Schweser Exam 1 Afternoon ethics question 13

Question: Tony Roberts, CFA, is a portfolio manager at Delta Sec. He suspects a colleague, who is not a member of candidate, of ongoing activities that, while not illegal under local law, violate CFA Institute Standards of Professional Conduct. Roberts and the colleague both report to the same managing director at Delta and are both currently being considered for a promotion to senior portfolio manager, According to the CFA Institute Standards of Professional Conduct, Roberts: A: Is required to dissociate from the activities that violate the Code and Standards if they continue B: Is not required to act because the Code and Standards do not apply to non-members. C: Must report the suspects violations of the Code and Standards first to his supervisors and then to the CFA Institute.

I answered C, correct answer is A. The solution says: “However, Robets is not required by the Code and the Standards to report violations of laws or the Code and Standars to the CFA Institute or to governmental regulators, although it may be prudent or even required by law that he do so.”

I thought you were required to report to government regulators if required by law?

Can you post the question…

I believe the correct answer is that you are supposed to let your supervisors know of any illegal or suspicious activity and are not supposed to go directly to regulators as other members of your firm may have more knowledge of the applicable rules. It also states that when in doubt you should consult a lawyer and then make an educated decision as to if you should report the suspicious activities. But most of the time the answer will be to report the activity to your supervisor in the CFA questions

I updated the post with the question. I also agree with your answer, but it does not seem entirely correct here.

Answer C is definitely incorrect. Since your colleague is not a CFA charterholder, why would you tell the CFA Institute about a violation he committed? The CFA Institute has no authority over non-members !

Answer B is also wrong because if you suspect someone is doing an activity that violates the CFA Institute Standards of Professional Conduct (even if he is not a member or candidate) you must dissociate from the activity. By failing to dissociate, you knowingly participate in a violation (because you know about it and do not act) and therefore you are violating Standard I (A) Knowledge of the law.

The CFA Institute recommends reporting violations to the authorities, but it is not a requirement

Ok. But lets say you colleague is a CFA holder. They I assume the procedure would be to inform supervisor first, not to immediately dissassociate from the activity?

Whether your colleague is a CFA charterholder or not does not really matter (except when reporting to the CFA Institute). If you have a reasonable basis to believe your colleague is doing something illegal you have to first tell your employer and then if the employer does not do anything you have to dissociate.

But in this case, the question says “while not illegal under local law”, this means that even if you tell your employer he will not do anything because the activity is not illegal in that country!!! So, the only thing you can do is to dissociate from the activity