Reading 2-IV: Standards of Professional Conduct & Guida 2008

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CFA Institute Area 1-2: Ethical and Professional Standards
Session 1: Code of Ethics and Professional Standards
Reading 2-IV: Standards of Professional Conduct & Guidance: Duties to Employers
LOS C.: Responsibilities of Supervisors.

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Wanda Kirby, CFA, recently joined Allegheny Investments as a senior analyst. Because of her extensive experience in the investments business and knowledge of the Code and Standards, Allegheny's management asked her to assume supervisory responsibility. Kirby reviewed Allegheny's existing compliance system and determined that it was inadequate to allow her to clearly discharge her supervisory responsibility. According to CFA Institute Standards, Kirby should:

A) decline in writing to accept supervisory responsibility until Allegheny adopts reasonable procedures to allow her to adequately exercise such responsibility.

B) agree to accept supervisory responsibility and to develop reasonable procedures to allow her to adequately exercise such responsibility.

C) agree to accept supervisory responsibility provided that Allegheny adopts reasonable procedures to allow her to adequately exercise such responsibility.

D) decline orally to accept supervisory responsibility until Allegheny adopts reasonable procedures to allow her to adequately exercise such responsibility.

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Answer and Explanation

If Kirby clearly cannot discharge supervisory responsibilities because of an inadequate compliance system, she should decline in writing to accept supervisory responsibility until Allegheny adopts reasonable procedures to allow her to adequately exercise such responsibility.

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Dixie Miller, CAIA, and Level II CFA candidate, heads the research department of a large brokerage firm. The firm has many analysts, some of whom are subjected to the CFA Institute Code of Ethics and Standards of Professional Conduct. If Miller delegates some of her supervisory duties, which statement best describes her responsibilities under the CFA Institute Code and Standards?

A) Miller retains supervisory responsibilities for those duties delegated to her subordinates.

B) CFA Institute Standards prevent Miller from delegating supervisory duties to subordinates.

C) Miller's supervisory responsibilities do not apply to those subordinates who are not subjected to the CFA Institute Code and Standards.

D) Miller no longer has supervisory responsibility for those duties delegated to her subordinates.

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Answer and Explanation

Even though members may delegate supervisory duties, such delegation does not relieve members of the supervisory responsibility.

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The following scenarios describe two members of CFA Institute who have supervisory responsibility.

• The president of Hawthorne Investments, a newly founded money management firm with five investment professionals, asked Rebecca Long, CFA, to be the company's compliance officer and to develop the company's compliance procedures. Long has an in-depth knowledge of the Code and Standards, but she was too busy to develop a compliance manual herself. Therefore, she copied, with written permission, the compliance manual of a large money management firm. This manual was comprehensive and covered many areas not part of Hawthorne's operations. Long gave the manual to Hawthorne's president, but did not distribute the contents of the program to other appropriate personnel.
• A co-worker at Barksdale Capital mentions to Stephen Luck, CFA, that George Trout, a candidate in the CFA Program, may have violated the CFA Institute standard involving priority of transactions. As Trout's supervisor, Luck decided to investigate this allegation but did not begin the investigation until a month after the alleged incident. Luck continued to maintain the same amount of supervision on Trout during the month before he began his investigation of Trout.

According to the CFA Institute Standards of Professional Conduct, which of the following statements about whether Long and Luck followed appropriate compliance procedures involving their responsibilities as supervisors is TRUE?

A) Both Luck and Long violated the procedures for compliance.

B) Neither Luck nor Long violated the procedures for compliance.

C) Long violated the procedures for compliance, but Luck did not.

D) Luck violated the procedures for compliance, but Long did not.

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Answer and Explanation

Long violated the procedures for compliance involving her supervisory responsibility by not tailoring the compliance manual to Hawthorne's operations and by not distributing the contents of the program to appropriate personnel. Luck also violated the procedures for compliance by not responding promptly to the allegation that Trout violated the CFA Institute standard involving priority of transactions and by not increasing supervision on Trout pending the outcome of the investigation.

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Jess Green, CFA, is the research director for Castle Investment, Inc., and has supervisory responsibility over eight analysts, including three CFA charterholders. Castle has a compliance program in place. According to CFA Institute Standards of Professional Conduct, which of the following is NOT an action that Green should take to adhere to the compliance procedures involving responsibilities of supervisors? Green should:

A) disseminate the contents of the compliance program to the eight analysts.

B) educate all analysts under his supervision about the compliance procedures.

C) issue periodic reminders of the procedures to all analysts under his supervision.

D) incorporate a professional conduct evaluation as part of the performance review only for the three CFA charterholders.

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Answer and Explanation

Green should incorporate a professional conduct evaluation as part of his review of all eight analysts under his supervision, not just the three CFA charterholders.

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A firm recently hired Hal Crane, CFA, to be a supervisor in the firm. Crane has reviewed the procedures for complying with the Code and Standards in the company. It is Cranes belief that the procedures need revision in order to be effective. Crane must:

A) refuse supervisory responsibilities in writing until the company adopts an adequate system.

B) only send out a petition to fellow workers asking for a change in the procedures.

C) only inform the SEC about the problem.

D) both submit a petition to fellow workers and inform the SEC.

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Answer and Explanation

If Crane believes the current procedures are not adequate, Crane must refuse the supervisory responsibilities in writing until an adequate system is adopted. There is nothing in the Standards about circulating a petition.

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A manager has pointed out that his firm has experienced significant expansion over the past few years. Until recently, its Legal Department was responsible for the firm's compliance activities. Now, however, the legal and compliance functions have been separated. A compliance officer has been formally designated and a comprehensive compliance program has been put in place.

In order to function effectively, the compliance officer must have the authority:

A) to affect, control, and guide employee behavior and to respond to employee misconduct.

B) to hire and fire personnel.

C) to hire trading personnel and to supervise operations personnel.

D) which is consistent with the most senior partner or executive officer in the firm.

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Answer and Explanation

Compliance officers must be able to guide employee behavior and respond to employee misconduct, otherwise there will be no effective compliance procedures in place. Unless the compliance officer can effectuate compliance procedures, the compliance program has no chance of responding to or preventing violations of the Standards.

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For years, John Berger, a CFA charterholder and CEO of a company, relied upon a set of reasonable procedures for preventing violations of the Standards of Practice in the firm. The company has recently arranged to have members of CFA Institute as mid-level supervisors throughout the firm. With this arrangement Berger has delegated the supervision of employees with respect to the Code and Standards to the mid-level managers. With this action Berger:

A) is relieved of his obligation to supervise the employees under the mid-level supervisors.

B) has violated Standard IV(C), Responsibilities of Supervisors.

C) has violated Standard I(B), Independence and Objectivity.

D) is still responsible for seeing that procedures are in place to prevent violations of the Code and Standards.

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Answer and Explanation

Berger has not violated any of the Standards. He has the right to delegate supervisory duties. This delegation does not relieve him of the responsibility of making sure that procedures are in place to prevent violations of the Code and Standards.

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The proper system for compliance with CFA Institute Standards and requirements:

A) cannot incorporate the professional conduct evaluation of the employees into their performance review, because not all of the employees are CFA charterholders.

B) should incorporate the professional conduct evaluation of the employees into their performance review.

C) should leave the procedures to report violators open and unstated so the employees can be more flexible about when they need to act.

D) should incorporate professional conduct evaluation of the employees into their performance review only for those employees who are CFA charterholders.

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Answer and Explanation

Once a compliance system is established, it should prohibit all employees, including those who are not CFA charterholders, from violating CFA Institute Standards. The incorporation of the professional conduct evaluation into the employees performance review is one of the recommended features of the compliance system.

Once a compliance system is established, it should prohibit all employees, including those who are not CFA charterholders, from violating CFA Institute Standards. The incorporation of the professional conduct evaluation into the employees performance review is one of the recommended features of the compliance system.

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Which of the following statements about Standard IV(C), Responsibilities of Supervisors, is FALSE? CFA Institute members with supervisory authority:

A) are expected to bring an inadequate compliance system to the attention of the firm's senior managers and recommend corrective action.

B) may delegate supervisory duties, which relieves them of their supervisory authority.

C) are expected to have in-depth knowledge of the Code and Standards and to apply this knowledge in discharging their supervisory responsibilities.

D) must make reasonable efforts to detect violations of laws, rules, regulations, and the Code and Standards.

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Answer and Explanation

Standard IV(C) permits members to delegate supervisory duties but such delegation does not relieve members of their supervisory responsibility.