Course: Ethical and Professional Standards- Application

29.11.2023
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Sachin Saroa

NMIMS Global Access School for Continuing Education (NGA-SCE)

Internal Assignment Applicable for December 2023 Examination

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Answer to Question No. 1

This case involves Standard I(A): Knowledge of the Law

All applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and

Standards of Professional Conduct) must be known about and followed by members and

candidates for membership in any professional association, government, regulatory body, or

licencing agency that oversees their professional activities. In the event of a dispute, Members

and Candidates shall abide by the more restrictive law, rule, or regulation. It is a requirement

for members and candidates that they not be aware of, endorse, or participate in any violation

of these laws, rules, or regulations.

The laws and regulations that are in effect in the countries and areas where members and

applicants conduct business must be known to them. These might include, among other things,

researching, trading stocks or other financial instruments, offering investment advice, and

performing other jobs linked to investing. Based on their reasonable and good faith

understanding, members and candidates should adhere by the laws and regulations that

directly oversee their professional activities and the outcomes they create, as well as those that

protect their clients' interests. Members and candidates should be informed about the policies

and procedures of their firm regarding the request for compliance support in the event of

questions. However, members or candidates do not need to be compliance professionals in

order to fulfil this condition. Moreover, members and applicants do not have to be experts in

every field of law that has a bearing on their job. It is crucial for members and candidates to be

aware of the requirements for their professional activity as rules change. New financial products

and processes, as well as discovered ethical violations, offer a context for periodic and

sometimes significant regulatory changes. Furthermore, members and candidates are

continuously provided with access to new and enhanced channels of contact with existing and

future clients, such as mobile applications and web-based social networking platforms. In

response to revisions in local, regional, and international standards that address these and
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other developments, members, applicants, and their companies must adapt their procedures

and practises to assure compliance.

In spite of the fact that the tokens are a virtual money, highly speculative, and unsuitable

for many investors, Morget is justified in offering them as investments. Rather than acting

as an investment counsellor, Morget is an issuer of investments. The investors and their

advisors would determine if an investment was suitable for a portfolio. From an ethical

standpoint, Morget is also free to market the tokens anyway it sees fit, provided that the

company responds to inquiries from potential investors, provides comprehensive and

accurate information about the investment, and doesn't spread any misleading or false

information about the tokens. Morget may direct someone to the company's white paper if

they come across any brief promotional text about the tokens on Twitter or in other media,

since it probably has all the information they want. Again, from the perspective of the

investor, an investment adviser, not the issuer, should be the one to highlight the

significant limitations and risks associated with buying the tokens.

In this case, the question is whether the tokens meet the requirements for securities under

US securities regulations and should thus be registered under US law (US law would apply

in this case as Morget is a US-based firm selling the products in the US). A product is

considered a security under SEC regulations if it entails capital investment in a joint venture

with a justifiable expectation of profits from the management or commercial endeavours

of third parties. The business promptly halted the sale and returned the money to the

customers who had purchased tokens after receiving notification from the SEC. Morget's

cooperation and timely response prevented the SEC from levying any more penalties.

This rendered Morget's ICO unsatisfactory since the coins were an unregistered security

according to US securities laws. It is also unfavourable since it promoted a virtual and

highly speculative investment that is not suitable for investors.

Answer to Question No. 2

This case involves Standard IV(A): Loyalty

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In all circumstances relating to their employment, Members and Candidates should act in a

manner that best benefits their employer; they shall not divulge confidential information, refuse

to provide their employer the benefit of their skills and abilities, or do their employer any other

harm.

In accordance with Standard IV(A), members and applicants are obliged to safeguard the

interests of their company by abstaining from any actions that might jeopardise the operation,

prevent it from making money, or take away the member's or candidate's abilities and

capabilities. While members and candidates should always prioritise the needs of their

customers over those of their employers, they should also think about the potential effects of

their choices on the long-term profitability and reputation of the employer business. Members

and candidates are not allowed to take any position on matters pertaining to their work that

might endanger the interests of their employer. In order to manage the employer-employee

relationship, this standard suggests that members and applicants must abide by the employer's

established policies and processes, provided that they do not contradict with the Code and

Standards or any other relevant laws, rules, or regulations. This suggestion is not intended to be

a general directive that an employee's interests always come first. Members and candidates are

not required by the criteria to choose their work above significant responsibilities to their

families and themselves. Candidates and members should talk with their employer about how

to balance these obligations when personal issues may substantially or often interfere with their

employment.

Even if it was an unintentional disclosure, Desmond breached his duty of loyalty to his

company by giving sensitive information about EduTech to outside parties. His honest

mistake does not excuse him from the crime.

Desmond is also in danger of violating Standard II(A): Material Nonpublic Information

It is strictly forbidden for Members and Candidates to take any action or encourage others to

take any action based on materially nonpublic information that they are aware might affect the

investment's value.
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Undermining confidence in capital markets, institutions, and investment professionals, trading

on substantial nonpublic information or encouraging others to trade on it fosters the idea that

people with privileged access and insider knowledge might unfairly take advantage of the larger

investing public. While trading on insider information may yield short-term financial rewards, it

eventually damages the individual and the industry as a whole. Because they think the markets

are "rigged" in favour of the knowledgeable insider, investors have shied away from the capital

markets as a result of these actions and will likely do so in the future. When the investing public

avoids capital markets and capital allocation, they become less effective and supportive of

strong and dynamic economies. A strong belief in market integrity is one of the cornerstones of

the investing profession, and Standard II(A) promotes and maintains this belief. It is forbidden to

utilise this information for anything outside the direct purchase and selling of individual shares

or bonds. It is against the law for candidates and members to use materially misleading

information to influence their choice of alternative investments, mutual funds, or derivatives

(such swaps or option contracts). Standard II(A) forbids trading on the basis of material

nonpublic knowledge. The expansion of financial products and the growing interconnection of

the global financial markets have created additional opportunities for trading on significant

nonpublic knowledge.

Inadvertently, Desmond gave some of his Facebook friends access to private and sensitive

information. On the other hand, the data presented does not imply that any of Desmond's

Facebook friends who were made aware of the merger made an effort to utilise the

knowledge. Desmond ought to make an effort to atone for his mistake. Desmond needs to

own his error to EduTech and Fix Conductor, but that won't be enough. Desmond has to

inform all investors of the merger's details as soon as feasible by making an official

announcement. The best course of action is this.

Answer to Question No. 3

Many people conclude that the supervisor should bear the responsibility for the

subordinate's poor performance. And that could be the case in some circumstances.

However, no supervisory offence may be equally justifiable under the right circumstances.
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This example shows that before choosing how to conduct an ethical choice analysis, it is

necessary to compile all relevant data. See potential defences for each reaction by reading

on.

3 (a)

Binoy violated Standard V(A): Diligence and Reasonable Basis.

Members and Candidates must: Exhibit independence, diligence, and thoroughness while

assessing investments, making recommendations, and carrying out suggested investments.

Any analysis, recommendation, or course of action pertaining to investments should have a

sound basis supported by pertinent research and investigation.

Standard V(A) implementation is dependent on the investing philosophy followed by the

member, candidate, or company; the applicant's or member's involvement in the decision-

making process regarding investments; and the resources and support provided by the

applicant's or member's place of employment. These factors will define the level of care and

thoroughness of the research as well as the quantity of investigation required by Standard V(A).

Different criteria will apply for deriving conclusions from research depending on how involved

the member or candidate is in the investment decision-making process; however, in order to

provide a recommendation, the member or candidate must endeavour in good faith to address

all pertinent concerns. Members and candidates increase transparency when they provide or

offer supporting documents to clients who are recommending them to purchase, sell, or alter a

recommendation.

Two erroneous presumptions plagued Binoy's model. The evidence does not show whether

he developed his idea after carefully analysing the data or whether he had a solid and fair

foundation. Furthermore, because he committed an arithmetic error that skewed the

model's results, he forgot to double-check his model.

Binoy did not violate the requirements since the evidence does not imply that he did not

follow due diligence and thoroughness procedures or that investigation and inquiry were

insufficient to support his study. Even if Binoy's initial assertions about the two
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assumptions proved to be incorrect, it does not follow that they were wrong given the

knowledge he had at the time. Making mistakes in diagnosis or investing advice is common.

A mistaken forecast by itself does not establish a violation of the CFA Institute Code and

Standards. Furthermore, it's unclear from the data if the math error had a significant

impact on the model's result.

3 (b)

Nishanth violated Standard V(A): Diligence and Reasonable Basis by relying on the

erroneous work done by Binoy. In addition, as Head of Research, Nishanth violated

Standard IV(C): Responsibilities of Supervisors by failing to supervise Binoy, who himself

violated the standards.

Members and Candidates shall make reasonable efforts to ensure that each person under their

supervision or control complies with all applicable laws, rules, regulations, and the Code and

Standards.

Nishanth took a quick look at Binoy's work. Finally, Nishanth presented "the Research

Department," Binoy's research conductor, as the study report's author.

Nishanth did not breach any restrictions since he lawfully relied on the work of a colleague

who was known for being meticulous and hardworking in their research. Moreover, there is

no indication in the evidence that Nishanth did not give Binoy enough monitoring. The

details of the case do not clearly show what supervision procedures Nishanth or the fund

use to monitor Binoy's actions. Nishanth's "brief" evaluation of the research may make

sense if other processes (like peer review, for instance) are in place to guarantee that

Binoy's interpretation is accurate. Moreover, there is no evidence that Binoy broke the law.

Finally, since the organisation completed the task, "Research Department" is a suitable

term for the author of the study report.