Reading 2-I: Standards of Professional Conduct & Guidan

cfaedu

CFA Institute Area 1-2: Ethical and Professional Standards
Session 1: Code of Ethics and Professional Standards
Reading 2-I: Standards of Professional Conduct & Guidance: Professionalism
LOS A.: Knowledge of the Law.

cfaedu

Joan Platt, CFA, operates an investment advisory service in New York but maintains an office in Xania. Xania recently establish a stock market, which is not very efficient. None of the Xanian stocks trade in the U.S. market. Xania legally permits the use of material inside information. Platt believes that using inside information would help her compete against other Xanian investment advisors and also help some of her Xanian clients reach their investment objectives. Platt is considering adopting local investment practices in Xania. According to CFA Institute Standards of Professional Conduct, Platt may:

A) use material inside information, but only after notifying CFA Institute.

B) use material inside information because Xania legally permits this practice.

C) not use material inside information.

D) use material inside information because CFA Institute Standards apply only to countries where the use of material inside information is illegal.

---

Answer and Explanation

Because applicable law involving material inside information is less strict than the Code and Standards, Platt must adhere to the Code and Standards. Standard II(A) prohibits against use of material nonpublic information.

cfaedu

Don Roberts, a CFA Institute member, resides in Country L, where the securities laws and regulations are less strict than the CFA Institute Code and Standards. Roberts also does business in Country N, which has no securities laws or regulations. Thus, Country N has no laws prohibiting the use of material nonpublic information. Roberts has clients in both Country L and N. Country L's law states that the law of the locality where business is conducted governs. According to CFA Institute Standards of Professional Conduct about the use of material nonpublic information, Roberts may:

A) take investment action based on this information for clients in both Country N and Country L and for himself.

B) not take investment action on the basis of this information.

C) take investment action based on this information only for his clients in Country N and Country L but not for himself.

D) take investment action based on this information only for his clients in Country N but not for his clients in Country L or himself.

---

Answer and Explanation

Because applicable law states that the law of the locality where the business is conducted governs and local law is less strict than the Code and Standards, the member must adhere to the Code and Standards. Standard II(A) prohibits the use of material nonpublic information.

cfaedu

The CFA Institute Standards of Practice Handbook requires CFA Institute members to do all the following EXCEPT:

A) to inform employer, clients, and potential clients of benefits received for recommending products or services.

B) receive written permission from both their employer and outside clients to engage in investment consulting outside the firm.

C) to disclose to their employer in writing all monetary compensation or benefits received for services performed in addition to their company compensation.

D) to disclose in writing to the proper regulatory authority all observed violations of the securities laws and regulations.

---

Answer and Explanation

Members are not required to report violations of others to regulatory authorities, either verbally or in writing, but such reporting may be prudent.

cfaedu

Mary White, CFA, sits on the board of directors of XYZ Manufacturing, Inc. She discovers that management has knowingly participated in an activity she knows is illegal. According to the CFA Institute Standards of Professional Conduct, White is required to:

A) disassociate herself from the activity.

B) All of these choices are correct.

C) seek legal advice to determine what actions should be taken.

D) report the activity to the appropriate supervisory person at her firm.

---

Answer and Explanation

Standard I(A), Knowledge of the Law. Prohibition against knowingly practicing or assisting in violation of laws, rules, and regulations. If White knows that someone has engaged in a possible illegal activity, she should: (1) report the finding to the appropriate supervisory person at her firm, (2) if the situation is not remedied, disassociate herself from the situation, and (3) seek legal advice to see what other actions, such as notifying the proper regulatory agency, should be taken.

cfaedu

Which of the following is a CORRECT statement of a member's duty under the Code and Standards?

A) A member is required to comply only with applicable local laws, rules, regulations, or customs even though the CFA Institute Code and Standards may impose a higher degree of responsibility or a higher duty on the member.

B) In the absence of specific applicable law or other regulatory requirements, the Code and Standards govern the member's actions.

C) A member who trades securities in a foreign securities market where no applicable local laws or stock exchange rules regulate the use of material nonpublic information may take investment action based on this information.

D) A member who trades securities in a country with less strict laws, rules, regulations, or customs may follow those laws if he discloses this information to his client.

---

Answer and Explanation

The Code and Standards represent a minimum level of guidance for members actions, not a maximum level. The key to remember here is that whether the local area does or does not have standards governing members actions, one must follow the stricter standard environment.

cfaedu

A U.S. Congressional oversight committee has concluded that investment company fees should be detailed in dollar terms each quarter and has proposed the enactment of new legislation to this end. Currently, the legal requirement is to report such data annually. In compliance with current legal requirements, Dolphin investments, a Florida-based investment firm, reports annually. Eun Shin, CFA and employee of Dolphin, learns of the proposed changes but does not convert Dolphin's reporting to a quarterly basis. This action:

A) is not a violation of the Code and Standards.

B) constitutes professional misconduct as defined in the Code and Standards.

C) is a violation of his duty to employer as defined in the Code and Standards.

D) is a violation of his responsibilities as a supervisor as defined in the Code and Standards.

---

Answer and Explanation

The quarterly fee presentation is only a proposal at this stage. There is no violation if Eun is following the regulations currently in force.

cfaedu

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 CFA Institute Soft Dollar Standards, informing the Santa Rosen regulators of his reasons.

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

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

D) must place all securities from Santa Rosa on its restricted list.

---

Answer and Explanation

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

cfaedu

Sometimes a CFA Institute member simply feels a law has been violated by his firm, and sometimes the member knows a law has been violated. Which of the following pairs of guidelines is CORRECT with respect to the first step a member should take in each case? The member should first contact:

A) the firm's counsel if he feels a law has been violated and contact his supervisor if he knows a law has been violated.

B) his supervisor in the firm if he feels a law has been violated and contact the firm's counsel if he knows a law has been violated.

C) the SEC if he feels a law has been violated and contact the firm's counsel if he knows a law has been violated.

D) the firm's counsel if he feels a law has been violated and the SEC if he knows a law has been violated.

---

Answer and Explanation

Standard I(A) says that when a member feels a law has been broken, the member should seek advice from the firms counsel. If the member feels the advice is unbiased and competent, the member should follow it. If the member knows a law has been violated, the member should contact a supervisor.

cfaedu

If a CFA Institute member knows that a fellow employee has violated a law, according to Standard I(A) the member must NOT do which of the following?

A) Report the employee violating the law to the appropriate supervisor in the firm.

B) Report the employee violating the law to the SEC.

C) Disassociate from the employee violating the law.

D) Seek legal advice.

---

Answer and Explanation

Standard I(A) does not require a CFA Institute member to report violations to governmental or regulatory agencies. All of the other answers are appropriate actions.