Reading 73: ethics application Flashcards
Karen Jones, CFA, is an outside director for Valley Manufacturing. At a director’s meeting, Jones finds out that Valley Corp. has made several contributions to foreign politicians that she suspects were illegal. Jones checks with her firm’s legal counsel and determines that the contributions were indeed illegal. At the next board meeting, Jones urges the board to disclose the contributions. The board, however, votes not to make a disclosure. Jones’s most appropriate action would be to:
protest the board’s actions in writing to the executive officer of Valley.
resign from the board and seek legal counsel as to her legal disclosure requirements.
inform her supervisor of her discovery and cease attending meetings until the matter is resolved.
According to Standard I(A) Knowledge of the Law, because she has taken steps to stop the illegal activities and the board has ignored her, Jones must dissociate from the board and seek legal advice as to what other actions would be appropriate in this instance. She may need to inform legal or regulatory authorities of the illegal activities. (LOS 73.a, 73.b)
Beth Bixby, CFA, uses a quantitative model to actively manage a portfolio of stocks with an objective of earning a greater return than the market. Over the last three years, the returns to a portfolio constructed using the model have been greater than the returns to the S&P Index by between 2% and 4%. In promotional materials, Bixby states, “Through our complex quantitative approach, we select a portfolio that has similar risk to the S&P 500 Index but will receive a return between 2% and 4% greater than the index.” This statement is:
permissible because prior returns to the firm’s model provide a reasonable and adequate basis for the promotional material.
permissible because the statement describes the basic characteristics of the fund’s risk and return objectives.
not permissible because Bixby is misrepresenting the investment performance her firm can reasonably expect to achieve.
There can be no assurance that a premium of 2% to 4% will consistently be obtained. Bixby is in violation of Standard I(C) Misrepresentation, because she has made an implicit guarantee of the fund’s expected performance. (LOS 73.a, 73.b)
Over the past two days, Lorraine Quigley, CFA, manager of a hedge fund, has been purchasing large quantities of Craeger Industrial Products’ common stock while at the same time shorting put options on the same stock. Quigley did not notify her clients of the trades, although they are aware of the fund’s general strategy to generate returns. Which of the following statements is most likely correct?
Quigley did not violate the Code and Standards.
Quigley violated the Code and Standards by manipulating the prices of publicly traded securities.
Quigley violated the Code and Standards by failing to disclose the transactions to clients before they occurred.
Quigley’s trades are most likely an attempt to take advantage of an arbitrage opportunity that exists between Craeger’s common stock and its put options. She is not manipulating the prices of securities in an attempt to mislead market participants, which would violate Standard II(B) Market Manipulation. She is pursuing a legitimate investment strategy. Participants in her hedge fund are aware of the fund’s investment strategy, and thus, Quigley did not violate the Code and Standards by not disclosing this specific set of trades in advance of trading. (LOS 73.a, 73.b)
Julia Green, CFA, has friends from her previous employer who have suggested that she receive information from them via an internet chat room. In this way, she receives news about an exciting new product being developed by a firm in Singapore that has the potential to double the firm’s revenue. The firm has not revealed any information regarding the product to the public. According to the Code and Standards, this information is:
both material and nonpublic, and Green may not trade on it in Singapore but may trade on it elsewhere.
both material and nonpublic and Green may not trade on it in any jurisdiction.
public by virtue of its release in the chat room and Green may trade on it.
The release of such information to a limited circle via an internet chat room does not cause the information to be public. The information is also clearly material. Therefore, Green is not allowed to trade on the information under Standard II(A) Material Nonpublic Information. (LOS 73.a, 73.b)
Melvin Byrne, CFA, manages a portfolio for James Martin, a very wealthy client. Martin’s portfolio is well diversified with a slight tilt toward capital appreciation. Martin requires very little income from the portfolio. Recently, Martin’s brother Cliff has become a client of Byrne. Byrne proceeds to invest Cliff’s portfolio in a similar manner to James’s portfolio based on the fact that both brothers have a similar lifestyle and are only two years apart in age. Which of the following statements is most accurate?
Byrne violated the Code and Standards by knowingly creating a conflict between the interests of James’s and Cliff’s portfolios.
Byrne violated the Code and Standards by failing to determine Cliff’s objectives and constraints prior to investing his portfolio.
Byrne violated the Code and Standards by failing to have a reasonable and adequate basis for Cliff’s portfolio allocation.
Standard III(C) Suitability requires that before taking investment action, members and candidates must make a reasonable inquiry into a client’s or prospect’s investment objectives and constraints, as well as their prior investment experience. Byrne cannot assume that because the brothers have similar lifestyles and are close in age that they should have similarly managed portfolios. Byrne should have interviewed Cliff directly before investing his portfolio. (LOS 73.a, 73.b)
Beth Anderson, CFA, is a portfolio manager for several wealthy clients, including Reuben Carlyle. Anderson manages Carlyle’s personal portfolio of stock and bond investments. Carlyle recently told Anderson that he is under investigation by the IRS for tax evasion related to his business, Carlyle Concrete (CC). After learning about the investigation, Anderson proceeds to inform a friend at a local investment bank so that they may withdraw their proposal to take CC public. Which of the following is most likely correct?
Anderson violated the Code and Standards by failing to maintain the confidentiality of her client’s information.
Anderson violated the Code and Standards by failing to detect and report the tax evasion to the proper authorities.
Anderson did not violate the Code and Standards because the information she conveyed pertained to illegal activities on the part of her client.
Standard III(E) Preservation of Confidentiality requires Anderson to maintain the confidentiality of client information. Confidentiality may be broken in instances involving illegal activities on the part of the client, but the client’s information may only be relayed to proper authorities. Anderson did not have the right to inform the investment bank of her client’s investigation. (LOS 73.a, 73.b)
Robert Blair, CFA, director of research, has had an ongoing battle with management about the adequacy of the firm’s compliance system. Recently, it has come to Blair’s attention that the firm’s compliance procedures are inadequate in that they are not being monitored or carefully followed. What should Blair most appropriately do?
Resign from the firm unless the compliance system is strengthened and followed.
Send his superior a memo outlining the problem.
Decline in writing to continue to accept supervisory responsibility until reasonable compliance procedures are adopted.
According to Standard IV(C) Responsibilities of Supervisors, because he is aware that the firm’s compliance procedures are not being monitored and followed and because he has repeatedly tried to get company management to correct the situation, Blair should decline supervisory responsibility until adequate procedures to detect and prevent violations of laws, regulations, and the Code and Standards are adopted and followed. If he does not do so, he will be in violation of the Code and Standards. (LOS 73.a, 73.b)
Eugene Nieder, CFA, has just accepted a new job as a quantitative analyst for Paschal Investments, LLP. Nieder developed a complex model while working for his previous employer and plans to recreate the model for Paschal. Nieder did not make copies of the model or any supporting documents because his employer refused to grant him permission to do so. Nieder will recreate the model from memory. Which of the following statements is most likely correct?
Nieder can recreate the model without violating the Code and Standards as long as he also generates supporting documentation.
Nieder can recreate the model without violating the Code and Standards without documentation if the model is modified from its original form.
Nieder cannot recreate the model without violating the Code and Standards because it is the property of his former employer.
Nieder must not take models or documents from his previous employer without explicit permission to do so, or he would violate Standard IV(A) Loyalty. He is allowed to reproduce the model from memory but must recreate the supporting documentation to maintain compliance with Standard V(C) Record Retention. (LOS 73.a, 73.b)
Fred Johnson, CFA, a financial analyst and avid windsurfer, has begun an investment survey of the water sports leisure industry. His brother sells windsurfing gear in Tampa and tells him that Swordfish9 is the “hottest windsurfing rig on the market and will be highly profitable for Swordfish Enterprises.” Johnson had never heard of Swordfish9 previously, but after testing the board himself became very excited about the Swordfish9 and issued an investment recommendation of “buy” on Swordfish Enterprises. As a result of issuing the recommendation, Johnson has:
not violated the Code and Standards.
violated the Code and Standards by failing to establish a reasonable and adequate basis.
violated the Code and Standards by failing to consider the suitability of the investment for his clients.
Johnson has apparently let his recreational passion cloud his judgment. This is not to say that Swordfish Enterprises is not or will not be an excellent investment. However, if he had never heard of the firm previously, issuing an investment recommendation without conducting a thorough financial investigation indicates a failure to exercise diligence and also indicates that he lacks a reasonable and adequate basis for his recommendation. He is in violation of Standard V(A) Diligence and Reasonable Basis. (LOS 73.a, 73.b)
Neiman Investment Co. receives brokerage business from Pick Asset Management in exchange for referring prospective clients to Pick. Pick advises clients—in writing, at the time the relationship is established— of the nature of its arrangement with Neiman. With regard to this practice, Pick has:
complied with the Code and Standards.
violated the Code and Standards by failing to preserve the confidentiality of the agreement with Neiman.
violated the Code and Standards by inappropriately negotiating an agreement that creates a conflict of interest.
There is no violation of the Standards regarding this matter. The referral arrangement is fully disclosed to clients before they agree to do business with Pick. Therefore, clients can fully assess the effect of the agreement on the referral and how the agreement may affect their accounts before hiring Pick as their asset manager. (LOS 73.a, 73.b)
After sitting for the Level I CFA exam, Cynthia White visits CFA Haven, an online forum, to express her frustration. White writes, “CFA Institute is not doing a competent job of evaluating candidates, because none of the questions in the June exam touched on Alternative Investments.” Regarding the CFA Institute Standards of Professional Conduct, White most likely:
did not violate any Standard, because she was exercising her right to freedom of speech.
violated the Standards by discussing exam content.
violated the Standards by impugning the reputation of CFA Institute.
Standard VII(A) Conduct as Participants in the CFA Programs prohibits candidates from revealing which portions of the Candidate Body of Knowledge were or were not covered on an exam. Members and candidates are free to disagree with the policies, procedures, or positions taken by the CFA Institute and express their opinion on such policies, procedures, and positions. (LOS 73.a, 73.b)
