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Georgia Jones, CFA, is an analyst for Johnson, Thomas & Co. She also serves as an outside director for Dewey Manufacturing, Inc. In the course of her duties, she begins to believe that Deweys income statement for the most recent period may have been misstated. Georgia should do all of the following EXCEPT:

A) consult with Dewey Manufacturing's legal counsel.

B) consult with Johnson, Thomas' legal counsel.

C) refrain from voting to approve any of Dewey's financial statements that include the element in question.

D) inform the Securities and Exchange Commission.

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Answer and Explanation

Jones must pursue her concerns about a possible misstatement, because, if material, it may be misleading to investors. Consistent with Standard I(A), Jones must not knowingly participate or assist in a regulatory violation. As long as her concerns exist, she must not validate any financial statements by voting to approve them. In addition she should seek competent legal counsel both at her own firm and at Dewey Manufacturing. She should not go to regulatory bodies until she has more certainty about the possible misstatement and has received counsel that she should proceed.

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Maria Valdes, CFA, is an analyst for Venture Investments in the country of Newamerica, which has laws prohibiting the acceptance of any gift from a vendor if the gift exceeds US $250. Valdes has evidence that her Venture Investments colleague, Ernesto Martinez, CFA, has been receiving gifts from vendors in excess of US $250.

Valdes is obligated to:

Valdes is obligated to:

A) disassociate herself from the activity.

B) disassociate herself from the activity, urge Venture to persuade Martinez to cease the activity, and inform CFA Institute of the violation.

C) disassociate herself from the activity, urge Venture to persuade Martinez to cease the activity, and inform CFA Institute and regulatory authorities of the violation.

D) disassociate herself from the activity, and urge Venture to persuade Martinez to cease the activity.

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Answer and Explanation

Standard I(A), Knowledge of the Law requires members who have knowledge of colleagues engaging in illegal activities to disassociate from the activity and urge their firms to persuade the individual to cease such activity. Reporting to regulatory authorities may be prudent in certain circumstances, but is not required. Reporting to CFA Institute is not required

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Which of the following is least likely an example of a violation of Standard I, Professionalism, of the Code and Standards? An analyst:

A) knowingly breaks a securities law.

B) learns of a standard or law violation when acting on an outside board and takes a "wait and see" approach to the violation.

C) quietly quits his job when he learns that a client knowingly misstates information on a prospectus.

D) learns of a client's violation of a standard or law and notifies the proper supervisory person in the analyst's firm.

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Answer and Explanation

Violations must be reported to the appropriate supervisory person in the analysts firm. Although CFA Institute Standards encourage a member to disassociate from an illegal activity, quietly resigning from a job is not an effective way to deal with a clients violation. The analyst should report findings to the appropriate supervisory person in the firm, so that the firm may take appropriate action.

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John Martin, an analyst and CFA charterholder, discovers that Jurix Co. has knowingly misstated information in their prospectus. To comply with CFA Institutes Code of Ethics and Standards of Professional Conduct, he should:

A) resign from his job in order to disassociate from the potentially illegal activity.

B) call the appropriate regulatory agency and report the action.

C) report the finding to the appropriate supervisory person in his firm.

D) do nothing and see if the firm corrects the problem.

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Answer and Explanation

To comply with the Code and Standards, John should notify the appropriate supervisory person in his firm of the violation.

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Michael Bellow, CFA, CAIA, is an investment banker who is involved with an initial public offering (IPO) of NewCo. Because this is Bellows 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 firms highly competent general counsel and follows the advice given without deviation. Based on the general counsels advice, Bellow consults his immediate supervisor about the suspected overstatement of earnings. After reviewing the situation, Bellows supervisor explains why NewCos calculations of its earnings are correct. Bellow realizes that his inexperience and exuberance initially led him to an incorrect conclusion about NewCos earnings.

Which of the following statements about Bellows actions involving Standard I(A), Knowledge of the law, and Standard I(C), Misrepresentation, is TRUE? Bellow:

Which of the following statements about Bellows 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) violated Standard I(A) but did not violate Standard I(C).

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

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

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Answer and Explanation

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.

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.

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Which of the following statements about the CFA Institute Code and Standards is most accurate? The Code and Standards:

A) prohibit members from accepting gifts that create a conflict with their employer's interest.

B) require members to resign from their jobs to disassociate themselves from clients engaging in illegal activities.

C) require members to persuade the perpetrator to cease illegal activities.

D) do not require that members report legal violations to the appropriate governmental or regulatory organization.

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Answer and Explanation

The Code and Standards do not require members to report violations to legal authorities, but such disclosure may be prudent in certain circumstances. They do not require members to quit their jobs or to persuade violators to cease illegal activities. They do require that members report the activities to the appropriate person(s) in their own firm and disassociate themselves from the illegal actions. Members must obtain written permission to accept gifts that create a conflict with their employer's interest.

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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 Blanfords firm. Based on his analysis, Blanford suspects that Shanti may have deliberately overstated Starrs current earnings and its earnings for the past several quarters. If this information becomes public, Blanford believes that Starrs stock price will drop substantially. Blanford suspects that Shanti may have violated Ragatans 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) take no action.

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

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Answer and Explanation

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.

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.

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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.

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Answer and Explanation

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.

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.

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If you suspect that a colleague is violating the law you should:

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

B) report the illegal activity to CFA Institute Professional Standards Review Board for action.

C) report all illegal activities to the appropriate regulatory agency.

D) associate yourself with the illegal activity.

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Answer and Explanation

Standard I(A), Knowledge of the law, applies in this situation. According to this standard, members shall not knowingly participate or assist in any violation of laws, rules, or regulations governing CFAs.

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 clients or employees 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.

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 clients or employees 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.

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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.

D) a violation of the Code and Standards unless his supervisor is a CFA Institute member and signs off on the documentation.

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Answer and Explanation

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.