Applications of Ethical and Professional Standards

Correct Answer: Inform his supervisor that he possesses material nonpublic information and refrain from preparing the report or trading on the information.

The correct answer is to inform his supervisor that he possesses material nonpublic information and refrain from preparing the report or trading on the information. As a CFA charterholder, John is bound by the CFA Institute Code of Ethics and Standards of Professional Conduct. According to the Code and Standards, members must not knowingly make any misrepresentations relating to investment analysis, recommendations, or actions. They also must not act or cause others to act on material nonpublic information that could affect the value of an investment. Incorporating the confidential information into the report would be a misrepresentation and a violation of the Code and Standards. Discussing the confidential information with his supervisor to determine its relevance would also be improper, as it would involve sharing material nonpublic information. Therefore, the most ethical course of action for John is to inform his supervisor that he accidentally received confidential information about the upcoming merger and recuse himself from preparing the report or trading on the information.

Correct Answer: Refuse to use the confidential information for trading purposes, inform her supervisor that it would be unethical and illegal to do so, and escalate the matter to the compliance department if necessary to ensure no improper trades are made based on the inside information.

The best answer is to refuse to use the confidential information for trading purposes, inform her supervisor that it would be unethical and illegal to do so, and escalate the matter to the compliance department if necessary to ensure no improper trades are made based on the inside information. As a CFA charterholder, Joanna is bound by the CFA Institute Code of Ethics and Standards of Professional Conduct. Using material nonpublic information to trade securities is illegal and violates the Code and Standards. Joanna has a duty to maintain the confidentiality of the client's information and not misuse it for personal gain. Trading on the inside information, even if donating the profits to charity, is still illegal and unethical. It does not matter if the trade size is small or the profits are given away - any personal trades based on the confidential information are prohibited. Discussing the situation with the client to get their consent to trade does not make it permissible. The client may not fully understand the legal and ethical implications. Regardless of client consent, Joanna is still prohibited from trading on the information. Joanna's obligation is to firmly refuse to make any trades and alert the compliance department about her supervisor's unethical suggestion, to prevent any misuse of the inside information. This upholds her ethical duties and the CFA Institute standards.

Correct Answer: Inform his supervisor that he has come into possession of material nonpublic information about the company and cannot complete the analysis without risking violation of the Code and Standards.

According to the CFA Institute Code of Ethics and Standards of Professional Conduct, John should inform his supervisor that he has come into possession of material nonpublic information about the company and cannot complete the analysis, as doing so would risk violating the Code and Standards. Using confidential information to complete the analysis, even if not sharing the source, would be unethical and a violation of the Code and Standards. Incorporating insights gained from the confidential information into the analysis, while using only publicly available information, would still be a violation, as it would indirectly use the material nonpublic information. As a CFA charterholder, John is obligated to maintain the confidentiality of the information he received and refrain from using it for any purpose, including his analysis. The most appropriate course of action is to inform his supervisor of the situation and recuse himself from the analysis to avoid any potential ethical violations.