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Ethical and Professional Standards 【Reading 7】Sample

Patricia Spraetz is the chief financial officer and compliance officer at Super Selection Investment Advisors.  Super Selection is a medium-sized money management firm which has incorporated the CFA Institute Code of Ethics and Standards of Practice into the firm's compliance manual.
Karen Jackson is a portfolio manager for Super Selection.  She is not a CFA charterholder.  Jackson is friendly with David James, president of AMD, a rapidly growing biotech company.  James has provided Jackson with recommendations in the biotech industry, which she buys for her own portfolio before buying them for her clients.  For three years, Jackson has also served on AMD's board of directors.  She has received options and fees as compensation.
Recently, the board of AMD decided to raise capital by voting to issue shares to the public.  This was attractive to board members (including Jackson) who wanted to exercise their stock options and sell their shares to get cash.  When the demand for initial public offerings (IPO) diminished, just before AMD's public offering, James asked Jackson to commit to a large purchase of the offering for her portfolios.  Jackson had previously determined that AMD was a questionable investment but agreed to reconsider at James' request.  Her reevaluation confirmed the stock to be overpriced, but she nevertheless decided to purchase AMD for her clients' portfolios.
Which of the following statements concerning Super Selection is CORRECT?
A)
Jackson did not violate the CFA Institute Code of Ethics and Standards since she is not a CFA charterholder.
B)
All employees of a firm are bound by CFA Institute's Code and Standards if they are incorporated in the company's policies manual, and the firm subscribes to them explicitly.
C)
Spraetz, in her capacity as a supervisor, violated Standard IV(C) by not preventing violations by Jackson.


Even though Jackson is not a CFA charterholder, she is nevertheless required to follow the Code and Standards since her firm subscribes to them and has incorporated them in its policy manual.  
Standard IV(C) violation is not clear or obvious since the case does not say much about a lack of guidelines or explicit gaps in the policy manual.  Under this assumption, Spraetz is not guilty of any supervisory violation.  Even though Jackson did not personally trade ahead of purchasing AMD shares for her clients, she had done so in the past and is in violation of Standard VI(B).  Spraetz needs to act on it because this violation has only just come to light.

Patricia Spraetz is the chief financial officer and compliance officer at Super Selection Investment Advisors.  Super Selection is a medium-sized money management firm which has incorporated the CFA Institute Code of Ethics and Standards of Practice into the firm's compliance manual.
Karen Jackson is a portfolio manager for Super Selection.  She is not a CFA charterholder.  Jackson is friendly with David James, president of AMD, a rapidly growing biotech company.  James has provided Jackson with recommendations in the biotech industry, which she buys for her own portfolio before buying them for her clients.  For three years, Jackson has also served on AMD's board of directors.  She has received options and fees as compensation.
Recently, the board of AMD decided to raise capital by voting to issue shares to the public.  This was attractive to board members (including Jackson) who wanted to exercise their stock options and sell their shares to get cash.  When the demand for initial public offerings (IPO) diminished, just before AMD's public offering, James asked Jackson to commit to a large purchase of the offering for her portfolios.  Jackson had previously determined that AMD was a questionable investment but agreed to reconsider at James' request.  Her reevaluation confirmed the stock to be overpriced, but she nevertheless decided to purchase AMD for her clients' portfolios.
Which of the following actions are most appropriate for Spraetz?
A)
If, after her investigation Spraetz finds that Jackson has committed violations, Spraetz must report them to senior management and seek legal counsel for possible legal and regulatory implications.  If the upper management does not follow through and take action, Spraetz has fulfilled her supervisory duties and need not take any further action.
B)
Spraetz, as the chief compliance officer, must set company policy in clear terms and monitor the actions of the employees.  In case of violations, she should investigate thoroughly, initiate disciplinary action, and issue guidelines that must be followed in order to prevent future violations.  She must not only detect violations through a continuous monitoring process but also provide guidance for proper conduct consistent with the firm's policy manual.
C)
Even though Spraetz does not supervise Jackson, as the compliance officer of the firm she is responsible for identifying violations.  Spraetz is not responsible for preventing them and should not go beyond their documentation for senior management.  Thus, she should record the violations but need not take any further action.



Since Spraetz has the authority to hire, fire, reward, and punish Jackson, Spraetz has supervisory duties in addition to being the chief compliance officer of Superior Selection. She must investigate Jackson and report her findings to her superiors and possibly the board. If no action is taken, Spraetz must consider resigning under the CFA Institute Code and Standards. Spraetz is also responsible for setting the policy, preventing and detecting violations, and putting into place reasonable procedures to monitor employees' actions. Her role as the chief compliance officer requires her to take disciplinary actions in order to deter further violations.

TOP

Xenica Jones, CFA, is a portfolio manager and also follows the office equipment industry for Hynes-Gold and Co. In her June 30 discussions with the management of Zprint, she learns that an internal audit has detected irregularities in the firm's Italian operations. This fact is disclosed on July 1 in both The Wall Street Journal and The Financial Times. On July 10 Zprint's management announces that an investigation of the matter would not be completed until an external audit of all European operations was complete. This stock dropped 6 percent on the news release on the 10th. Jones places a series of sell transactions in Zprint stock on the 3rd. When she places the trades, she trades first for her clients and finishes with a trade selling short for her own account. These actions are:
A)
not in violation of the Code and Standards.
B)
in violation of the Standard concerning fair dealing.
C)
in violation of the Standard concerning fiduciary duties since she is not allowed to sell short under the Standard.



Her actions are not in violation of the Code and Standards. So long as her firm does not preclude her selling short, she is entitled to do so.

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Patricia Spraetz is the chief financial officer and compliance officer at Super Selection Investment Advisors.  Super Selection is a medium-sized money management firm which has incorporated the CFA Institute Code of Ethics and Standards of Practice into the firm's compliance manual.
Karen Jackson is a portfolio manager for Super Selection.  She is not a CFA charterholder.  Jackson is friendly with David James, president of AMD, a rapidly growing biotech company.  James has provided Jackson with recommendations in the biotech industry, which she buys for her own portfolio before buying them for her clients.  For three years, Jackson has also served on AMD's board of directors but has never notified Super Selection of this fact.  She has received options and fees as compensation.
Recently, the board of AMD decided to raise capital by voting to issue shares to the public.  This was attractive to board members (including Jackson) who wanted to exercise their stock options and sell their shares to get cash.  When the demand for initial public offerings (IPO) diminished, just before AMD's public offering, James asked Jackson to commit to a large purchase of the offering for her portfolios.  Jackson had previously determined that AMD was a questionable investment but agreed to reconsider at James' request.  Her reevaluation confirmed the stock to be overpriced, but she nevertheless decided to purchase AMD for her clients' portfolios.
Which of the following statements is NOT correct?
A)
Jackson did not violate Standard III(A) on Fiduciary Duty to clients because she was bound by her fiduciary duty to AMD and its stockholders as a board member. Therefore, when she reversed her decision to buy AMD shares for Super Selection's clients, portfolios on James' request, her obligation to AMD took precedence.
B)
Jackson violated Standard IV(B) regarding Disclosure of Additional Compensation by not disclosing additional compensation in the form of cash and stock options received from AMD, as its board member to her employer.
C)
Jackson violated Standard VI(A) regarding Conflicts of interest by not disclosing her board membership and ownership of stock options to her employer.



Jackson has violated Standard III(A) because her first obligation is to her firm's clients. Standard VI(A) addresses precisely these kinds of situations regarding potential conflict of interest. Given this conflict of interest, Jackson also compromised her objectivity in violation of Standard I(B). Her fiduciary duty to her clients takes precedence over her fiduciary duty to AMD's stockholders under the CFA Institute Code and Standards. By not disclosing her relationship with AMD, she also violated Standard IV(B). Making past personal security transactions ahead of purchase of the same securities for her clients has put Jackson in violation of Standard VI(B). This standard clearly prohibits such actions.

TOP

Karen Jackson is a portfolio manager for Super Selection.  Jackson is friendly with David James, president of AMD, a rapidly growing biotech company. James has provided Jackson with recommendations in the biotech industry, which she buys for her own portfolio before buying them for her clients. For three years, Jackson has also served on AMD's board of directors. She has received options and fees as compensation.
Recently, the board of AMD decided to raise capital by voting to issue shares to the public. This was attractive to board members (including Jackson) who wanted to exercise their stock options and sell their shares to get cash. When the demand for initial public offerings (IPO) diminished, just before AMD's public offering, James asked Jackson to commit to a large purchase of the offering for her portfolios. Jackson had previously determined that AMD was a questionable investment but agreed to reconsider at James' request. Her reevaluation confirmed the stock to be overpriced, but she nevertheless decided to purchase AMD for her clients' portfolios.
Did Jackson violate Standard III(C) concerning Portfolio Recommendations and Actions?
A)
Yes, she did not consider the appropriateness and suitability of investment recommendations or actions for each portfolio or client.
B)
Yes, she did not deal fairly with all clients.
C)
No.



Jackson violated Standard III(C) because she did not consider her clients' financial situation, investment experience, and investment objectives. If the stock is questionable and overpriced, it is not suitable for any of her clients.

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