"morality" exercise:Preservation of Confidentiality
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Questions 1:
Chan Liu, CFA, is the new research manager at the Pacific MicroCap Fund. Liu observed the following activities after she published a research report on a thinly traded micro cap stock that included a “buy” recommendation:
● Pacific traders purchased the stock for Pacific’s proprietary account and then purchased the same stock for all client accounts; and
● Pacific marketing department employees disseminated positive, but false, information about this stock in widely read Internet forums.Liu notes the stock’s price increased more than 50% within a period of two days and was then sold for Pacific’s account. Which of the following steps is most appropriate for Liu to take to avoid violating the CFA Institute Code of Ethics and Standards of Professional Conduct?
A、 Report the observed activities to her employer.
B 、Remove her name from the micro cap stock research report.
C 、Publicly refute the false information posted on Internet forums.
Questions 2:
Teresa Staal, CFA, is an investment officer in a bank trust department. She manages money for celebrities and public figures, including an influential local politician. She receives a request from the politician’s political party headquarters to disclose his stock holdings. The request indicates that local law requires the disclosure. What steps should Staal most likely take to ensure she does not violate any CFA Institute Standards of Professional Conduct?
A 、Provide the information and inform her client.
B 、Send the requested documents and inform her supervisor.
C 、Check with her firm’s compliance department to determine her legal responsibilities.
A is correct because certain staff at Liu’s employer appear to be engaged in front-running, a violation of Standard VI(B)–Priority of Transactions, and market manipulation, a violation of Standard II(B)–Market Manipulation. If Liu observes these violations without taking steps to notify her employer, she will be in violation of Standard I(A)–Knowledge of the Law. Liu should know that the conduct observed is likely a violation of applicable laws, rules, and regulations and is a violation of the CFA Institute Code and Standards. Her first step, therefore, 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. Inaction may be construed as participation or assistance in the illegal or unethical conduct.
B is incorrect because the firm the member is employed by appears to be engaged in a classic pump and dump stock fraud and market manipulation scheme. Removing her name from the firm’s investment recommendation would not alleviate the member from her more immediate responsibilities under Standard I(A)–Knowledge of the Law because the firm and the member must not knowingly participate or assist in and must dissociate from any violations of such laws, rules, or regulations. Now that the member knows of the violations, she must dissociate from them. Inaction may be construed as participation or assistance in the illegal or unethical conduct.
C is incorrect because the firm the member is employed by appears to be engaged in a classic pump and dump stock fraud and market manipulation scheme and the member must not knowingly participate or assist in and must dissociate from any violations of such laws, rules, or regulations as required by Standard I(A)–Knowledge of the Law. Inaction may be construed as participation or assistance in the illegal or unethical conduct.
C is correct. In order to avoid violating Standard III(E) Staal should determine if applicable securities regulations require disclosing the records before she provides the confidential information concerning her client’s investments.
A is incorrect as providing the requested information would violate the confidentiality of the client’s records.
B is incorrect as providing the requested information would violate the confidentiality of the client’s records
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