Ethical and Professional Standards

Correct Answer: Refrain from trading on the information, maintain confidentiality, and report the situation to her supervisor or compliance department

The correct answer is to refrain from trading on the information, maintain confidentiality, and report the situation to her supervisor or compliance department. As a CFA charter holder, Sarah is bound by the CFA Institute Code of Ethics and Standards of Professional Conduct. This requires her to maintain confidentiality of material non-public information and prohibits her from acting on such information for personal or professional gain. Trading on the insider information would be a violation of the Code and Standards, regardless of whether it benefits her clients. Sarah's duty to maintain confidentiality and uphold ethical standards takes precedence over any potential benefits to clients. Discussing the potential acquisition with colleagues would also be a breach of confidentiality. The appropriate action is to keep the information confidential and report the situation to her supervisor or compliance department for guidance on how to proceed in accordance with the Code and Standards.

Correct Answer: Inform the colleague about the confidential nature of the information and refrain from acting on it until it becomes public

The most appropriate action for a CFA member who receives material nonpublic information is to inform the colleague about the confidential nature of the information and refrain from acting on it until it becomes public. Using the nonpublic information to make trades before the research report is published would be a violation of the CFA Institute's Code of Ethics and Standards of Professional Conduct, as it would constitute acting on material nonpublic information for personal gain. Discussing the implications of the nonpublic information with colleagues and clients would also be inappropriate, as it could lead to the dissemination of the confidential information and potentially enable others to act on it before it becomes public. As a CFA member, the ethical course of action is to maintain the confidentiality of the nonpublic information, inform the colleague who provided it about its sensitive nature, and refrain from acting on or sharing the information until it is publicly available.

Correct Answer: Disclose the information about the environmental scandal in the research report to provide a complete and accurate analysis.

According to the CFA Institute Code of Ethics and Standards of Professional Conduct, a CFA charterholder must act with integrity, competence, diligence, respect, and in an ethical manner. This includes providing a thorough, accurate, and honest analysis of the company, even if it may not be in the company's best interests. The environmental scandal is material information that could significantly impact the company's financial performance and reputation. Omitting this information would be misleading to investors and violate the ethical principles of the CFA Institute. Focusing solely on the company's financial performance and not disclosing the scandal would be a breach of trust and could lead to investors making decisions based on incomplete information. Discussing the situation with the supervisor to find a way to protect the company's interests would also be unethical, as it prioritizes the company's well-being over the interests of investors and the public.