kim226

Mary White, CFA, sits on the board of directors of XYZ Manufacturing, Inc. She discovers that management has knowingly participated in an activity she knows is illegal. According to the CFA Institute Standards of Professional Conduct, White is required to:

A) disassociate herself from the activity.

B) seek legal advice to determine what actions should be taken.

C) both of these choices are correct.

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Standard I(A), Knowledge of the Law. Prohibition against knowingly practicing or assisting in violation of laws, rules, and regulations. If White knows that someone has engaged in a possible illegal activity, she should: (1) report the finding to the appropriate supervisory person at her firm, (2) if the situation is not remedied, disassociate herself from the situation, and (3) seek legal advice to see what other actions, such as notifying the proper regulatory agency, should be taken.

kim226

If a CFA Institute member knows that a fellow employee has violated a law, according to Standard I(A) the member is NOT required to do which of the following?

A) Seek legal advice.

B) Report the employee violating the law to the appropriate supervisor in the firm.

C) Report the employee violating the law to the appropriate governmental authority.

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Standard I(A) does not require a CFA Institute member to report violations to governmental or regulatory agencies. The other answers are appropriate actions.

kim226

The SEC’s 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) No, because the member remedied the situation.

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

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

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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).

kim226

Mega Securities, a multinational investment advisor based in the United States, employs the following analysts who practice in multiple jurisdictions.

• Melissa Black, CFA, resides in Country N, which has no securities laws or regulations, but does business in Country L, which has securities laws and regulations that are less strict than the Code and Standards.
• Tom White, a CFA Institute member, resides in Country L, but does business in Country S, which has securities laws and regulations that are stricter than the Code and Standards.

According to the CFA Institute Code and Standards, which of the following statements about Black and White is CORRECT?

Black must adhere to the

White must adhere to the

A) Code and Standards law of Country S

B) law of Country L law of Country S

C) law of Country N law of Country L

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Because the applicable law in Country L is less strict than the Code and Standards, Black must adhere to the Code and Standards. Because the applicable law is stricter than the Code and Standards, White must adhere to the more strict applicable law of Country S.

kim226

A CFA Institute member is also a member and the portfolio manager of an environmentalist group. In its charter, the environmentalist group lists a group of companies its members should boycott. The CFA Institute member would violate Standard I(A) concerning obeying all rules and regulations if the member:

A) purchases stock of a boycotted firm for the group's portfolio.

B) performs either of the activities listed here.

C) actively protests against a publicly traded firm boycotted by the group.

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Standard I(A) says the member must be guided by all applicable rules and regulations of professional associations governing the member’s professional activities. Purchasing the stock for the firm would be a violation because it involves the member’s professional activities and the rules of a group to which the member belongs and works for. Actively protesting would not be covered by that standard.

kim226

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 NOT correct? Parsons:

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

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

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

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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.

kim226

Michael Bellow, CFA, CAIA, is an investment banker who is involved with an initial public offering (IPO) of NewCo. Because this is Bellow’s 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 firm’s highly competent general counsel and follows the advice given without deviation. Based on the general counsel’s advice, Bellow consults his immediate supervisor about the suspected overstatement of earnings. After reviewing the situation, Bellow’s supervisor explains why NewCo’s calculations of its earnings are correct. Bellow realizes that his inexperience and exuberance initially led him to an incorrect conclusion about NewCo’s earnings.
Which of the following statements about Bellow’s actions involving Standard I(A), Knowledge of the law, and Standard I(C), Misrepresentation, is CORRECT? Bellow:

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

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

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

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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.

karoliukas

Robe Advisory Services operates an office in San Francisco, where it manages portfolios for its clients based in the United States. The firm also maintains an office in Tokyo, where it employs Sam Lee, CFA who researches Japanese stocks. According to the CFA Institute Standards of Professional Conduct, Lee is required to maintain knowledge of and comply with all applicable laws, rules, and regulations in:

A) both the U.S. and Japan, but not the CFA Institute Standards of Professional Conduct.

B) Japan, but not the U.S., and the CFA Institute Standards of Professional Conduct.

C) both the U.S. and Japan and the CFA Institute Standards of Professional Conduct.

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To abide by the Standards, employees who work for foreign-based firms are required to apply the stricter of the foreign (here, U.S.) law, the domestic (here, Japanese) law, or CFA Institute standards.

karoliukas

Sometimes a CFA Institute member simply feels a law has been violated by his firm, and sometimes the member knows a law has been violated. Which of the following pairs of guidelines is CORRECT with respect to the first step a member should take in each case? The member should first contact:

A) the firm's counsel if he feels a law has been violated and contact his supervisor if he knows a law has been violated.

B) the firm's counsel if he feels a law has been violated and the SEC if he knows a law has been violated.

C) his supervisor in the firm if he feels a law has been violated and contact the firm's counsel if he knows a law has been violated.

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Standard I(A) says that when a member feels a law has been broken, the member should seek advice from the firm’s counsel. If the member feels the advice is unbiased and competent, the member should follow it. If the member knows a law has been violated, the member should contact a supervisor.

karoliukas

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 Blanford’s firm. Based on his analysis, Blanford suspects that Shanti may have deliberately overstated Starr’s current earnings and its earnings for the past several quarters. If this information becomes public, Blanford believes that Starr’s stock price will drop substantially. Blanford suspects that Shanti may have violated Ragatan’s securities laws. Which of the following statements is least likely to comply with Standard I, Professionalism? Blanford should:

A) take no action.

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

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

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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.