chapter 10 questiosn I mess up

Question 1

Which of the following statements best describes an aspect of the Professional Conduct Program process?

a) Inquiries are not initiated in response to information provided by the media.

b) Investigations result in Disciplinary Review Committee panels for each case.

c) Investigations may include requesting a written explanation from the member or candidate.

Answer 1

C is correct. When an inquiry is initiated, the Professional Conduct staff conducts an investigation that may include requesting a written explanation from the member or candidate.

Question 2

As stated in the revised 11th edition, the Standards of Professional Conduct:

a) require supervisors to focus on the detection and prevention of violations.

b) adopt separate ethical considerations for programs such as CIPM and Investment Foundations.

c) address the risks and limitations of recommendations being made to clients.

Answer 2

C is correct. Given the constant development of new and exotic financial instruments and strategies, the standard regarding communicating with clients now includes an implicit requirement to discuss the risks and limitations of recommendations being made to clients.

Question 3

Which of the following responses most completely represents an ethical principle of CFA Institute as outlined in the Standards of Practice Handbook?

a) Individual professionalism

b) Responsibilities to clients and employers

c) Ethics involved in investment analysis and recommendations

Answer 3

a) Individual professionalism

Within the Standards of Practice Handbook, CFA Institute addresses ethical principles for the profession in the following Standards: individual professionalism; integrity in capital markets; responsibilities to clients, responsibilities to employers; ethics involved in investment analysis, recommendations, and actions; and possible conflicts of interest.

B is incorrect because it represents, and combines, two ethical principles, those relating to the Standards “Duties to Clients” and “Duties to Employers.”

Question 4

A CFA Institute member would violate the standard for material nonpublic information by:

a) conducting price distortion practices.
inappropriately

b) causing others to act.
inadequately
c) maintaining investment records.

Question 5

According to the Duties to Clients standard, suitability requires members and candidates in an advisory relationship with a client to:

a) place their clients’ interests before their own interests.

b) consider investments in the context of the client’s total portfolio.

c) not knowingly make misrepresentations relating to recommendations.

Answer 5

b) consider investments in the context of the client’s total portfolio.

B is correct. Standard III.C.1c Suitability states that when members and candidates are in an advisory relationship with a client, they must judge the suitability of investments in the context of the client’s total portfolio.

Question 6

s part of the Duties to Clients standard, members and candidates must:

a) document client financial constraints after an initial investment action.

b) maintain an equal balance of interests owed to their clients and employers.

c) deal fairly and objectively with all clients when engaging in professional activities.

Answer 6

c) deal fairly and objectively with all clients when engaging in professional activities.

C is correct. Under the III.B Fair Dealing section of the Duty to Clients standard, members and candidates must deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities.

A is incorrect because under Standard III.C.1a Suitability, a section of Duties to Clients, members and candidates in an advisory relationship must make a reasonable inquiry into a client’s financial constraints prior to (not after) taking investment action and must reassess and update this regularly.

Question 7

The Investment Analysis, Recommendations, and Actions standard states that members and candidates must:

a0 find an investment suitable for their client before making a recommendation.

b) make reasonable efforts to ensure that performance presentation is fair, accurate, and complete.

c) distinguish between fact and opinion in the presentation of investment analysis and recommendations.

Answer 7

c) distinguish between fact and opinion in the presentation of investment analysis and recommendations.

The V.B.4 Communications with Clients and Prospective Clients section of the Investment Analysis, Recommendations, and Actions standard states that members and candidates must distinguish between fact and opinion in the presentation of investment analysis and recommendation

A is incorrect because this standard is discussed in the III.C.1b Suitability section of the Duties to Clients standard.

Question 8

Based on the Conflicts of Interest standard, members and candidates must:

a) disclose, as required by law, those conflicts interfering with their professional duties.

b) disclose, as appropriate, any benefit paid to others for the recommendation of products.

c) seek employer approval before prioritizing their investment transactions over those clients.

Answer 8

b) disclose, as appropriate, any benefit paid to others for the recommendation of products.

Question 9

Which of the following groups is most likely responsible for maintaining oversight and responsibility for the Professional Conduct Program (PCP)?

CFA Institute Board of Governors

Disciplinary Review Committee

Professional Conduct Division

Answer 9

CFA Institute Board of Governors

A. Correct because all CFA Institute members and candidates enrolled in the CFA Program are required to comply with the Code and Standards. The CFA Institute Board of Governors maintains oversight and responsibility for the Professional Conduct Program (PCP).

B. Incorrect because the Disciplinary Review Committee (DRC) works in conjunction with the PCP and is responsible for enforcement of the Code and Standards.

Question 10

Which of the following statements related to requirements for the CFA Institute Standards of Professional Conduct Standard V(B)–Communication with Clients and Prospective Clients is least likely accurate? The standard requires members and candidates to:

a. divulge the number of investment related personnel responsible for external communication.

b. disclose the basic format and general principles of the investment process.

c. distinguish between fact and opinion in the presentation of investment analysis and recommendations.

Answer 10

a. divulge the number of investment related personnel responsible for external communication.

because the CFA Institute Standards of Professional Conduct Standard V(B)–Communication with Clients and Prospective Clients does not limit the type or number of staff responsible for external communication.

Question 11

Which of the following activities if undertaken by CFA Institute members and/or candidates would most likely violate the Code and Standards?

a. An analyst discloses confidential, sensitive information about a client account as part of an investigation by the CFA Institute Professional Conduct Program.

b. A senior trader does not have safeguards in place to determine whether a junior trader under their supervision is following the firm’s policies regarding best execution.

c. An institutional portfolio manager takes a group of clients to an expensive restaurant to discuss portfolio returns over the recently completed quarter without prior written consent from his employer.

Answer 11

b. A senior trader does not have safeguards in place to determine whether a junior trader under their supervision is following the firm’s policies regarding best execution.

because Standard IV(C)–Responsibilities of Supervisors states that members and candidates must make reasonable efforts to prevent violation of applicable laws, rules, regulations, and the Code and Standards by anyone subject to their supervision or authority. Interviewing with a competitor during lunch or taking clients out to lunch do not necessarily violate any Standard unless specifically prohibited in company policies.

Question 12

Which statement about a manager’s use of client brokerage commissions violates the Code and Standards?

a) A client may direct a manager to use that client’s brokerage commissions to purchase goods and services for that client.

b) Client brokerage commissions should be used to benefit the client and should be commensurate with the value of the brokerage and research services received.

c) client brokerage commissions may be directed to pay for the investment manager’s operating expenses.

Answer 12

c) client brokerage commissions may be directed to pay for the investment manager’s operating expenses.

This question involves Standard III(A)–Loyalty, Prudence, and Care and the specific topic of soft dollars or soft commissions. Answer C is the correct choice because client brokerage commissions may not be directed to pay for the investment manager’s operating expenses

Answer A describes a practice that is commonly referred to as “directed brokerage.” Because brokerage is an asset of the client and is used to benefit the client, not the manager, such practice does not violate a duty of loyalty to the client. Members and candidates are obligated in all situations to disclose to clients their practices in the use of client brokerage commissions.

Question 13

Scott works for a regional brokerage firm. He estimates that Walkton Industries will increase its dividend by US$1.50 a share during the next year. He realizes that this increase is contingent on pending legislation that would, if enacted, give Walkton a substantial tax break. The US representative for Walkton’s home district has told Scott that, although she is lobbying hard for the bill and prospects for its passage are favorable, concern of the US Congress over the federal deficit could cause the tax bill to be voted down. Walkton Industries has not made any statements about a change in dividend policy. Scott writes in his research report, “We expect Walkton’s stock price to rise by at least US$8.00 a share by the end of the year because the dividend will increase by US$1.50 a share. Investors buying the stock at the current time should expect to realize a total return of at least 15% on the stock.” According to the Standards:

a) Scott violated the Standards because he used material inside information.

b) Scott violated the Standards because he failed to separate opinion from fact.

c) Scott violated the Standards by basing his research on uncertain predictions of future government action.

Answer 13

b) Scott violated the Standards because he failed to separate opinion from fact.

The correct answer is B. This question relates to Standard V(B)–Communication with Clients and Prospective Clients. Scott has issued a research report stating that he expects the price of Walkton Industries stock to rise by US$8 a share “because the dividend will increase” by US$1.50 per share. He has made this statement knowing that the dividend will increase only if Congress enacts certain legislation, an uncertain prospect. By stating that the dividend will increase, Scott failed to separate fact from opinion.

The information regarding passage of legislation is not material nonpublic information because it is conjecture, and the question does not state whether the US representative gave Scott her opinion on the passage of the legislation in confidence. She could have been offering this opinion to anyone who asked. Therefore, statement A is incorrect

Question 14

Which one of the following actions will help to ensure the fair treatment of brokerage firm clients when a new investment recommendation is made?

a) Informing all people in the firm in advance that a recommendation is to be disseminated.

b) Distributing recommendations to institutional clients prior to individual accounts.

c) Minimizing the time between the decision and the dissemination of a recommendation.

Answer 14

c) Minimizing the time between the decision and the dissemination of a recommendation.

The correct answer is C. This question, which relates to Standard III(B)–Fair Dealing, tests the knowledge of the procedures that will assist members and candidates in treating clients fairly when making investment recommendations. The step listed in C will help ensure the fair treatment of clients.

Answer B, distributing recommendations to institutional clients before distributing them to individual accounts, discriminates among clients on the basis of size and class of assets and is a violation of Standard III(B).

Question 15

The mosaic theory holds that an analyst:

a) Violates the Code and Standards if the analyst fails to have knowledge of and comply with applicable laws.

b) Can use material public information and nonmaterial nonpublic information in the analyst’s analysis.

c) Should use all available and relevant information in support of an investment recommendation

Answer 15

b) Can use material public information and nonmaterial nonpublic information in the analyst’s analysis.

The correct answer is B. This question deals with Standard II(A)–Material Nonpublic Information. The mosaic theory states that an analyst may use material public information and nonmaterial nonpublic information in creating a larger picture than shown by any individual piece of information and the conclusions the analyst reaches become material only after the pieces are assembled

Question 16

Which of the following statements is correct under the Code and Standards?

a) CFA Institute members and candidates are prohibited from undertaking independent practice in competition with their employer.

b) Written consent from the employer is necessary to permit independent practice that could result in compensation or other benefits in competition with a member’s or candidate’s employer.

c) Members and candidates are prohibited from making arrangements or preparations to go into a competitive business before terminating their relationship with their employer.

Answer 16

b) Written consent from the employer is necessary to permit independent practice that could result in compensation or other benefits in competition with a member’s or candidate’s employer.

Question 17

Smith is a financial analyst with XYZ Brokerage Firm. She is preparing a purchase recommendation on JNI Corporation. Which of the following situations is most likely to represent a conflict of interest for Smith that would have to be disclosed?

a) Smith frequently purchases items produced by JNI.

b) XYZ holds for its own account a substantial common stock position in JNI.

c) Smith’s brother-in-law is a supplier to JNI.

Answer 17

b) XYZ holds for its own account a substantial common stock position in JNI.

Question 18

Stewart has been hired by Goodner Industries, Inc., to manage its pension fund. Stewart’s duty of loyalty, prudence, and care is owed to:

a) The management of Goodner.

b) The participants and beneficiaries of Goodner’s pension plan.

c) The shareholders of Goodner.

Answer 18

b) The participants and beneficiaries of Goodner’s pension plan.

Question 19

former hedge fund manager, Jackman, has decided to launch a new private wealth management firm. From his prior experiences, he believes the new firm needs to achieve US$1 million in assets under management in the first year. Jackman offers a $10,000 incentive to any adviser who joins his firm with the minimum of $200,000 in committed investments. Jackman places notice of the opening on several industry web portals and career search sites. Which of the following is correct according to the Code and Standards?

a) A member or candidate is eligible for the new position and incentive if he or she can arrange for enough current clients to switch to the new firm and if the member or candidate discloses the incentive fee.

b) A member or candidate may not accept employment with the new firm because Jackman’s incentive offer violates the Code and Standards.

c) A member or candidate is not eligible for the new position unless he or she is currently unemployed because soliciting the clients of the member’s or candidate’s current employer is prohibited.

Answer 19

c) A member or candidate is not eligible for the new position unless he or she is currently unemployed because soliciting the clients of the member’s or candidate’s current employer is prohibited.

Question 20

Townsend was recently appointed to the board of directors of a youth golf program that is the local chapter of a national not-for-profit organization. The program is beginning a new fund-raising campaign to expand the number of annual scholarships it provides. Townsend believes many of her clients make annual donations to charity. The next week in her regular newsletter to all clients, she includes a small section discussing the fund-raising campaign and her position on the organization’s board.

a) Townsend did not violate the Code and Standards.

b) Townsend violated the Code and Standards by soliciting donations from her clients through the newsletter.

c) Townsend violated the Code and Standards by not getting approval of the organization before soliciting her clients.

Answer 20

a) Townsend did not violate the Code and Standards.

Question 21

Beth Kozniak, a CFA candidate, is an independent licensed real estate broker and a well-known property investor. She is currently brokering the sale of a commercial property on behalf of a client in financial distress. If the client’s building is not sold within 30 days, he will lose the building to the bank. A year earlier, another client of Kozniak’s had expressed interest in purchasing this same property. However, she is unable to contact this client, and she has not discovered any other potential buyers. Given her distressed client’s limited time frame, Kozniak purchases the property herself and foregoes any sales commission. Six months later, she sells the property for a nice profit to the client who had earlier expressed interest in the property. Does Kozniak most likely violate the CFA Institute Standards of Professional Conduct?

a) No

b) Yes, she did not disclose her potential conflicts of interest to either client

c) Yes, she profited on the real estate to the detriment of her financially stressed client

Answer 21

a) No

Question 22

Ross Nelson, CFA, manages accounts for high-net-worth clients including his own family’s account. He has no beneficial ownership in his family’s account. Because Nelson is concerned about the appearance of improper behavior in managing his family’s account, when his firm purchases a block of securities, Nelson allocates to his family’s account only those shares that remain after his other client accounts have their orders filled. The fee for managing his family’s account is based on his firm’s normal fee structure. According to the Standards of Practice Handbook, Nelson’s best course of action with regard to management of his family’s account would be to:

a) treat the account like other client accounts.

b) treat the account like other employee accounts of the firm.

c) remove himself from any direct involvement by transferring responsibility for this account to another investment professional in the firm.

Answer 22

a) treat the account like other client accounts.

Question 23

Colin Caldwell, CFA, is the chief investment officer of Northwest Mutual Fund, whose investment objective is to invest in fixed income emerging market securities. Caldwell allocates the fund’s assets primarily to bonds of commodity producers in emerging markets and invests in a combination of several different investments to ensure an acceptable level of risk. The allocation is clearly disclosed in all fund communications. High volatility in the commodities markets at the start of the year makes Caldwell pessimistic about returns, so he shifts the fund into emerging market and US government securities, positions he maintains at the end of the year. This change is noted in the next annual report to fund shareholders. Caldwell’s investment change least likely violated the CFA Institute Code of Ethics and Standards of Professional Conduct concerning:

A.
diversification.

B.
communication with clients.

C.
investments outside his mandate.

Answer 23

A.
diversification.

Question 24

Marc Davidson, CFA, works as a trust specialist for Integrity Financial. On his own time, Davidson starts a part time consulting business providing advice to Trustees for a fee. Since this is only part time work, he doesn’t inform Integrity of the consulting business. Davidson asks his assistant to compile a list of Integrity’s clients and their contact information. The following month, Davidson is offered a similar role at Integrity’s largest competitor, Legacy Trust Services, Inc. After he begins working at Legacy, his new manager arranges for him to meet with a number of prospective clients, many of whom are clients of Integrity. After meeting with Davidson, a number of former Integrity clients decide to transfer their business to Legacy. Did Davidson’s action violate the Code and Standards?

a) No

b) Yes, Davidson’s part time consulting business is a violation of the Standards

c) Yes, both Davidson’s part time consulting business and his meetings with Integrity clients are a violation of the Standards

Answer 24

b) Yes, Davidson’s part time consulting business is a violation of the Standards

Question 25

While at a bar in the financial district after work, Ellen Miffitt, CFA, overhears several employees of a competitor discuss how they will manipulate down the price of a thinly traded micro cap stock’s price over the next few days. Miffitt’s clients have large positions of this stock so when she arrives at work the next day she immediately sells all of these holdings. Because she had determined the micro cap stock was suitable for all of her accounts at its previously higher price, Miffitt buys back her client’s original exposure at the end of the week at the new, lower price. Which CFA Institute Standards of Professional Conduct did Miffitt least likely violate?

a) Market manipulation

b) Preservation of confidentiality

c) Material nonpublic information

Answer 25

b) Preservation of confidentiality