several recommendations. He received no monetary compensation from his friends for his investment advice and provided no future investment counsel to them. According to CFA Institute Standards of Professional Conduct, did Bellow violate his duty to Progressive Trust?

A) Yes, because he undertook an independent practice that could result in compensation or other benefit to him.

B) No, because Bellow received no monetary compensation for his services.

C) No, because Bellow provided no ongoing investment advice.

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Standard IV(A) does not preclude providing independent services for compensation while still employed; however, notification to the employer is required describing the type of service, the expected duration, and the compensation. Compensation includes more than just monetary benefits.