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

cfaedu

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.

cfaedu

For many years, John Berger, CFA, has been a mentor of Bob Chennings, a family friend, who just earned the CFA designation. Berger is the CEO of a firm that just hired Chennings, but the hiring was done at a lower level so Berger and Chennings have no direct contact in the daily operation of the firm. With respect to Standard IV(C), Responsibilities of Supervisors, Berger:

A) must develop a set of written procedures to prevent violations derived from his mentoring Chennings.

B) must routinely evaluate Chennings' performance.

C) assumes no extra responsibility with the hiring of Chennings.

D) must both develop written procedures concerning Chennings and routinely evaluate his performance.

---

Answer and Explanation

As a CEO, Berger is responsible for reasonable procedures being in place for the entire firm. Since Berger is not the supervisor of Chennings, however, Berger assumes no extra responsibility upon his hiring.

cfaedu

For years John Berger, a CFA charterholder and CEO of a company, relied upon a set of reasonable procedures for preventing violations of the Code and Standards of Professional Conduct in the firm. To not be liable for a violation of the Standards, Berger must:

A) do nothing more than have the set of procedures in place as stated.

B) periodically review the procedures.

C) ensure the procedures are monitored and enforced.

D) both periodically review the procedures and ensure the procedures are monitored and enforced.

---

Answer and Explanation

As a CEO, Berger is responsible for implementing and maintaining appropriate compliance procedures. He must also ensure the procedures are monitored and enforced.

cfaedu

According to Standard IV(C), a CFA Institute member who is in a supervisory role must have which of the following?

A) An in-depth knowledge of the Code and Standards.

B) A graduate degree.

C) Five years of work experience.

D) All of these.

---

Answer and Explanation

The only requirement for a supervisor is an in-depth knowledge of the Code and Standards. None of the other choices are required.

cfaedu

A firm recently hired Jill Taylor, CFA, to be a managing supervisor in the firm. Taylor knows that all of her subordinate supervisors are members of CFA Institute and that they have a compliance system in place with respect to the Code and Standards. Under these conditions Taylor needs to:

A) immediately implement a new compliance system.

B) rely on the current compliance system since the subordinate supervisors are subject to the Code and Standards.

C) none of these choices.

D) review the compliance system for its adequacy.

---

Answer and Explanation

According to Standard IV(C), Responsibilities of Supervisors, Taylor must make reasonable efforts to detect violations of law, rules, regulations, and Code and Standards. This responsibility is not eliminated because the Taylors subordinates are CFA Charterholders. Taylor should review the compliance system and report any inadequacies to senior management.

cfaedu

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.

---

Answer and Explanation

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

cfaedu

Martin Tripp, CFA, is vice-president of the equity department at Walker Financial, a large money management firm. Of the twenty analysts in his department for whom he has supervisory responsibility, eight are subject to CFA Institute Standards of Professional Conduct. Tripp believes that he cannot personally evaluate the conduct of the twenty analysts on a continuing basis. Therefore, he plans to delegate some of his supervisory duties to Sarah Green, who is subject to the Standards, and some to Bob Brown, who is not subject to the Standards. According to CFA Institute Standards of Professional Conduct, which of the following statements about Tripp's ability to delegate supervisory duties is most correct?

A) Tripp cannot delegate any of his supervisory duties to either Green or Brown.

B) Tripp can delegate some or all of his supervisory duties to Brown, even though Brown is not subject to the Standards.

C) Tripp can delegate some or all of his supervisory duties only to Green because she is subject to the Standards.

D) Trip can delegate some of his supervisory duties to Green and the remainder to Brown and, therefore, relieve himself of his supervisory responsibility.

---

Answer and Explanation

Standard IV(C), Responsibilities of Supervisors, permits Tripp to delegate supervisory duties to Green, Brown, or both, but such delegation does not relieve Tripp of his supervisory responsibility.

cfaedu

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.

---

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.

cfaedu

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.

---

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.

cfaedu

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.

---

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.