Richard Chambers, CFA, is a registered representative for XXX. Chambers, who was a leading revenue producer in the firm’s New York office, moved last week to the firm’s new Botwari office to establish a revenue source in Asia. To develop a strong client base, Chambers follows firm practices and takes advantage of a local law allowing brokers to pay prospective clients as an inducement to gain their business. Chambers sometimes pays local accountants significant sums for referring wealthy clients to him as well, and he discloses this to the clients. Has Chambers violated CFA Institute Standards of Professional Conduct? A. No, Chambers has not violated the Code and Standards. B. Yes, Chambers has violated Standard III(B) Fair Dealing. C. Yes, Chambers is violating US law, which puts him in violation of Standard I(D) Misconduct. D. Yes, Chambers has violated Standard VI© Referral Fees. I don’t see how any of the answers above are correct; I would have thought that this violates the PROFESSIONALISM: Independence & Objectivity requirement where CFA members/candidates must not **offer**, solicit, or accept any gift, benefit compensation, or consideration…But the correct answer is apparently ***A***. No explanation provided (Schweser, Book 6, Sample 1 Morning exam, q. 8). ---------------------------------------------------- Christopher Kim, CFA, is a research analyst for Batts Brothers, an investment banking firm in New York. Kim follows the energy industry and has frequent contact with industry executives. A CEO of a large oil and gas corporation that has previously employed Batts Brothers to underwrite a stock issue has invited Kim to his office to discuss a secondary offering of the Company’s stock. The CEO wants Batts Brothers to underwrite the stock issue. As an incentive to place the issue quickly with institutional investors, the CEO offers Kim the opportunity to fly on his private jet to his ranch in Texas for an exotic game hunting expedition if Kim’s firm can place 90% of the issue within one month. According to CFA Inst Standards of Conduct, Kim: A. Must not accept such lavish benefits in order to maintain his objectivitiy. B. Must obtain written consent from Batts Brotehrs before accepting the invitiation. C. May accept the invitation without consent if he submits a statement disclosing the value of teh trip to Batts Brothers when he returns. D. May accept the invitiation without consent only if he discloses the trip to Batts Brothers before accepting. Again, I would have thought this falls under I&O, but apparently the correct answer is B. No explanation provided (Schweser, Book 6, Sample 1 Morning exam, q. 10). Help??? ---------------------------------------------------- Doug Watson, CFA, serves in a sales position at Sommerset Brokerage, a registered investment advisor. As part of his employment, he is expected to entertain clients from time to time with dinners, professional sporting events, and golf outings. Frequently at these client outings, Watson drinks excessively. On one occasion, after dropping off a client, Watson was cited by local police for public intoxication. According to the CFA Inst. Standards of Professional Conduct, is Watson in violation of either Standard I(A) Knowledge of the Law or Standard I(D) Misconduct? A. Yes / Yes B. Yes / No C. No / Yes D. No / No My answer: A. I think he violates both!! The law likely doesn’t allow drunk driving (he dropped off his client!), while being intoxicated / drinking excessively reflects badly on his integrity & trustworthiness, etc. However, the answer according to Schweser is D. What’s wrong with my argument??
Richard Chambers, CFA, is a registered representative for XXX. Chambers, who was a leading revenue producer in the firm’s New York office, moved last week to the firm’s new Botwari office to establish a revenue source in Asia. To develop a strong client base, Chambers follows firm practices and takes advantage of a local law allowing brokers to pay prospective clients as an inducement to gain their business. Chambers sometimes pays local accountants significant sums for referring wealthy clients to him as well, and he discloses this to the clients. Has Chambers violated CFA Institute Standards of Professional Conduct? A. No, Chambers has not violated the Code and Standards. B. Yes, Chambers has violated Standard III(B) Fair Dealing. C. Yes, Chambers is violating US law, which puts him in violation of Standard I(D) Misconduct. D. Yes, Chambers has violated Standard VI© Referral Fees. Answer is A ==> because local law permits him to do so. And Local Law is higher than the Code and Standards, so he is not violating the code and Standards by offering the inducements Christopher Kim, CFA, is a research analyst for Batts Brothers, an investment banking firm in New York. Kim follows the energy industry and has frequent contact with industry executives. A CEO of a large oil and gas corporation that has previously employed Batts Brothers to underwrite a stock issue has invited Kim to his office to discuss a secondary offering of the Company’s stock. The CEO wants Batts Brothers to underwrite the stock issue. As an incentive to place the issue quickly with institutional investors, the CEO offers Kim the opportunity to fly on his private jet to his ranch in Texas for an exotic game hunting expedition if Kim’s firm can place 90% of the issue within one month. According to CFA Inst Standards of Conduct, Kim: A. Must not accept such lavish benefits in order to maintain his objectivitiy. B. Must obtain written consent from Batts Brotehrs before accepting the invitiation. C. May accept the invitation without consent if he submits a statement disclosing the value of teh trip to Batts Brothers when he returns. D. May accept the invitiation without consent only if he discloses the trip to Batts Brothers before accepting. This I believe would be B. He must disclose the offer of the trip to his employers so they can make a decision as to whether this would impact independence and objectivity. Doug Watson, CFA, serves in a sales position at Sommerset Brokerage, a registered investment advisor. As part of his employment, he is expected to entertain clients from time to time with dinners, professional sporting events, and golf outings. Frequently at these client outings, Watson drinks excessively. On one occasion, after dropping off a client, Watson was cited by local police for public intoxication. According to the CFA Inst. Standards of Professional Conduct, is Watson in violation of either Standard I(A) Knowledge of the Law or Standard I(D) Misconduct? A. Yes / Yes B. Yes / No C. No / Yes D. No / No It is D here. He did drink, he was caught by the police. But he did not do anything more. I believe in the 160 page CFAI document, there are many more examples - people getting caught on protests in public, etc. etc. If he drank at lunch, and came back drunk to office and then made erratic investment decisions, he is in violation of both I(A) Knowledge and I(D) Misconduct then.
For the first one, it’s A because he disclosed the arrangement…and local law is only higher if it is more strict than CFA Code & Standards.
agreed first question it is not because the local law is more strict, it is actually more lax. It is because he disclosed it that makes it ok. and for question 3…the moral of the story is if you get busted outside of work its ok. As long as you can still pick stocks like a winner.
ycli, here’s a few things to consider. Question 1: edit: deleted, already addressed above. Question 2: This relates to Standard IV(B): Duties to Employers: Additional Compensation Arrangements “Members and Candidates must not accept gifts, benefits, compensation, or consideration that competes with, or might reasonably be expected to create a conflict of interest with, their employer’s interest unless they obtain written consent from all parties involved.” Question 3: This one’s probably the toughest of the three. However, it doesn’t appear Watson’s situation fits CFAI’s definition of misconduct. "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. " For example, compare this situation to the two following CFAI examples in the Standards of Practice Handbook. “Example 1. 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. Comment: 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 thus reflects poorly on him, his employer, and the investment industry.” “Example 4. Carmen Garcia manages a mutual fund dedicated to socially responsible investing. She is also an environmental activist. As the result of her participation at 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. Comment: 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 or candidate’s professional reputation, integrity, or competence.” It’s a fine line, but search for misconduct that casts doubt on Members/Candidates’ professionalism while they’re in the process of rendering service to clients. Just my $0.02.
With 2, one is allowed to take additional compensation from a Client as long as it is disclosed to the employer. In this case, Kim’s firm is underwritng the issue, so Oil and Gas C/o is a client so he is allowed to take the compensation as logn as it is disclosed. Of course, if he were researching/analysing the firm to make a recommendation it would be a violation of the standards With 3, my guess would have been A too, since a DUI is a violation of the law (not related to civil disobedience),. However, maybe it is not a violation since he is a sales man not an advisor?
With 3, I agree he violated knowledge of the law because he “dropped off his client” while intoxicated. Coming from the US and CA (state), I believe that would constitue DUI. Unless dropping off means walking them home… I think if it didn’t say he dropped his client home, and said after he left the games, or something like that, it’d be different.
#2 - He is also a research analyst & follows the same industry. Won’t he violate Independence & Objectivity. #3 - I agree with acwu on 3rd one. He violated the Knowledge of the law.
For 2 --> by disclosing to his employer he’s allowing the employer to make the decision as to whether he’s compromised in independence and objectivity terms. If his employer gives consent, he’s good to go. For 3 --> I believe acwu and you are reading too much meaning into this. Go by the book. It says you drink, you then go to your job, and do incorrect things, that’s a violation. Just drinking with the client and then dropping him back home, and in the process being accosted by a cop – is similar to someone going to protest against the Iraq war or nuclear disarmament and then getting arrested by the police.
Thanks everyone!! W/ Q2, I think I read it as Kim being a research analyst that is helping in the underwriting, but I guess it’s not the case? Re-reading it again, I still can’t really get around it. With respect to Q3, admit that it is different from him having violated Misconduct standard, but with respect to Knowledge of the Law, it seems the examples given show that as long as he doesn’t violate the law in respect of his position as an investment advisor / employee of investment services he would not be in violation of the KofL standard. Will have to think about this a bit more, but it helps to discuss!!!
Schweser has crappy questions. I have to say for 3, Knowledge of law is violated because he did break the local law and get arrested. Another question asks that if a Level 1 candidate wrote notes on his palm and walk into a GRE test or something, then he is in violation of the standard. I dont see how this question should be treated differently than #3 since its all outside of their professional investing jobs.
i agree, whether or not something happens outside your job, it all comes down to whether it makes you, your company, profession, cfa society, look bad… (if it causes any damage to your reputation)… i find that the best way to tackle ethics questions, is to pretend you’re a judge… right or wrong, ethical or not, its all about interpreting the current law to the situation at hand…