Ethical and Professional Standards 【Reading 2】Sample his, regulatory, standards, industry

bapswarrior

Nicholas Brynne, CFA, is a fixed-income analyst who trades in mortgage-backed securities (MBS). The MBS industry has seen sweeping regulatory changes since Brynne took his current position, and he now feels his understanding of applicable laws and regulatory standards is dated. Brynne must:

A) have all trades reviewed by his compliance department until he has obtained an expert level of knowledge in compliance.

B) rely on his firm’s policies and procedures for guidance on legal and regulatory standards.

C) update his understanding of applicable laws and regulatory standards relating to his position.

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See Standard I(A) "Knowledge of the Law." Brynne should update his understanding of applicable laws and regulatory standards relating to his position, although he is not required to be an expert in compliance. Relying only on firm policies and procedures is not sufficient.

bapswarrior

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

B) violated both Standard I(A) and 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.

bapswarrior

Which of the following statements about the responsibilities of CFA charterholders is CORRECT? CFA charterholders:

A) are only obligated to comply with securities laws in the U.S.

B) need not comply with the laws and rules governing their profession or must not engage in any individual behavior that reflects adversely on the entire profession.

C) must comply with the laws and rules governing their profession and must not engage in any individual behavior that reflects adversely on the entire profession.

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CFA charterholders must comply with the laws and rules governing their profession and must not engage in any individual behavior that reflects adversely on the entire profession. While they should act honorably and follow U.S. securities laws, they are obligated to more than that, as set forth in the Code and Standards.

bapswarrior

According to the CFA Institute Standards of Professional Conduct, Standard I(A), Knowledge of the Law, members shall not knowingly participate or assist in any violations of laws, rules, or regulations. An analyst:

A) is held responsible for participating in illegal acts when the law is evident to anyone knowing the law and is held responsible for violations by others when the analyst is unaware of the facts giving rise to the violation.

B) must report all legal violations to the proper regulatory commission and is held responsible for participating in illegal acts when the law is evident to anyone knowing the law.

C) is held responsible for participating in illegal acts when the law is evident to anyone knowing the law and can participate in a violation by having knowledge of the violation and taking no action to stop it or disassociate from it.

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If you suspect someone is planning or engaging in illegal activities, you should:

• Determine the legality of the activities. Consult your supervisor and legal counsel.
• Take appropriate action. Disassociate, attempt to persuade the perpetrator to stop. CFA Institute does not require you to report them to the authorities, but the law might.

bapswarrior

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).

bapswarrior

Lawrence Kelly is the Chief Investment Officer at a money management company that claims it is in compliance with CFA Institute Soft Dollar Standards. For the first time, the company has purchased securities in the country of Santa Rosa. He learns that under Santa Rosen law, one of the company's soft dollar policies is forbidden, yet to conform with the law, Lawrence would have to violate the Soft Dollar Standards, but not the Standards of Professional Conduct. Lawrence:

A) must follow the Santa Rosen Law and cease claiming compliance with CFA Institute Soft Dollar Standards.

B) should follow the Santa Rosen Law and can still claim compliance with CFA Institute Soft Dollar Standards.

C) must follow the CFA Institute Soft Dollar Standards, informing the Santa Rosen regulators of his reasons.

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In cases when the Soft Dollar Standards conflict with local law, managers should follow local law and are still in compliance with the Standards.

bapswarrior

Lawrence Kelly is the Chief Investment Officer at a money management company that claims it is in compliance with CFA Institute Soft Dollar Standards. For the first time, the company has purchased securities in the country of Santa Rosa. He learns that under Santa Rosen law, one of the company's soft dollar policies is forbidden, yet to conform with the law, Lawrence would have to violate the Soft Dollar Standards, but not the Standards of Professional Conduct. Lawrence:

A) must follow the Santa Rosen Law and cease claiming compliance with CFA Institute Soft Dollar Standards.

B) should follow the Santa Rosen Law and can still claim compliance with CFA Institute Soft Dollar Standards.

C) must follow the CFA Institute Soft Dollar Standards, informing the Santa Rosen regulators of his reasons.

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In cases when the Soft Dollar Standards conflict with local law, managers should follow local law and are still in compliance with the Standards.

bapswarrior

A member who suspects that a colleague is violating the law should most appropriately:

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

B) report the illegal activity to the appropriate regulatory agency.

C) report the illegal activity to CFA Institute Professional Conduct Program for action.

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Standard I(A), Knowledge of the Law, applies in this situation. According to this Standard, members shall not knowingly participate or assist in, and must dissociate from, any violation of laws, rules, or regulations.
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 client’s or employee’s 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.

bapswarrior

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) reporting the activity to the appropriate authorities.

B) transferring supervision of the intern to another person.

C) telling her intern to stop such conduct.

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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.

bapswarrior

CFA Institute believes:

A) that a minimum level of professional responsibility and conduct dictates that members be aware of and comply with laws, rules, and regulations governing their conduct.

B) that a maximum level of professional responsibility and conduct dictates that members be aware of and comply with laws, rules, and regulations governing their conduct.

C) that firms should comply with all domestic laws and regulations and that these laws also govern behavior in foreign markets, regardless of foreign laws and requirements.

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CFA Institute’s Code and Standards dictate a minimum level of conduct. Standards should not be based on ethics of upper management and the board of directors of a company. Firms must comply with the strictest applicable standards, whether they be foreign or domestic laws and regulations.