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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) transferring supervision of the intern to another person.

B) reporting the violation to CFA Institute.

C) telling her intern to stop such conduct.

D) reporting the activity to the appropriate authorities.

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Answer and Explanation

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.

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.

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When a CFA Institute member suspects a client or a colleague of planning or engaging in ongoing illegal activities, which of the statements about the actions that the member should take is most correct? According to the CFA Institute Standards of Professional Conduct, the CFA Institute member should:

A) consult counsel to determine the legality of the activity.

B) ignore the suspected illegal activity unless the suspected party is a CFA Institute member.

C) disassociate from any illegal or unethical activity if the member has reasonable grounds to believe that the activity is illegal or unethical.

D) consult counsel to determine the legality of the activity and disassociate from any illegal or unethical activity if the member has reasonable grounds to believe that the activity is illegal or unethical.

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Answer and Explanation

According to the procedures for compliance involving Standard I(A), CFA Institute members should determine legality and disassociate from any illegal or unethical activity.

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Bob Smith, CFA, is an outside board member of Atlantic Technologies, but is not paid by the firm for his services. An employee at Atlantic informs Smith that Atlantic has improperly timed the booking of contracts to achieve the desired quarterly financial results. The misleading financial statements would turn losses into profits. Smith confers with the firm's legal counsel who indicates that this conduct is, in fact, illegal. Smith urges Sharon White, Atlantic's chief operating executive, to change the financial statements, but she refuses to do so. According to CFA Institute Standards of Professional Conduct, which of the following statements best describes what Smith should do in this situation?

A) Smith should immediately make CFA Institute aware of the situation at Atlantic.

B) Smith should promptly disassociate himself from Atlantic's actions by resigning as a director or by reporting the activities to the appropriate authorities.

C) Smith should wait until the next board meeting, which is scheduled in two weeks, to make other board members aware of the situation.

D) Smith does not have to take any additional action because he is not one of the firm's paid employees.

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Answer and Explanation

Smith should disassociate from any illegal activity by resigning as a director or by reporting the activities to appropriate authorities. Inaction combined with continuing association with Atlantic's illegal conduct may be construed as participation, or assistance, in the illegal conduct.

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The SECs 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) Yes, because the member did not maintain knowledge and know of the rule.

B) Yes, because breaking a rule of the SEC has no remedy for a member of CFA Institute.

C) No, because the member remedied the situation.

D) No, because the member unknowingly broke the rule.

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Answer and Explanation

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), and so the no remedy response is not correct.

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A CFA Institute member works for Secure Securities, Inc., and plays rugby on the firms rugby team. Secure Securities team recently played the team of a rival firm. During the game, a fight broke out and the CFA Institute member was the instigator, but no one was seriously hurt. Is this a violation of I(A) concerning maintaining knowledge and complying with laws, rules, and regulations?

A) Yes, because the member could have hurt someone in the fight.

B) Yes, because the member is bound by the Code of Ethics.

C) No, because a fight at a rugby game is not a professional activity.

D) No, because no one was seriously hurt.

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Answer and Explanation

Standard I(A) requires that a CFA Institute member obey the Code of Ethics. Among other things, the Code says the member shall act with respect and in an ethical manner with the public and colleagues.

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For an employee with the CFA designation who works for a firm, which of the following is NOT necessary to meet the requirements of the Code and Standards?

A) Deliver a copy of the Code and Standards to their employer.

B) It is recommended that their employer is aware of the Code and Standards.

C) Recommend notifying their employer of their responsibility to follow the Code and Standards.

D) Recommended that their immediate supervisor is aware of the Code and Standards.

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Answer and Explanation

It is no longer required but recommended that CFA members and candidates notify their employer that they are required to follow the Code and Standards.

It is no longer required but recommended that CFA members and candidates notify their employer that they are required to follow the Code and Standards.

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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) buys, for personal use, a product made by a boycotted firm.

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

C) performs any of the activities listed here.

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

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Answer and Explanation

Standard I(A) says the member must be guided by all applicable rules and regulations of professional associations governing the members professional activities. Purchasing the stock for the firm would be a violation because it involves the members professional activities and the rules of a group to which the member belongs and works for. Buying a product for personal use from a boycotted company would not be covered by Standard I(A) nor would actively protesting be covered by that standard.

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A CFA Institute member conscientiously maintains records of changes in security regulations. The member notices that his colleagues do NOT, and does NOT say anything. Is this a violation of Standard I(A)?

A) Yes, and the member should disassociate from these colleagues.

B) No, as long as the colleagues do not violate the new rules.

C) No, as long as he allows the colleagues access to his files.

D) Yes, because the member is bound by the Code of Ethics.

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Answer and Explanation

Component three of the Code says that a member shall Strive to maintain and improve their competence and the competence of others in the profession. Ignoring the neglect of rule changes of others would clearly be incongruent with this component. Simply allowing the colleagues access to the files is not enough effort to constitute striving. As long as the colleagues do not violate the laws, the member does not have to disassociate himself from the colleagues.

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The Standards of Professional Conduct explicitly outlines responsibilities to four groups. Which of the following is NOT a group mentioned in that list?

A) The Federal Reserve.

B) The profession.

C) Employers.

D) The investing public.

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Answer and Explanation

The Standards explicitly mention responsibilities to the profession, employers, clients, prospects, and the investing public. The Federal Reserve is not mentioned.

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Benito Salvatore, CFA, is licensed in the established country of Oldworld but has clients and makes investments in the emerging county of Newworld. The regulations of Oldworld prohibit licensed investment professionals from taking gifts or gratuities in any amount from vendors or persons connected with potential investments. The laws of Newworld are silent on this issue. Unsolicited, Salvatore is offered a vase worth US $75 by a Newworld trust company and a bronze statue worth US $200 by a Newworld company that Salvatore is considering as a potential investment.

Salvatore is:

A) permitted to accept the vase but not the statue.

B) permitted to accept the statue but not the vase.

C) not permitted to accept either gift.

D) permitted to accept both gifts.

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Answer and Explanation

Under Standard I(A), Salvatore must, as a CFA charterholder, apply the CFA Institute Code and Standards or the controlling law, whichever is stricter. In this instance the stricter laws of Oldworld, where Salvatore is licensed, apply to prohibit the gifts, even though the gifts are offered in Newworld.