Ethics Helper: Standard 1: Professionalism Flashcards
1
Q
What is Standard 1(A): Knowledge of the Law
A
Members and Candidates must understand and comply with all applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct) of any government, regulatory organization, licensing agency, or professional association governing their professional activities. In the event of conflict, Members and Candidates must comply with the more strict law, rule, or regulation. Members and Candidates must not knowingly participate or assist in and must dissociate from any violation of such laws, rules, or regulations.
2
Q
What should a CFA member do when legal questions arise?
A
When questions arise, members and candidates should know their firm’s policies and procedures for accessing compliance guidance.
This standard does not require members and candidates to become experts, however, in compliance. Additionally, members and candidates are not required to have detailed knowledge of or be experts on all the laws that could potentially govern their activities
3
Q
What should a CFA member do during times of changing regulations?
A
During times of changing regulations, members and candidates must remain vigilant in maintaining their knowledge of the requirements for their professional activities.
4
Q
If applicable law does not require candidates to disclose referral fees, what must the CFA member do?
A
Applicable law or regulation may not require members and candidates to disclose referral fees received from or paid to others for the recommendation of investment products or services.
Because the Code and Standards impose this obligation, however, members and candidates must disclose the existence of such fees.
5
Q
Fill in the Blank:
Members and candidates must not engage in conduct that constitutes a violation of the ______ & _______, even though it may otherwise be legal.
A
Code & Standards
Members and candidates must not engage in conduct that constitutes a violation of the CODE & STANDARDS, even though it may otherwise be legal.
6
Q
How does the CFA view violations in which participants knowingly participate or assist?
A
Members and candidates are responsible for violations in which they knowingly participate or assist.
7
Q
How does the CFA view violations in which participants unknowingly participate or assist?
A
Although members and candidates are presumed to have knowledge of all applicable laws, rules, and regulations, CFA Institute acknowledges that members may not recognize violations if they are not aware of all the facts giving rise to the violations.
8
Q
What must a CFA member do if illegal or unethical activity is going on?
A
The first step should be to attempt to stop the behavior by bringing it to the attention of the employer through a supervisor or the firm’s compliance department.
If this attempt is unsuccessful, then members and candidates have a responsibility to step away and dissociate from the activity.
9
Q
True or False:
Inaction combined with continuing association with those involved in illegal or unethical conduct may be construed as participation or assistance in the illegal or unethical conduct.
A
True
10
Q
True or False:
CFA Institute strongly encourages members and candidates to report potential violations of the Code and Standards committed by fellow members and candidates.
A
True
11
Q
How must a CFA member conduct himself/herself?
Use Case:
Member resides in NS country, does business in LS country; LS law applies
Conventions:
NS: country with no securities laws or regulations
LS: country with less strict securities laws and regulations than the Code and Standards
MS: country with more strict securities laws and regulations than the Code and Standards
A
Member must adhere to the Code and Standards.
Because applicable law is less strict than the Code
and Standards, the member must adhere to the Code and Standards.
12
Q
How must a CFA member conduct himself/herself?
Use Case:
Member resides in NS country, does business in MS
country; MS law applies.
Conventions:
NS: country with no securities laws or regulations
LS: country with less strict securities laws and regulations than the Code and Standards
MS: country with more strict securities laws and regulations than the Code and Standards
A
Member must adhere to the law of MS country.
Because applicable law is stricter than the Code and
Standards, member must adhere to the more strict
applicable law.
13
Q
How must a CFA member conduct himself/herself?
Use Case:
Member resides in LS country, does business in NS
country; LS law applies.
Conventions:
NS: country with no securities laws or regulations
LS: country with less strict securities laws and regulations than the Code and Standards
MS: country with more strict securities laws and regulations than the Code and Standards
A
Member must adhere to the Code and Standards.
Because applicable law is less strict than the Code and
Standards, member must adhere to the Code and Standards.
14
Q
How must a CFA member conduct himself/herself?
Use Case:
Member resides in LS country, does business in MS
country; MS law applies.
Conventions:
NS: country with no securities laws or regulations
LS: country with less strict securities laws and regulations than the Code and Standards
MS: country with more strict securities laws and regulations than the Code and Standards
A
Member must adhere to the law of MS country.
Because applicable law is stricter than the Code and
Standards, member must adhere to the more strict
applicable law
15
Q
How must a CFA member conduct himself/herself?
Use Case:
Member resides in LS country, does business in NS
country; LS law applies, but it states that law of locality
where business is conducted governs.
Conventions:
NS: country with no securities laws or regulations
LS: country with less strict securities laws and regulations than the Code and Standards
MS: country with more strict securities laws and regulations than the Code and Standards
A
Member must adhere to the Code and Standards.
Because applicable law states that the law of the locality where the business is conducted governs and there is no local law, the member must adhere to the Code and Standards.
16
Q
How must a CFA member conduct himself/herself?
Use Case:
Member resides in LS country, does business in MS
country; LS law applies, but it states that law of locality
where business is conducted governs.
Conventions:
NS: country with no securities laws or regulations
LS: country with less strict securities laws and regulations than the Code and Standards
MS: country with more strict securities laws and regulations than the Code and Standards
A
Member must adhere to the law of MS country.
Because applicable law of the locality where the business is conducted governs and local
law is stricter than the Code and Standards, member must adhere to the more strict applicable law.
17
Q
How must a CFA member conduct himself/herself?
Use Case:
Member resides in MS country, does business in LS
country; MS law applies.
Conventions:
NS: country with no securities laws or regulations
LS: country with less strict securities laws and regulations than the Code and Standards
MS: country with more strict securities laws and regulations than the Code and Standards
A
Member must adhere to the law of MS country.
Because applicable law is stricter than the Code and
Standards, member must adhere to the more strict
applicable law.
18
Q
How must a CFA member conduct himself/herself?
Use Case:
Member resides in MS country, does business in LS
country; MS law applies, but it states that law of locality
where business is conducted governs.
Conventions:
NS: country with no securities laws or regulations
LS: country with less strict securities laws and regulations than the Code and Standards
MS: country with more strict securities laws and regulations than the Code and Standards
A
Member must adhere to the Code and Standards.
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, member must adhere to the Code and Standards.
19
Q
How must a CFA member conduct himself/herself?
Use Case:
Member resides in MS country, does business in LS
country with a client who is a citizen of LS country; MS
law applies, but it states that the law of the client’s home country governs
Conventions:
NS: country with no securities laws or regulations
LS: country with less strict securities laws and regulations than the Code and Standards
MS: country with more strict securities laws and regulations than the Code and Standards
A
Member must adhere to the Code and Standards.
Because applicable law states that the law of the client’s
home country governs (which is less strict than the Code and Standards), member must adhere to the Code and Standards.
20
Q
How must a CFA member conduct himself/herself?
Use Case:
Member resides in MS country, does business in LS
country with a client who is a citizen of MS country; MS
law applies, but it states that the law of the client’s home country governs.
Conventions:
NS: country with no securities laws or regulations
LS: country with less strict securities laws and regulations than the Code and Standards
MS: country with more strict securities laws and regulations than the Code and Standards
A
Member must adhere to the law of MS country.
Because applicable law states that the law of the client’s
home country governs and the law of the client’s home
country is stricter than the Code and Standards, the
member must adhere to the more strict applicable law.
21
Q
What should Allen Do?
Michael Allen works for a brokerage firm and is responsible for an underwriting of securities. A company official gives Allen information indicating that the financial statements Allen filed with the regulator overstate the issuer’s earnings. Allen seeks the advice of the brokerage firm’s general counsel, who states that it would be difficult for the regulator to prove that Allen has been involved in any wrongdoing.
A
Allen should report this situation to his supervisor, seek an independent legal opinion, and determine whether the regulator should be notified of the error.
22
Q
What should Lawrence Brown do?
Lawrence Brown’s employer, an investment banking firm, is the principal underwriter for an issue of convertible debentures by the Courtney Company. Brown discovers that the Courtney Company has concealed severe third-quarter losses in its foreign
operations. The preliminary prospectus has already been distributed.
A
Knowing that the preliminary prospectus is misleading, Brown should report his findings to the appropriate supervisory persons in his firm.
If the matter is not remedied and Brown’s employer does not dissociate from the underwriting, Brown should sever all his connections with the underwriting. Brown should also seek legal advice to determine whether additional reporting or other action should be taken.
23
Q
What should Kamisha do?
Kamisha Washington’s firm advertises its past performance record by showing the 10-year return of a composite of its client accounts.
Washington discovers, however, that the composite omits the performance of accounts that have left the firm during the 10-year period, whereas the description of the composite indicates the inclusion of
all firm accounts.
This omission has led to an inflated performance figure. Washington is asked to use promotional material that includes the erroneous performance number when soliciting business for the firm.
A
Misrepresenting performance is a violation of the Code and Standards.
Although she did not calculate the performance herself,
Washington would be assisting in violating Standard I(A) if she were to use the inflated performance number when soliciting clients.
She must dissociate herself from the activity. If discussing the misleading number with the person responsible is not an option for correcting the problem, she can bring the situation to the attention of her supervisor or the compliance department at her firm.
If her firm is unwilling to recalculate performance, she must refrain from using the misleading promotional material and should notify the firm of her reasons.
If the firm insists that she use the material, she should consider whether her obligation to dissociate from the activity requires her to seek other employment.
24
Q
What should James Collins do?
James Collins is an investment analyst for a major Wall Street brokerage firm. He works in a developing country with a rapidly modernizing economy and a growing capital market. Local securities laws are minimal—in form and content—and include
no punitive prohibitions against insider trading.
A
Collins must abide by the requirements of the Code and Standards, which might be more strict than the rules of the developing country.
He should be aware of the risks that a small market and the absence of a fairly regulated flow of information to the market represent to his ability to obtain information and make timely judgments.
He should include this factor in formulating his advice to clients. In handling material nonpublic information that accidentally comes into his possession, he must follow Standard II(A)–Material Nonpublic Information.
25
What should Laura Jameson do?
Laura Jameson works for a multinational investment adviser based in the United States. Jameson lives and works as a registered investment adviser in the tiny, but wealthy, island nation of Karramba.
Karramba’s securities laws state that no investment adviser registered and working in that country can participate in initial public offerings (IPOs) for the adviser’s personal account.
Jameson, believing that, as a US citizen working for a US-based company, she should comply only with US law, has ignored this Karrambian law.
In addition, Jameson believes that as a charterholder,
as long as she adheres to the Code and Standards requirement that she disclose her participation in any IPO to her employer and clients when such ownership creates a conflict of interest, she is meeting the highest ethical requirements.
Jameson is in violation of Standard I(A).
As a registered investment adviser in Karramba, Jameson is prevented by Karrambian securities law from participating in IPOs regardless of the law of her home country.
In addition, because the law of the country where she is working is stricter than the Code and Standards, she must follow the stricter requirements of the local law rather than the requirements of the Code and Standards.
26
What should Amanda do?
Amanda Janney is employed as a fixed-income portfolio manager for a large international firm. She is on a team within her firm that is responsible for creating and managing a fixed-income hedge fund to be sold throughout the firm’s distribution centers to high-net-worth clients.
Her firm receives expressions of interest from potential
clients from the Middle East who are seeking investments that comply with Islamic law.
The marketing and promotional materials for the fixed-income hedge fund do not specify whether or not the fund is a suitable investment for an investor seeking
compliance with Islamic law.
Because the fund is being distributed globally, Janney
is concerned about the reputation of the fund and the firm and believes disclosure of whether or not the fund complies with Islamic law could help minimize potential mistakes with placing this investment.
As the financial market continues to become globalized, members and candidates will need to be aware of the differences between cultural and religious laws and requirements as well as the different governmental
laws and regulations.
Janney and the firm could be proactive in their efforts
to acknowledge areas where the new fund may not be suitable for clients.
27
What should Krista do?
Krista Blume is a junior portfolio manager for high-net-worth portfolios at a large global investment manager.
She observes a number of new portfolios and relationships coming from a country in Europe where the firm did not have previous business and is told that a broker in that country is responsible for this new business.
At a meeting on allocation of research resources to third-party research firms, Blume notes that this
broker has been added to the list and is allocated payments for research.
However, she knows the portfolios do not invest in securities in the broker’s country, and she has
not seen any research come from this broker.
Blume asks her supervisor about the name being on the list and is told that someone in marketing is receiving the research and that the name being on the list is OK.
She believes that what may be going on is that the broker is being paid for new business through the inappropriate research payments, and she wishes to dissociate from the misconduct
Blume should follow the firm’s policies and procedures for reporting potential unethical activity, which may include discussions with her supervisor or someone in a designated compliance department.
She should communicate her concerns appropriately while advocating for disclosure between the new broker relationship and the research payments
28
What should Colleen White do?
Colleen White is excited to use new technology to communicate with clients and potential clients.
She recently began posting investment information, including performance reports and investment opinions and recommendations, to her Facebook page.
In addition, she sends out brief announcements, opinions, and thoughts via her Twitter account (for example, “Prospects for future growth of XYZ company look good! #makingmoney4U”).
Prior to White’s use of these social media platforms, the local regulator had issued new requirements and guidance governing online electronic communication.
White’s communications appear to conflict with the recent regulatory announcements.
White is in violation of Standard I(A) because her communications do not comply with the existing guidance and regulation governing use of social media.
White must be aware of the evolving legal requirements
pertaining to new and dynamic areas of the financial services industry that are applicable to her.
She should seek guidance from appropriate, knowledgeable, and reliable sources, such as her firm’s compliance department, external service providers, or outside counsel, unless she diligently follows legal and regulatory trends affecting her professional responsibilities.
29
What is Standard 1B?
Professionalism - Independence & Objectivity
30
Summarize Standard 1B
maintain independence and objectivity
so clients will be unaffected by any potential conflict of
interest or other circumstance adversely affecting their judgment.
31
Is this type of benefit allowed? Why or Why not?
Allocation of shares in oversubscribed IPOs to investment managers for their personal accounts.
No. This practice affords managers the opportunity to make quick profits that may not be available to their clients.
Such a practice is prohibited under Standard I(B).
Modest gifts and entertainment are acceptable, but special care must be taken by members and candidates to resist subtle and not-so-subtle pressures to
act in conflict with the interests of their clients.
32
How should CFA members respond to large gifts that seek to influence behavior?
Best practice dictates that members and candidates reject any offer of gift or entertainment that could be expected to threaten their independence and objectivity
33
Why should a CFA member disclose gifts from clients to their employer?
Disclosure allows the employer of a member or candidate to make an independent determination about the extent to which the gift may affect the member’s or candidate’s independence and objectivity
34
How should firms protect the integrity of investment opinions?
Members, candidates, and their firms should establish policies stating that every research report concerning the securities of a corporate client should reflect the unbiased opinion of the analyst.
Firms should also design compensation systems that protect the integrity of the investment decision process by maintaining the independence and objectivity of analysts.
35
What should be done if a firm is unwilling to disseminate adverse opinions about a corporate client?
If the firm is unwilling to permit dissemination of
adverse opinions about a corporate client, members and candidates should encourage the firm to remove the controversial company from the research
universe and put it on a restricted list so that the firm disseminates only factual information about the company.
36
When attending meetings at an issuer’s
headquarters, which of the following should CFA members pay for?
[A] Commercial Transportation
[B] Hotel Charges
[C] Air fare
Members and Candidates should pay for:
Commercial Transport
Hotel Charges
Air Fare
37
Members and candidates must limit the acceptance of gratuities and/or gifts to _______ items
Token.
Members and candidates must limit the acceptance of gratuities and/or gifts to token items
38
True or False:
Standard I(B) does not preclude customary,
ordinary business-related entertainment as long as its purpose is not to influence or reward members or candidates.
True
39
True or False:
Members and candidates should encourage their
investment firms to develop formal policies related to employee purchases of equity or equity-related IPOs.
True
40
Does the following situation comply with Standard 1B?
Steven Taylor, a mining analyst with Bronson Brokers, is invited by Precision Metals to join a group of his peers in a tour of mining facilities in several western US states.
The company arranges for chartered group flights from site to site and for accommodations in Spartan Motels, the only chain with accommodations near the mines,
for three nights.
Taylor allows Precision Metals to pick up his tab, as do the other analysts, with one exception—John Adams, an employee of a large trust company who insists on following his company’s policy and paying for his hotel room himself.
The policy of the company where Adams works complies closely with Standard I(B) by avoiding even the appearance of a conflict of interest, but Taylor and the other analysts were not necessarily violating Standard I(B).
In general, when allowing companies to pay for travel and/or accommodations in these circumstances, members and candidates must use their judgment.
They must be on guard that such arrangements not impinge on a member’s or candidate’s independence and objectivity.
In this example, the trip was strictly for business and Taylor was not accepting irrelevant or lavish hospitality.
The itinerary required chartered flights, for which analysts were not expected to pay. The accommodations were modest.
These arrangements are not unusual and did not violate Standard I(B) as long as Taylor’s independence and objectivity were not compromised.
In the final analysis, members and candidates should consider both whether they can remain objective and whether their integrity might be perceived by their clients to have been compromised.
41
When is it appropriate to use a client's commercial aircraft?
If commercial transportation is not available or in which efficient movement could not otherwise be arranged.
42
How should Susan Dillon navigate this situation?
Susan Dillon, an analyst in the corporate finance department of an investment services firm, is making a presentation to a potential new business client that includes the promise that her firm will provide full research coverage of the potential client.
Dillon may agree to provide research coverage, but she must not commit her firm’s research department to providing a favorable recommendation.
The firm’s recommendation (favorable, neutral, or unfavorable) must be based on an independent and objective investigation and analysis of the company and its securities.
43
How should Walter Fritz proceed?
Walter Fritz is an equity analyst with Hilton Brokerage who covers the mining industry.
He has concluded that the stock of Metals & Mining is overpriced at its current level, but he is concerned that a negative research report will hurt the good relationship between Metals & Mining and the investment banking division of his firm.
In fact, a senior manager of Hilton Brokerage has just sent him a copy of a proposal his firm has made to Metals & Mining to underwrite a debt offering.
Fritz needs to produce a report right away and is concerned about issuing a less-than-favorable rating.
Fritz’s analysis of Metals & Mining must be objective and based solely on consideration of company fundamentals.
Any pressure from other divisions of his firm is inappropriate.
This conflict could have been eliminated if, in anticipation of the offering, Hilton Brokerage had placed Metals & Mining on a restricted list for its sales force.
44
How should Walter Fritz proceed?
Walter Fritz has concluded that Metals & Mining stock is overvalued at its current level, but he is concerned that a negative research report might jeopardize a close rapport that he has nurtured over the years with Metals & Mining’s CEO, chief finance officer, and investment relations officer.
Fritz is concerned that a negative report might result also in management retaliation—for instance, cutting him off from participating in conference calls when a quarterly earnings release is made, denying him the ability to ask questions on such calls, and/or denying him access to top management for arranging group meetings between Hilton Brokerage clients and
top Metals & Mining managers.
Fritz’s analysis must be objective and based
solely on consideration of company fundamentals. Any pressure from Metals & Mining is inappropriate.
Fritz should reinforce the integrity of his conclusions by stressing that his investment recommendation is based
on relative valuation, which may include qualitative issues with respect to Metals & Mining’s management.
45
How should Lindsey proceed?
As support for the sales effort of her corporate bond department, Lindsey Warner offers credit guidance to purchasers of fixed-income securities. Her compensation is closely linked to the performance of the corporate bond department.
Near the quarter’s end, Warner’s firm has a large inventory position in the bonds of Milton, Ltd., and has
been unable to sell the bonds because of Milton’s recent announcement of an operating problem.
Salespeople have asked her to contact large clients to push the bonds
Unethical sales practices create significant potential violations of the Code and Standards. Warner’s opinion of the Milton bonds must not be affected by internal pressure or compensation.
In this case, Warner must refuse to push the Milton bonds unless she is able to justify that the market price has already adjusted for the operating problem.
46
How should Jill proceed?
Jill Jorund is a securities analyst following airline stocks and a rising star at her firm.
Her boss has been carrying a “buy” recommendation on International Airlines and asks Jorund to take over coverage of that airline.
He tells Jorund that under no circumstances should the prevailing buy recommendation be changed
Jorund must be independent and objective in her analysis of International Airlines.
If she believes that her boss’s instructions have
compromised her, she has two options: She can tell her boss that she cannot cover the company under these constraints, or she can take over coverage of the company, reach her own independent conclusions, and if they conflict with her boss’s opinion, share the conclusions with her boss or other supervisors in the firm so that they can make appropriate recommendations.
Jorund must issue only recommendations that reflect her independent and objective opinion.
47
How Ed done anything wrong?
Edward Grant directs a large amount of his commission business to a New York–based brokerage house.
In appreciation for all the business, the brokerage house gives Grant two tickets to the World Cup in South Africa, two nights at a nearby resort, several
meals, and transportation via limousine to the game. Grant fails to disclose receiving this package to his supervisor.
Ed has violated Standard I(B) because accepting these substantial gifts may impede his independence and objectivity.
Every member and candidate should endeavor to avoid situations that might cause or be perceived to cause a loss of independence or objectivity in recommending investments or taking investment action.
By accepting the trip, Ed has opened himself up to the accusation that he may give the broker favored
treatment in return.
48
Is Theresa Green in compliance with Standard 1B?
Theresa Green manages the portfolio of Ian Knowlden, a client of Tisbury Investments. Green achieves an annual return for Knowlden that is consistently better than that of the benchmark she and the client previously agreed to.
As a reward, Knowlden offers Green two tickets to Wimbledon and the use of Knowlden’s flat in London for a week. Green discloses this gift to her supervisor at Tisbury.
Green is in compliance with Standard I(B) because she disclosed the gift from one of her clients in accordance with the firm’s policies.
Members and candidates may accept bonuses or gifts from clients as long as they disclose them to their employer because gifts in a client relationship are deemed less likely to affect a member’s or candidate’s objectivity and independence than gifts in other situations.
Disclosure is required, however, so that supervisors can monitor such situations to guard against employees favoring a gift-giving client to the detriment of other fee-paying clients (such as by allocating a greater proportion of IPO stock to the gift-giving client’s portfolio). Best practices for monitoring include comparing the transaction costs of the Knowlden account with the costs of other accounts managed by Green and other similar accounts within Tisbury. The supervisor could also compare the performance returns with the returns of other clients with the same mandate. This comparison will assist in determining whether a pattern of favoritism by Green is disadvantaging other Tisbury clients or the possibility that this favoritism could affect her future behavior.
49
Assess Tom Wayne's Situation:
Tom Wayne is the investment manager of the Franklin City Employees Pension Plan.
He recently completed a successful search for a firm to manage the foreign equity allocation of the plan’s diversified portfolio.
He followed the plan’s standard procedure of seeking presentations from a number of qualified firms and recommended that his board select Penguin Advisors because of its experience, well-defined investment strategy, and performance record.
The firm claims compliance with the Global Investment Performance Standards (GIPS) and has been verified. Following the selection of Penguin, a reporter from the Franklin City Record calls to ask if there was any connection between this action and the fact that Penguin was one of the sponsors of an “investment fact-finding trip to Asia” that Wayne made earlier in the year.
The trip was one of several conducted by the Pension Investment Academy, which had arranged the itinerary of meetings with economic, government, and corporate officials in major cities in several Asian countries. The Pension Investment Academy obtains support for the cost of these trips from a number of investment managers, including Penguin Advisors; the Academy then pays the travel expenses of the various pension plan managers on the trip and provides all meals and accommodations. The president of Penguin Advisors was also one of the travelers on the trip.
Although Wayne can probably put to good use the knowledge he gained from the trip in selecting portfolio managers and in other areas of managing the pension plan, his recommendation of Penguin Advisors may be tainted by the possible conflict incurred when he participated in a trip partly paid for by Penguin Advisors and when he was in the daily company of the president of Penguin Advisors.
To avoid violating Standard I(B), Wayne’s basic expenses for travel and accommodations should have been paid by his employer or the pension plan; contact with the president of Penguin Advisors should have been limited to informational or educational events only; and the trip, the organizer, and the sponsor should have been made a matter of public record.
Even if his actions were not in violation of Standard I(B), Wayne should have been sensitive to the public perception of the trip when reported in the newspaper and the extent to which the subjective elements of his decision might have been affected by the familiarity that the daily contact of such a trip would encourage. This advantage would probably not be shared by firms competing with Penguin Advisors.
50
Is Javier in violation of Standard 1B?
Javier Herrero recently left his job as a research analyst for a large investment adviser.
While looking for a new position, he was hired by an investor-relations firm to write a research report on one of its clients, a small educational software company.
The investor-relations firm hopes to generate investor interest in the technology company. The firm will pay Herrero a flat fee plus a bonus if any new investors buy stock in the company as a result of Herrero’s report.
If Herrero accepts this payment arrangement, he will be in violation of Standard I(B) because the compensation arrangement can reasonably be expected to compromise his independence and objectivity.
Herrero will receive a bonus for attracting investors, which provides an incentive to draft a positive report regardless of the facts and to ignore or play down any negative information about the company.
Herrero should accept only a flat fee that is not tied to the conclusions or recommendations of the report. Issuer-paid research that is objective and unbiased can be done under the right circumstances as long as the analyst takes steps to maintain his or her objectivity and includes in the report proper disclosures regarding potential conflicts of interest.
51
Is Wade acting in accordance with Standard 1B?
Two years ago, Bob Wade, trust manager for Central Midas Bank, was approached by Western Funds about promoting its family of funds, with special interest in the service-fee class of funds.
To entice Central to promote this class, Western Funds offered to pay the bank a service fee of 0.25%.
Without disclosing the fee being offered to the bank, Wade asked one of the investment managers to review Western’s funds to determine whether they were suitable for clients of Central Midas Bank.
The manager completed the normal due diligence review and determined that the new funds were fairly valued in the market with fee structures on a par with competitors.
Wade decided to accept Western’s offer and instructed the team of portfolio managers to exclusively promote these funds and the service-fee class to clients seeking to invest new funds or transfer from their current investments.
Now, two years later, the funds managed by Western begin to underperform their peers. Wade is counting on the fees to reach his profitability targets and continues to push these funds as acceptable investments for Central’s clients.
Wade is violating Standard I(B) because the fee arrangement has affected the objectivity of his recommendations.
Wade is relying on the fee as a component of the department’s profitability and is unwilling
to offer other products that may affect the fees received.
See also Standard VI(A)–Disclosure of Conflicts.
52
Is Bob acting in accordance with Standard 1B?
Bob Thompson has been doing research for the portfolio manager of the fixed-income department.
His assignment is to do sensitivity analysis on securitized subprime mortgages. He has discussed with the manager possible scenarios to use to calculate expected returns. A key assumption in such calculations is housing price appreciation (HPA) because it drives “prepays” (prepayments of mortgages) and losses.
Thompson is concerned with the significant appreciation experienced over the previous five years as a result of the increased availability of funds from subprime mortgages.
Thompson insists that the analysis should include a scenario run with –10% for Year 1, –5% for Year 2, and then (to project a worst-case scenario) 0% for Years 3 through 5.
The manager replies that these assumptions are too dire because there has never been a time in their available database when HPA was negative. Thompson conducts his research to better understand the risks inherent in these securities and evaluates these securities in the worst-case scenario, an unlikely but possible environment.
Based on the results of the enhanced scenarios, Thompson does not recommend the purchase of the securitization. Against the general market trends, the manager follows Thompson’s recommendation and does not invest. The following year, the housing market collapses. In avoiding the subprime investments, the manager’s portfolio outperforms its peer group that year
Thompson’s actions in running the worst-case scenario against the protests of the portfolio manager are in alignment with the principles of Standard I(B).
Thompson did not allow his research to be pressured
by the general trends of the market or the manager’s desire to limit the research to historical norms.
53
Is Mandel in Violation of Section 1B?
Adrian Mandel, CFA, is a senior portfolio manager for ZZYY Capital Management who oversees a team of investment professionals who manage labor union pension funds.
A few years ago, ZZYY sought to win a competitive asset manager search to manage a significant allocation of the pension fund of the United Doughnut and Pretzel Bakers Union (UDPBU).
UDPBU’s investment board is chaired by a recognized key decision maker and long-time leader of the union, Ernesto Gomez.
To improve ZZYY’s chances of winning the competition, Mandel made significant monetary contributions to Gomez’s union reelection campaign fund.
Even after ZZYY was hired as a primary manager of the pension, Mandel believed that his firm’s position was not secure. Mandel continued to contribute to Gomez’s reelection campaign chest as well as to entertain lavishly the union leader and his family at top restaurants on a regular basis.
All of Mandel’s outlays were routinely handled as marketing expenses reimbursed by ZZYY’s expense accounts and were disclosed to his senior management as being instrumental in maintaining a strong close relationship with an important client.
Mandel not only offered but actually gave monetary gifts, benefits, and other considerations that reasonably could be expected to compromise Gomez’s objectivity.
Therefore, Mandel was in violation of Standard I(B).
54
Is Mandel in Violation of Section 1B?
Adrian Mandel, CFA, is a senior portfolio manager for ZZYY Capital Management who oversees a team of investment professionals who manage labor union pension funds.
Adrian had heard about the manager search competition for the UDPBU Pension Fund through a broker/dealer contact.
The contact told him that a well-known retired professional golfer, Bobby “The Bear” Finlay, who had become a licensed broker/dealer serving as a pension consultant, was orchestrating the UDPBU manager search.
Finlay had gained celebrity status with several labor union pension fund boards by entertaining their respective board members and regaling them with colorful stories of fellow pro golfers’ antics in clubhouses around the world.
Mandel decided to improve ZZYY’s chances of being invited to participate in the search competition by befriending Finlay to curry his favor. Knowing Finlay’s love of entertainment, Mandel wined and dined Finlay at high-profile bistros where Finlay could glow in the fan recognition lavished on him by all the other patrons.
Mandel’s endeavors paid off handsomely when Finlay recommended to the UDPBU board that ZZYY be entered as one of three finalist asset management firms in its search.
Yes.
Mandel lavished gifts, benefits, and other considerations in the form of expensive entertainment that could reasonably be expected to influence the consultant to recommend the hiring of his firm.
Therefore, Mandel was in violation of Standard I(B).
55
Is Scott in violation of Standard 1B?
Amie Scott is a performance analyst within her firm with responsibilities for analyzing the performance of external managers.
While completing her quarterly analysis, Scott notices a change in one manager’s reported composite construction. The change concealed the bad performance of a particularly large account by placing that account into a new residual composite.
This change allowed the manager to remain at the top of the list of manager performance. Scott knows her firm has a large allocation to this manager, and the fund’s manager is a close personal friend of the CEO. She needs to deliver her final report but is concerned with pointing out the composite change.
Scott would be in violation of Standard I(B) if she did not disclose the change in her final report.
The analysis of managers’ performance should not be influenced by personal relationships or the size of the allocation to the outside managers. By not including the change, Scott would not be providing an independent analysis of the performance metrics for her firm.
56
How should Jill proceed?
Jill Stein is head of performance measurement for her firm.
During the last quarter, many members of the organization’s research department were removed because of the poor quality of their recommendations.
The subpar research caused one larger account holder to experience significant underperformance, which resulted in the client withdrawing his money after the end of the quarter.
The head of sales requests that Stein remove this account from the firm’s performance composite because the performance decline can be attributed to the departed research team and not the client’s adviser.
Pressure from other internal departments can create situations that cause a member or candidate to violate the Code and Standards. Stein must maintain her independence and objectivity and refuse to exclude specific accounts from the firm’s performance composites to which they belong.
As long as the client invested under a strategy similar to that of the defined composite, it cannot be excluded because of the poor stock selections that led to the underperformance and asset withdrawal.
57
What is standard 1C?
Professionalism - Misrepresentation
58
What is a "misrepresentation" ?
A misrepresentation is any untrue statement or omission of a fact or any statement that is otherwise false or misleading.
59
What is the definition of "knowingly" ?
“knowingly” means that the member or candidate either knows or should have known that the misrepresentation was being made or that omitted information could alter the investment decision-making process.
60
Are CFA members allowed to guarantee specific returns on volatile investments?
Standard I(C) prohibits members and candidates from guaranteeing clients any specific return on volatile investments.
61
Which section prohibits the following statement:
“I can guarantee that you will earn 8% on equities this year”
Standard I(C) prohibits members and candidates from guaranteeing clients any specific return on volatile investments.
62
What must a CFA member do when using external managers?
Members and candidates must disclose their intended use of external managers and must not represent those managers’ investment practices as their own
63
Why is selecting an appropriate benchmark important?
The transparent presentation of appropriate performance benchmarks is an important aspect
in providing clients with information that is useful in making investment decisions.
64
Is a CFA member required to always present performance vs. a benchmark?
Standard I(C) does not require that a benchmark always be provided in order to comply. Some investment strategies may not lend themselves to displaying
an appropriate benchmark because of the complexity or diversity of the investments included.
65
What kind of misrepresentations can occur when reporting valuations of illiquid securities?
Reporting misrepresentations may also occur when valuations for illiquid or non-traded securities are available from more than one source.
When different options are available, members and candidates may be tempted to switch providers to obtain higher security valuations.
The process of shopping for values may misrepresent a
security’s worth, lead to misinformed decisions to sell or hold an investment, and result in overcharging clients advisory fees.
66
Fill in the blank:
Members and candidates should take __________ steps to provide accurate and reliable security pricing information to clients on a consistent basis.
reasonable
67
Can a CFA member anonymously provide investment information via a social network?
Yes, but actions undertaken through social media that knowingly misrepresent investment recommendations or professional activities are considered a violation of
Standard I(C).
68
How should communication via social media differ from email or other forms of communication?
It shouldn't.
when communicating through social media channels, members and candidates should provide only the same information they are allowed to distribute to
clients and potential clients through other traditional forms of communication.
69
Which standard prohibits plagiarism?
Standard I(C) also prohibits plagiarism in the preparation of material for distribution to employers, associates, clients, prospects, or the general public.
Plagiarism is defined as copying or using in substantially the same form materials prepared by others without acknowledging the source of the material or identifying the author and publisher of
such material.
Members and candidates must not copy (or represent as their own) original ideas or material without permission and must acknowledge and identify the
source of ideas or material that is not their own.
70
Is the following plagiarism?
Using excerpts from articles or reports prepared by others either verbatim or with only slight changes in wording without acknowledgment.
Yes.
71
Is the following plagiarism?
Citing specific quotations as attributable to “leading analysts” and “investment experts” without naming the specific references.
Yes.
72
Is the following plagiarism?
Presenting statistical estimates of forecasts prepared
by others and identifying the sources but without including the qualifying statements or caveats that may have been used.
Yes.
73
Is the following plagiarism?
Using charts and graphs without stating their
sources
Yes.
74
Is the following plagiarism?
Copying proprietary computerized spreadsheets or algorithms without seeking the cooperation or authorization of their creators.
Yes.
75
Can a company continue to publish work of a former employee even after the employee has left?
Research and models developed while employed by a firm are the property of the firm.
The firm retains the right to continue using the work completed after a member or candidate has left the organization.
The firm may issue future reports without providing attribution to the prior analysts.
76
What is a qualification summary?
To ensure accurate presentations to clients, each member and candidate should prepare a summary of his or her own qualifications and experience and a list
of the services the member or candidate is capable of performing
77
Should CFA members verify outside information?
When providing information to clients from a third party, members and candidates share a responsibility for the accuracy of the marketing and distribution materials that pertain to the third party’s capabilities, services, and products.
78
What is expected of CFA charterholders that maintain websites?
Members and candidates who publish a webpage should regularly monitor materials posted on the site to ensure that the site contains current information.
79
What are the steps the CFA recommends to avoid plagiarism?
Maintain Copies + Attribute Source Material
---------------------------------------------------------------
(1) Maintain copies: Keep copies of all research reports, articles containing research ideas, material with new statistical methodologies, and other materials that were relied on in preparing the research report.
(2) Attribute quotations: Attribute to their sources any direct quotations, including projections, tables, statistics, model/product ideas, and new methodologies prepared by persons other than recognized financial and statistical reporting services or similar sources.
(3) Attribute summaries: Attribute to their sources any paraphrases or summaries of material prepared by others. For example, to support his analysis of
Brown Company’s competitive position, the author of a research report on Brown might summarize another analyst’s report on Brown’s chief competitor, but the author of the Brown report must acknowledge in his own report the reliance on the other analyst’s report.
80
Is Anthony acting appropriately?
Anthony McGuire is an issuer-paid analyst hired by publicly traded companies to electronically promote their stocks.
McGuire creates a website that promotes his research efforts as a seemingly independent analyst. McGuire posts a profile and a strong buy recommendation for each company on the website indicating that the stock is expected to increase in value.
He does not disclose the contractual relationships with the companies he covers on his website, in the research reports he issues, or in the statements he makes about the companies in internet chat rooms.
McGuire has violated Standard I(C) because the website is misleading to potential investors.
Even if the recommendations are valid and supported with thorough research, his omissions regarding the true relationship between himself and the companies he covers constitute a misrepresentation.
McGuire has also violated Standard VI(A)–Disclosure
of Conflicts by not disclosing the existence of an arrangement with the companies through which he receives compensation in exchange for his services.
81
Whis Hijan acting appropriately? What must he do?
Hijan Yao is responsible for the creation and distribution of the marketing materials for his firm, which claims compliance with the GIPS standards.
Yao creates and distributes a presentation of performance by the firm’s Asian equity composite that states the composite has ¥350 billion in assets.
In fact, the composite has only ¥35 billion in
assets, and the higher figure on the presentation is a result of a typographical error.
Nevertheless, the erroneous material is distributed to a number of clients before Yao catches the mistake.
Once the error is discovered, Yao must take steps to cease distribution of the incorrect material and correct the error by informing those who have received the erroneous information.
Because Yao did not knowingly make the misrepresentation, however, he did not violate Standard I(C).
Because his firm claims compliance with the GIPS standards, it must also comply with the GIPS Guidance Statement on Error Correction in relation to the error.
82
Has Syed acted appropriately?
Syed Muhammad is the president of an investment management firm. The promotional material for the firm, created by the firm’s marketing department, incorrectly claims that Muhammad has an advanced degree in finance from a prestigious business school in addition to the CFA designation.
Although Muhammad attended the school for a short period of time, he did not receive a degree.
Over the years, Muhammad and others in the firm have distributed this material to numerous prospective clients and consultants.
Even though Muhammad may not have been directly responsible for the misrepresentation of his credentials in the firm’s promotional material, he used this material numerous times over an extended period and should have known of the misrepresentation.
Thus, Muhammad has violated Standard I(C).
83
Has Cindy acted appropriately?
Cindy Grant, a research analyst for a Canadian brokerage firm, has specialized in the Canadian mining industry for the past 10 years.
She recently read an extensive research report on Jefferson Mining, Ltd., by Jeremy Barton, another analyst. Barton provided extensive statistics on the mineral reserves, production capacity, selling rates, and marketing factors affecting Jefferson’s operations.
He also noted that initial drilling results on a new ore body, which had not been made public, might show the existence of mineral zones that could increase the life of Jefferson’s main mines, but Barton cited no specific data as to the initial drilling results.
Grant called an officer of Jefferson, who gave her the initial drilling results over the telephone. The data indicated that the expected life of the main mines would be tripled. Grant added these statistics to Barton’s report and circulated it within her firm as her own report.
Grant plagiarized Barton’s report by reproducing large parts of it in her own report without acknowledgment
84
Did Ricki Marks act appropriately?
When Ricki Marks sells mortgage-backed derivatives called “interest-only strips” (IOs) to public pension plan clients, she describes them as “guaranteed by the US government.” Purchasers of the IOs are entitled only to the interest stream generated by the mortgages, however, not the notional principal itself.
One particular municipality’s investment policies and local law require that securities purchased by its public pension plans be guaranteed by the US government. Although the underlying mortgages are guaranteed, neither the investor’s investment nor the interest stream on the IOs is guaranteed. When interest rates decline, causing an increase in prepayment of mortgages, interest payments to the IOs’ investors decline, and these investors lose a portion of their investment.
Marks violated Standard I(C) by misrepresenting the terms and character of the investment.
85
Is Khalouck acting appropriately?
Khalouck Abdrabbo manages the investments of several high-net-worth individuals in the United States who are approaching retirement. Abdrabbo advises these individuals that a portion of their investments be moved from equity to bank-sponsored certificates of deposit and money market accounts so that the principal will be “guaranteed” up to a certain amount. The interest is not guaranteed.
Although there is risk that the institution offering the certificates of deposits and money market accounts could go bankrupt, in the United States, these accounts are insured by the US government through the Federal Deposit Insurance Corporation.
Therefore, using the term “guaranteed” in this context is not inappropriate as long as the amount is within the government-insured limit.
Abdrabbo should explain these facts to the clients.
86
How should Steve Swanson proceed?
Steve Swanson is a senior analyst in the investment research department of Ballard and Company.
Apex Corporation has asked Ballard to assist in acquiring the majority ownership of stock in the Campbell Company, a financial consulting firm, and to prepare a report recommending that stockholders of Campbell agree to the acquisition.
Another investment firm, Davis and Company, had already prepared a report for Apex analyzing both Apex and Campbell and recommending an exchange ratio.
Apex has given the Davis report to Ballard officers, who have passed it on to Swanson.
Swanson reviews the Davis report and other available material on Apex and Campbell. From his analysis, he concludes that the common stocks of Campbell and Apex represent good value at their current prices; he believes, however, that the Davis report does not consider all the factors a Campbell stockholder would need to know to make a decision.
Swanson reports his conclusions to the partner in charge, who tells him to “use the Davis report, change a few words, sign your name, and get it out.”
If Swanson does as requested, he will violate Standard I(C).
He could refer to those portions of the Davis report that he agrees with if he identifies Davis as the source; he could then add his own analysis and conclusions to the report before signing and distributing it.
87
How should Claude Browning proceed?
Claude Browning, a quantitative analyst for Double Alpha, Inc., returns from a seminar in great excitement.
At that seminar, Jack Jorrely, a well-known quantitative analyst at a national brokerage firm, discussed one of his new models in great detail, and Browning is intrigued by the new concepts.
He proceeds to test the model, making some minor mechanical changes but retaining the concepts, until he produces some very positive results.
Browning quickly announces to his supervisors at Double Alpha that he has discovered a new model and that clients and prospective clients should be informed of this positive finding as ongoing proof of Double Alpha’s continuing innovation and ability to add value.
Although Browning tested Jorrely’s model on his own and even slightly modified it, he must still acknowledge the original source of the idea. Browning can certainly take credit for the final, practical results; he can also support his conclusions with his own test. The credit for the innovative thinking, however, must be awarded to Jorrely.
88
Would this use of material be a violation of Standard I(C)?
Fernando Zubia would like to include in his firm’s marketing materials some “plain-language” descriptions of various concepts, such as the price-to-earnings (P/E) multiple and why standard deviation is used as a measure of risk.
The descriptions come from other sources, but Zubia wishes to use them without reference to the
original authors.
Copying verbatim any material without acknowledgement, including plain-language descriptions of the P/E multiple and standard deviation, violates Standard I(C).
Even though these concepts are general, best practice would be for Zubia to describe them in his own words or cite the sources from which the descriptions are quoted. Members and candidates would be violating Standard I(C) if they either were responsible for creating marketing materials without attribution or knowingly use plagiarized materials.
89
Through a mainstream media outlet, Erika Schneider learns about a study that she would like to cite in her research.
Should she cite both the mainstream intermediary source as well as the author of the study itself when using that information?
In all instances, a member or candidate must cite the actual source of the information. Best practice for Schneider would be to obtain the information directly from the author and review it before citing it in a report. In that case, Schneider would not need to report how she found out about the information.
90
Paul Ostrowski runs a two-person investment management firm.
Ostrowski’s firm subscribes to a service from a large investment research firm that provides research reports that can be repackaged by smaller firms for those firms’ clients.
Ostrowski’s firm distributes these reports to clients as its own work.
Ostrowski can rely on third-party research that has a reasonable and adequate basis, but he cannot imply that he is the author of such research.
If he does, Ostrowski is misrepresenting the extent of his work in a way that misleads the firm’s clients or prospective clients.
91
How should Tom Stafford proceed?
Tom Stafford is part of a team within Appleton Investment Management responsible for managing a pool of assets for Open Air Bank, which distributes structured securities to offshore clients.
He becomes aware that Open Air is promoting the structured securities as a much less risky investment than the investment management policy followed by him and the team to manage the original pool of assets.
Also, Open Air has procured an independent rating for the pool that significantly overstates the quality of the investments. Stafford communicates his concerns to his supervisor, who responds that Open Air owns the product and is responsible for all marketing and distribution.
Stafford’s supervisor goes on to say that the product is outside of the US regulatory regime that Appleton follows and that all risks of the product are disclosed at the bottom of page 184 of the prospectus.
As a member of the investment team, Stafford is qualified to recognize the degree of accuracy of the materials that characterize the portfolio, and he is correct to be worried about Appleton’s responsibility
for a misrepresentation of the risks.
Thus, he should continue to pursue the issue of Open Air’s inaccurate promotion of the portfolio according to
the firm’s policies and procedures.
The Code and Standards stress protecting the reputation of the firm and the sustainability and integrity of the capital markets. Misrepresenting the
quality and risks associated with the investment pool may lead to negative consequences for others well beyond the direct investors.
92
Is Trina in compliance with Standard 1C?
Trina Smith is a fixed-income portfolio manager at a pension fund.
She has observed that the market for highly structured mortgages is the focus of salespeople she meets and that these products represent a significant number of trading opportunities.
In discussions about this topic with her team, Smith learns that calculating yields on changing cash flows within the deal structure requires very specialized vendor software.
After more research, they find out that each deal is unique and that deals can have more than a dozen layers and changing cash flow priorities.
Smith comes to the conclusion that, because of the complexity of these securities, the team cannot effectively distinguish between potentially good and bad investment options.
To avoid misrepresenting their understanding, the team decides that the highly structured mortgage segment of the securitized market should not become part of the core of the fund’s portfolio; they will allow some of the less complex securities to be part of the core.
Smith is in compliance with Standard I(C) by not investing in securities that she and her team cannot effectively understand.
Because she is not able to describe the risk and return profile of the securities to the pension fund beneficiaries and trustees, she appropriately limits the fund’s exposure to this sector.
93
Is Robert in compliance with Standard 1C?
Robert Palmer is head of performance for a fund manager.
When asked to provide performance numbers to fund rating agencies, he avoids mentioning that the fund manager is quite liberal in composite construction.
The reason accounts are included/ excluded is not fully explained. The performance values reported to the rating agencies for the composites, although accurate for the accounts shown each period, may not present a true representation of the fund manager’s ability.
No, as he is “Cherry picking” accounts to include in either published reports or information provided to rating agencies conflicts with Standard I(C).
Moving accounts into or out of a composite to influence the overall performance results materially misrepresents the reported values over time.
Palmer should work with his firm to strengthen its reporting practices concerning composite construction to avoid misrepresenting the firm’s track record or the quality of the information being provided.
94
Is Finch in compliance with Standard 1C?
David Finch is a sales director at a commercial bank, where he directs the bank’s client advisers in the sale of third-party mutual funds.
Each quarter, he holds a division-wide training session where he provides fact sheets on investment funds the bank is allowed to offer to clients.
These fact sheets, which can be redistributed to potential clients, are created by the fund firms and contain information about the funds, including investment strategy and target distribution rates.
Finch knows that some of the fact sheets are out of date; for example, one long-only fund approved the use of significant leverage last quarter as a method to enhance returns. He continues to provide the sheets to the sales team without updates because the bank has no control over the marketing material released by the mutual fund firms.
Finch is violating Standard I(C) by providing information that misrepresents aspects of the funds.
By not providing the sales team and, ultimately, the clients with the updated information, he is misrepresenting the potential risks associated with the funds with outdated fact sheets.
Finch can instruct the sales team to clarify the deficiencies in the fact sheets with clients and ensure they have the most recent fund prospectus document
before accepting orders for investing in any fund.
95
Has Bob done anything wrong?
Bob Anderson is chief compliance officer for Optima Asset Management Company, a firm currently offering eight funds to clients.
Seven of the eight had 10-year returns below the median for their respective sectors.
Anderson approves a recent advertisement, which includes this statement: “Optima Asset Management is achieving excellent returns for its investors.
The Optima Emerging Markets Equity fund, for example, has 10-year returns that exceed the sector median by more than 10%.”
From the information provided it is difficult to determine whether a violation has occurred as long as the sector outperformance is correct.
Anderson may be attempting to mislead potential clients by citing the performance of the sole fund that achieved such results. Past performance is often used to demonstrate a firm’s skill and abilities in comparison to funds in the same sectors.
However, if all the funds outperformed their respective benchmarks, then Anderson’s assertion that the company “is achieving excellent returns” may be factual. Funds may exhibit positive returns for investors, exceed benchmarks, and yet have returns below the median in their sectors.
Members and candidates need to ensure that their marketing efforts do not include statements that misrepresent their skills and abilities to remain compliant with Standard I(C). Unless the returns of a single fund reflect the performance of a firm as a whole, the use of a singular fund for performance comparisons should be avoided.
96
What is standard 1D?
PROFESSIONALISM – MISCONDUCT
97
What is the language detailing standard 1D?
Members and Candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence.
98
What does standard 1A compare to standard 1D?
Whereas Standard I(A) addresses the obligation of members and candidates to comply with applicable law that governs their professional activities, Standard I(D) addresses all conduct that reflects poorly on the professional integrity, good reputation, or competence of members and candidates.
99
Does any act of lying, cheating, or stealing prohibited by standard 1D?
No. only acts that reflect adversely on a member’s or candidate’s professional activities.
100
Does the Code universally prohibit lying, cheating, and stealing?
Although the code discourages any sort of unethical behavior by members and candidates, the Code
and Standards are primarily aimed at conduct and actions related to a member’s or candidate’s professional life.
101
What organizational procedures does the CFA recommend to limit misconduct?
1. Develop a code of ethics
2. Develop a list of violations and potential disciplinary actions
3. Check employee's references
102
Are Simon's actions appropriate?
Simon Sasserman is a trust investment officer at a bank in a small affluent town.
He enjoys lunching every day with friends at the country club, where his clients have observed him having numerous drinks.
Back at work after lunch, he clearly is intoxicated while making investment decisions. His colleagues make a point of handling any business with Sasserman in the morning because they distrust his judgment after lunch.
Sasserman’s excessive drinking at lunch and subsequent intoxication at work constitute a violation of Standard I(D) because this conduct has raised questions about his professionalism and competence.
His behavior reflects poorly on him, his employer, and the investment industry.
103
Are Howard Hoffman's action appropriate?
Howard Hoffman, a security analyst at ATZ Brothers, Inc., a large brokerage house, submits reimbursement forms over a two-year period to ATZ’s self-funded health insurance program for more than two dozen bills, most of which have been altered to increase the amount due.
An investigation by the firm’s director of employee benefits uncovers the inappropriate conduct. ATZ subsequently terminates Hoffman’s employment and notifies CFA Institute.
Hoffman violated Standard I(D) because he engaged in intentional conduct involving fraud and deceit in the workplace that adversely reflected on his integrity.
104
Are Jody's actions appropriate?
Jody Brink, an analyst covering the automotive industry, volunteers much of her spare time to local charities.
The board of one of the charitable institutions decides to buy five new vans to deliver hot lunches to low-income elderly people.
Brink offers to donate her time to handle purchasing agreements.
To pay a long-standing debt to a friend who operates an automobile dealership—and to compensate herself for her trouble—she agrees to a price 20% higher than normal and splits the surcharge with her friend.
The director of the charity ultimately discovers the scheme and tells Brink that her services, donated or otherwise, are no longer required.
Brink engaged in conduct involving dishonesty, fraud, and misrepresentation and has violated Standard I(D).
105
Are Carmen's actions appropriate?
Carmen Garcia manages a mutual fund dedicated to socially responsible investing. She is also an environmental activist.
As the result of her participation in nonviolent protests, Garcia has been arrested on numerous occasions for trespassing on the property of a large petrochemical plant that is accused of damaging the environment.
Generally, Standard I(D) is not meant to cover legal transgressions resulting from acts of civil disobedience in support of personal beliefs because such conduct does not reflect poorly on the member’s or candidate’s
professional reputation, integrity, or competence.
106
What should Meredith Rasmussen do?
Meredith Rasmussen works on a buy-side trading desk of an investment management firm and concentrates on in-house trades for a hedge fund subsidiary managed by a team at the investment management firm.
The hedge fund has been very successful and is marketed globally by the firm. From her experience as the trader for much of the activity of the fund, Rasmussen has become quite knowledgeable about the hedge fund’s strategy, tactics, and performance.
When a distinct break in the market occurs and many of the securities involved in the hedge fund’s strategy decline markedly in value, Rasmussen observes that the reported performance of the hedge fund does not reflect this decline.
In her experience, the lack of effect is a very unlikely occurrence. She approaches the head of trading about her concern and is told that she should not ask any questions and that the fund is big and successful and is not her concern.
She is fairly sure something is not right, so she contacts the compliance officer, who also tells her to stay away from the issue of the hedge fund’s reporting.
Rasmussen has clearly come across an error in policies, procedures, and compliance practices within the firm’s operations.
According to the firm’s procedures for reporting potentially unethical activity, she should pursue the issue by gathering some proof of her reason for doubt.
Should all internal communications within the firm not satisfy her concerns, Rasmussen should consider reporting the potential unethical activity to the appropriate regulator
