CFA Practice Question

CFA Practice Question

Emmy Noether is a senior division manager at Harding & Harding, a money management firm. Emmy is quite fastidious about following the rules of the investment industry and has established specific procedures and guidelines designed to prevent any violations. Recently, it surfaced that one of the employees reporting to Emmy, William Bathwater, had been secretly using inside information on a computer maker to generate profits in his portfolio. William had been extremely clever at hiding these profits and only a serendipitous audit by the Compliance Department revealed the pattern.

Emmy, in her capacity as William's supervisor, has ______
A. has not violated any standard in the CFA Institute Code of Ethics.
B. violated Standard IV (C) "Responsibilities of Supervisors" by failing to check William's behavior.
C. violated Standard II (A) "Material Nonpublic Information" by failing to check William's insider trading behavior.
Explanation: Under Standard IV (C) - Responsibilities of Supervisors, members must take reasonable care to ensure that their subordinates do not violate any laws or the code of conduct. This includes designing effective procedures to deter fraudulent activity. However, no amount of scrutiny can prevent the cleverest of frauds. What is expected of the members is that they be diligent enough in carrying out their duties. In the present case, given the facts, Emmy cannot be faulted for William's criminal activity since she hasn't been found to be negligent in any way. Hence, she has not violated Standard IV (C) - Responsibilities of Supervisors nor any other standards.

User Contributed Comments 3

User Comment
JepTang I have reservations as far as how the question was structured. According to the Handbook, candidates/members or supervisors must also make reasonable efforts to make sure that their subordinates are enacting compliance procedures. It is not only required from members that they create rules and procedures. There has not been any indication in the question, though, that Emmy made reasonable efforts to make sure that policies were adhered to.

Just my opinion. But i have re-read the Handbook for further clarification. Maybe the key word here is William was very clever.
CFunder it says she has setup guidelines to prevent...but not detect...there was no indication that she was ensure compliance on her own...
cslau83 I thought so too.. but how bout the fact that audit detects?
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