Reading - 2-I - LOS a: Q6 - Q10

6、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 unless his supervisor is a CFA Institute member and signs off on the documentation.

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

The correct answer was  D)

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.

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

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

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

D)   take no action.

The correct answer was  D)

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.

8、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 TRUE? 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).

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

The correct answer was  B)

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.

9、What is the rule of thumb for members, CFA charterholders and candidates in the CFA program when weighing the requirements of the CFA Institute Code and Standards and the requirements of local laws? If the applicable laws are:

A)   more strict, they must still follow the Code and Standards.

B)   less strict, they must still follow the local country laws.

C)   less strict, they should make a judgment call on which to follow, the Code and Standards or the local laws and requirements.

D)   more strict, they must adhere to the applicable laws.

The correct answer was  D)  

The rule of thumb for members, CFA charterholders and candidates in the CFA program requires that they adhere to the applicable laws if the applicable laws are more strict than the requirements of the Code and Standards. If there are no laws or the laws are less strict, they must adhere to the Code and Standards.

10、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.

The correct answer was  D)

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.