Reading 2-I: Standards of Professional Conduct & Guidance style, center, members, following, 2011

1215

Session 1: Ethical and Professional Standards
Reading 2-I: Standards of Professional Conduct & Guidance: Professionalism

LOS A.: Knowledge of the Law.

 

 

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

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

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

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

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

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1215

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

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

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

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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.

1215

Robe Advisory Services operates an office in San Francisco, where it manages portfolios for its clients based in the United States. The firm also maintains an office in Tokyo, where it employs Sam Lee, CFA who researches Japanese stocks. According to the CFA Institute Standards of Professional Conduct, Lee is required to maintain knowledge of and comply with all applicable laws, rules, and regulations in:

A) both the U.S. and Japan, but not the CFA Institute Standards of Professional Conduct.

B) Japan, but not the U.S., and the CFA Institute Standards of Professional Conduct.

C) both the U.S. and Japan and the CFA Institute Standards of Professional Conduct.

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To abide by the Standards, employees who work for foreign-based firms are required to apply the stricter of the foreign (here, U.S.) law, the domestic (here, Japanese) law, or CFA Institute standards.

1215

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 the SEC if he knows a law has been violated.

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

C) 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.

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Standard I(A) says that when a member feels a law has been broken, the member should seek advice from the firm’s 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.

1215

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) take no action.

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

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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.

1215

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 since he is required not to knowingly participate or assist in such an act.

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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.

1215

A CFA Institute member is also a member and the portfolio manager of an environmentalist group. In its charter, the environmentalist group lists a group of companies its members should boycott. The CFA Institute member would violate Standard I(A) concerning obeying all rules and regulations if the member:

A) performs either of the activities listed here.

B) purchases stock of a boycotted firm for the group's portfolio.

C) actively protests against a publicly traded firm boycotted by the group.

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Standard I(A) says the member must be guided by all applicable rules and regulations of professional associations governing the member’s professional activities. Purchasing the stock for the firm would be a violation because it involves the member’s professional activities and the rules of a group to which the member belongs and works for. Actively protesting would not be covered by that standard.

1215

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 NOT correct? Parsons:

A) is required to report this legal violation to the appropriate governmental or regulatory organizations.

B) should urge his firm to attempt to persuade the perpetrator to cease such conduct.

C) should consult counsel to determine whether the conduct is, in fact, illegal.

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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.