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The SECs new stock-trading rule has just gone into effect. The SEC will give brokers a 10-day grace period, during which violators of the rule will be immediately notified and given a chance to remedy their situation to comply with the new rule. If a CFA Institute member unknowingly violates the rule and then remedies the situation within the 10-day grace period, has the member violated Standard I(A)?

A) Yes, because the member did not maintain knowledge and know of the rule.

B) Yes, because breaking a rule of the SEC has no remedy for a member of CFA Institute.

C) No, because the member remedied the situation.

D) No, because the member unknowingly broke the rule.

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Answer and Explanation

Standard I(A) explicitly says that a member shall maintain knowledge and comply with laws, rules, and regulations. By not knowing of the rule, the member broke the standard. If a CFA Institute member accidentally breaks a rule from a careless error and remedies the situation, this would not be a violation of Standard I(A), and so the no remedy response is not correct.

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When a CFA Institute member suspects a client or a colleague of planning or engaging in ongoing illegal activities, which of the statements about the actions that the member should take is most correct? According to the CFA Institute Standards of Professional Conduct, the CFA Institute member should:

A) consult counsel to determine the legality of the activity.

B) ignore the suspected illegal activity unless the suspected party is a CFA Institute member.

C) disassociate from any illegal or unethical activity if the member has reasonable grounds to believe that the activity is illegal or unethical.

D) consult counsel to determine the legality of the activity and disassociate from any illegal or unethical activity if the member has reasonable grounds to believe that the activity is illegal or unethical.

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Answer and Explanation

According to the procedures for compliance involving Standard I(A), CFA Institute members should determine legality and disassociate from any illegal or unethical activity.

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Bob Smith, CFA, is an outside board member of Atlantic Technologies, but is not paid by the firm for his services. An employee at Atlantic informs Smith that Atlantic has improperly timed the booking of contracts to achieve the desired quarterly financial results. The misleading financial statements would turn losses into profits. Smith confers with the firm's legal counsel who indicates that this conduct is, in fact, illegal. Smith urges Sharon White, Atlantic's chief operating executive, to change the financial statements, but she refuses to do so. According to CFA Institute Standards of Professional Conduct, which of the following statements best describes what Smith should do in this situation?

A) Smith should immediately make CFA Institute aware of the situation at Atlantic.

B) Smith should promptly disassociate himself from Atlantic's actions by resigning as a director or by reporting the activities to the appropriate authorities.

C) Smith should wait until the next board meeting, which is scheduled in two weeks, to make other board members aware of the situation.

D) Smith does not have to take any additional action because he is not one of the firm's paid employees.

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Answer and Explanation

Smith should disassociate from any illegal activity by resigning as a director or by reporting the activities to appropriate authorities. Inaction combined with continuing association with Atlantic's illegal conduct may be construed as participation, or assistance, in the illegal conduct.

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Shortly after becoming employed by Valco & Co., an investment banking firm, Stan McDowell, CFA, learns that most of Valco's initial public offerings (IPO) are really effected in order to profit management via price manipulation of the shares. McDowell observes an illegal act, sanctioned by senior management, in progress and refuses to sign off on his responsibility. Instead, McDowell takes the documentation to his supervisor and tells him he should sign it in his place. This action is:

A) an overreaction. Senior management's sanctioning of the act absolves McDowell from his ordinary responsibility as a CFA Institute member.

B) a suitable reaction, and he is in compliance with the Code and Standards.

C) a violation of the Code and Standards since he is required not to knowingly participate or assist in such an act.

D) a violation of the Code and Standards unless his supervisor is a CFA Institute member and signs off on the documentation.

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Answer and Explanation

McDowell, by his action in taking the documentation to his supervisor, is knowingly participating in and/or assisting in an illegal act. This is clearly prohibited under Standard I(A), and he is in violation of the Standard.

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Deloris Johnson, CFA, suspected that her intern, who was working without pay at her brokerage firm, had violated a federal securities regulation. Johnson discussed the matter with her company's legal counsel who said that the intern's conduct was illegal. According to the CFA Institute Code and Standards of Professional Conduct, Johnson can dissociate herself from this illegal activity by:

A) transferring supervision of the intern to another person.

B) reporting the violation to CFA Institute.

C) telling her intern to stop such conduct.

D) reporting the activity to the appropriate authorities.

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Answer and Explanation

Johnson can dissociate herself from the illegal activity by reporting the activity to the appropriate authorities. However, the Code and Standards do not require that she report legal violations to the appropriate governmental or regulatory organizations, but such disclose is prudent in this circumstance.

By transferring the intern to another supervisor this may not solve the problem of the illegal activity occurring and the company would still be held liable for it.

By transferring the intern to another supervisor this may not solve the problem of the illegal activity occurring and the company would still be held liable for it.

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If you suspect that a colleague is violating the law you should:

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

B) report the illegal activity to CFA Institute Professional Standards Review Board for action.

C) report all illegal activities to the appropriate regulatory agency.

D) associate yourself with the illegal activity.

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Answer and Explanation

Standard I(A), Knowledge of the law, applies in this situation. According to this standard, members shall not knowingly participate or assist in any violation of laws, rules, or regulations governing CFAs.

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 clients or employees 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.

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 clients or employees 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.

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Bob Blanford, CFA, is an investment analyst for a large global brokerage firm. He recently moved to Ragatan, a developing country with few securities laws and regulations. As part of conducting a company analysis, Blanford interviews Ravi Shanti, vice-president of finance at Starr Industries. Starr is a major industrial firm in Ragatan and a client at Blanfords firm. Based on his analysis, Blanford suspects that Shanti may have deliberately overstated Starrs current earnings and its earnings for the past several quarters. If this information becomes public, Blanford believes that Starrs stock price will drop substantially. Blanford suspects that Shanti may have violated Ragatans securities laws. Which of the following statements is least likely to comply with Standard I, Professionalism? Blanford should:

A) determine the legality of the activity, possibly by consulting counsel.

B) disassociate himself from the client, if the activity is illegal or unethical.

C) take no action.

D) urge his firm to attempt to persuade Shanti to cease such conduct, if the activity is illegal.

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Answer and Explanation

Because Blanford suspects Shanti of engaging in ongoing illegal activities, Blanford should take action by determining the legality of the suspected action, disassociating from any illegal activity, and urging his firm to attempt to persuade Shanti to cease such conduct if such an activity is illegal or unethical.

Because Blanford suspects Shanti of engaging in ongoing illegal activities, Blanford should take action by determining the legality of the suspected action, disassociating from any illegal activity, and urging his firm to attempt to persuade Shanti to cease such conduct if such an activity is illegal or unethical.

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Allen Parsons, a CFA candidate, suspects a colleague at his firm of engaging in an illegal activity. Which of the following statements about procedures for compliance involving Standard I(A), Knowledge of the law is FALSE? Parsons:

A) should consult counsel to determine whether the conduct is, in fact, illegal.

B) should disassociate from any illegal activity.

C) should urge his firm to attempt to persuade the perpetrator to cease such conduct.

D) is required to report this legal violation to the appropriate governmental or regulatory organizations.

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Answer and Explanation

Standard I(A), Knowledge of the law, does not require that Parsons report legal violations to the appropriate governmental or regulatory organizations, but such disclosures may be appropriate under certain circumstances.

Standard I(A), Knowledge of the law, does not require that Parsons report legal violations to the appropriate governmental or regulatory organizations, but such disclosures may be appropriate under certain circumstances.

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Michael Bellow, CFA, CAIA, is an investment banker who is involved with an initial public offering (IPO) of NewCo. Because this is Bellows first involvement in an IPO, he reports to an experienced supervisor. While reviewing past financial statements provided by NewCo, Bellow suspects that NewCo deliberately overstated its earnings for the past several quarters. Bellow seeks the advice of his firms highly competent general counsel and follows the advice given without deviation. Based on the general counsels advice, Bellow consults his immediate supervisor about the suspected overstatement of earnings. After reviewing the situation, Bellows supervisor explains why NewCos calculations of its earnings are correct. Bellow realizes that his inexperience and exuberance initially led him to an incorrect conclusion about NewCos earnings.

Which of the following statements about Bellows actions involving Standard I(A), Knowledge of the law, and Standard I(C), Misrepresentation, is TRUE? Bellow:

Which of the following statements about Bellows actions involving Standard I(A), Knowledge of the law, and Standard I(C), Misrepresentation, is TRUE? Bellow:

A) violated both Standard I(A) and Standard I(C).

B) violated Standard I(A) but did not violate Standard I(C).

C) did not violate Standard I(A) but violated Standard I(C).

D) did not violate either Standard I(A) or Standard I(C).

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Answer and Explanation

Bellow did not violate Standard I(A), Knowledge of the law, because he sought advice of counsel and followed that advice. Bellow did not violate Standard I(C), Misrepresentation, because he made reasonable and diligent efforts to ensure the accuracy of the information and to avoid any material representation.

Bellow did not violate Standard I(A), Knowledge of the law, because he sought advice of counsel and followed that advice. Bellow did not violate Standard I(C), Misrepresentation, because he made reasonable and diligent efforts to ensure the accuracy of the information and to avoid any material representation.

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Which of the following statements about the CFA Institute Code and Standards is most accurate? The Code and Standards:

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

B) require members to resign from their jobs to disassociate themselves from clients engaging in illegal activities.

C) require members to persuade the perpetrator to cease illegal activities.

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

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Answer and Explanation

The Code and Standards do not require members to report violations to legal authorities, but such disclosure may be prudent 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.