Which of the following properly characterize Hundt’s compliance activities?

Hilda Olson covers the chemical industry for Bern Securities. Based on conversations with two executives of InterChem, a major producer of synthetic fabrics, she issues a generalized sector report claiming that "according to a survey of industry executives, rayon feedstocks will be in short supply for at least the next 12 months." In addition, Olson recommends Han Chemical, a major producer of rayon, which has routinely reported higher profits than its competitors and should be well positioned to gain further from reduced supply.

In her efforts to learn more about Han Chemical and support her recommendation, Olson scrambles to compile a research report on the firm. She reproduces financial data provided in a research report by Standard & Poor’s (S&P) and the Bank of Korea (BOK), the Korean government’s central bank. She also obtains two research reports from brokerage firms with operations in Korea, and incorporates portions of the text and charts from these reports into her research report.

Olson describes Han Chemical in her research report as "low risk," even though she knows that the operating risk of the chemical industry is above average and that Han has a higher debt-to-equity ratio than its average competitor. She justifies this to her supervisor by saying that since the market for rayon feedstocks is tight, an investment in Han has a very low risk of suffering a loss in the near term. Olson’s supervisor accepts her explanation as valid and the report is issued to the firm’s clients.

Shortly after issuing her research report, Olson visited Han Chemical’s operations in New Jersey. During her conversation with the firm’s vice president of operations, who is also one of Bern’s personal trust clients, she was told in confidence that Han Chemical’s profit margins are higher than its competitors, partly because they routinely discharge untreated chemical waste into the Delaware River in order to reduce production costs. Such action is a direct violation of U.S. environmental laws.

When Olson returns from her trip to New Jersey, Wolfgang Hundt, director of research at Bern Securities, requests a meeting. Hundt has developed a compliance procedure and has provided relevant written information to employees. Every quarter, he issues written reminders regarding the program to Olson and her peers, so when Olson tells Hundt of Han’s chemical dumping, he immediately begins an investigation into the violation.

Olson is concerned that Hundt’s compliance actions as director of the firm’s research department are inconsistent with CFA Institute Standards.

Which of the following properly characterize Hundt’s compliance activities? Hundt’s actions are:
A . consistent with CFA Institute Standards.
B . improper with respect to both the investigation procedures and the periodic reminders.
C . improper regarding the periodic reminders, as these do not constitute regular training.

View Answer

Answer: A

Explanation:

All of Hundt’s actions are consistent with CFA Institute Standard IV(C) Responsibilities of Supervisors. According to this Standard, supervisors exercise reasonable supervision by ensuring that employees follow the written compliance procedures established by their supervisor. Supervisors have a responsibility to disseminate the compliance procedures to employees and it is recommended that they regularly update procedures and continually educate personnel subject to the procedures- If a supervisor knows of a violation, he or she must promptly begin an investigation into the matter. (Study Session 1, LOS l.b) Sample Scoring Key: 3 points for each correct response.