3.1) Professionalism I (A): Knowledge of the law

Question 1

What is the substandard 1(A) of professionalism?

Answer 1

Knowledge of the Law

Question 2

What does 1(A): Knowledge of the law suggest? (3)

Answer 2

• Understand and comply with all CFA standards, government regulatory
  laws etc.
• In the event of conflict, the strictest law or regulation must be adhered
  to. CFA Institute Standards are a minimum requirement, even if activity is
  otherwise legal.
• May not knowingly violate or assist others in violating law/s, rules etc.

Question 3

How is 1(A): Knowledge of the law, implemented for members? (2)

Answer 3

• Know all the relevant regulations (of the country where the member resides
  and the country where the member is doing business) and CFA Institute
  Standards.
• Adhere to the strictest possible options when faced with local laws and CFA Institute Standards. CFA Institute Standards are a minimum requirement, even if activity is otherwise legal.

Question 4

What is the apporach if the rules are violated by co-workers or clients? (2)

Answer 4

• Reporting violations to supervisor, compliance department, or regulatory
  body (or even a lawyer) is encouraged but is not a requirement under CFA
  Institute rules but local laws may require it.
• Dissociate from such the activity.

Question 5

What are the recommendations** for members** under 1(A) knowledge of the law? (3)

Answer 5

• Stay informed, participate in continuing education, encourage employer to
  provide ongoing opportunities for above.
• Regularly review or encourage employer to review written compliance
  procedures.
• Maintain, or encourage employer to maintain updated copies of regulations.

Question 6

What are the recommendations** for firms** under 1(A) knowledge of the law? (3)

Answer 6

• Develop and adopt a code of ethics.
• Make available to employees, relevant legislation and regulations and any
  changes to these.
• Put in place written procedures for the reporting of suspected violations.

Question 7

Example 1: John Delano works for an investment banking firm that is part of
an underwriting syndicate for the IPO of Mega Minerals (Pty) Ltd. After the
preliminary IPO prospectus has gone out, John has a discussion with one of
the mine’s geologists and accidentally discovers that Mega Minerals had
significantly overstated its gold reserves.

What should Delano do? (3)

Answer 7

Solution: Delano should:
1. Report the issue to the appropriate supervisory person in the company.
2. If his firm does not dissociate itself from the underwriting or the problem
is not addressed, Delano should sever all ties with the underwriting.
3. Seek legal advice to determine whether further actions are required
*Note that there is no automatic requirement for Delano to report this to the authorities, unless this is a legal requirement.

Question 8

Example 2: Amanda Jube CFA is an investment advisor in the Country X office of a multinational investment house headquartered in Country Y. She is considering applying for shares in a Country X IPO. Which one of the following should determine her response?

A. The CFA code of ethics allows investment professionals to participate in IPOs, provided they disclose their participation in IPOs to their employer
and clients.
B. Country X legislation allows investment professionals to participate in IPOs.
C. Country Y legislation prohibits investment professionals from participating in IPOs.

Answer 8

Solution: C.
* The strictest law is the one in Country Y and therefore this must determine
Jube’s response. Always comply with the strictest option when faced with
different laws and requirements.