CODE OF ETHICS Flashcards
According to the AIMR Code of Ethics, members must practice, and encourage others to
practice, in a professional and ethical manner that will:
A. reflect credit on members and their profession.
B. add value for clients, prospects, employers, and employees.
C. maintain the excellent reputation of AIMR and its members.
D. encourage talented and ethical individuals to enter the investments profession.
A
George Moses, CFA, analyzes Technicorp for a brokerage company. Extensive study has led Moses to rate Technicorp as a “hold,” largely because of increasing competition in the industry. At a recent AIMR Society meeting, Moses discussed Technicorp’s prospects with two other analysts. Although the other analysts did not give a reason, both said that Technicorp was about to experience rapid earnings growth. Immediately following the meeting, Moses issued a “buy” recommendation for Technicorp. According to the AIMR Standards of Practice Handbook, did Moses violate the AIMR Standards of Professional Conduct?
A. No.
B. Yes, because he copied the opinions of others.
C. Yes, because he did not seek approval of the change from his supervisor.
D. Yes, because he did not have a reasonable and adequate basis for his recommendation.
D
Wilfred Clark, CFA, accumulated several items of nonpublic information through contacts with computer companies. Although none of the information is “material” individually, Clark concluded, by combining the nonpublic information, that one of the companies will have unexpectedly high earnings in the coming year. According to the AIMR Standards of Practice Handbook, Clark:
A. may not use the nonpublic information.
B. may use the nonpublic information to make investment recommendations and decisions at any time.
C. must make reasonable efforts to achieve immediate public dissemination of the nonpublic information.
D. may use the nonpublic information only after gaining approval from a supervisory analyst attesting to its nonmateriality.
B
The AIMR Standards of Professional Conduct specifically require that an AIMR member must inform his or her employer, in writing, about the Standards only if the member works at a company that:
A. provides investment advice directly to clients.
B. employs 25 or more investment professionals.
C. has not previously employed AIMR members.
D. has not publicly acknowledged, in writing, the AIMR Standards as part of the company’s policies.
D
Susan Roberts, CFA, a portfolio manager for Howard Investment Counsel, received a call from Michael Moore, an institutional broker. Moore called to recommend buying Megamove, an obscure stock traded over-the-counter, as a takeover candidate. In the past, Moore has demonstrated an ability to pick takeover candidates. If she buys the stock, is Roberts violating the AIMR Standards of Professional Conduct involving trading on material nonpublic information?
A. No.
B. Yes, because Roberts did not research the stock herself.
C. Yes, because Roberts is receiving confidential information.
D. Yes, because Moore and his sources are breaching fiduciary duty and are receiving
personal benefits as a result.
A
- According to the AIMR Standards of Practice Handbook, which of the following statements about a member’s use of clients’ brokerage commission is FALSE? Client brokerage commissions:
A. may be directed to pay for the investment manager’s operating expenses.
B. should be used by the member to ensure that fairness to the client is maintained.
C. should be commensurate with the value of the brokerage and research services received.
D. may be used by the member to pay for securities research used in managing the client’s
portfolio.
A
Beth Patrick, a fixed income analyst at a brokerage company, assists her company’s traders by developing in-house bond ratings to supplement those of the major bond rating services. The traders use disparities in the ratings to construct profitable investment strategies. Patrick makes inferences from nonmaterial private information and news events, which she reflects in her bond ratings. Patrick’s approach:
A. reflects the mosaic theory.
B. violates confidentiality rules.
C. violates insider trading rules.
D. reflects the misappropriation of information theory.
A
Beth Knoll, CFA, is the portfolio manager for Techwood Industries’ pension fund, which has a substantial holding of Techwood stock. Knoll also owns Techwood stock in her personal account. The chief financial officer at Techwood confides in Knoll that Techwood’s earnings in the current quarter will be substantially below the consensus forecast of security analysts. According to the AIMR Standards of Practice Handbook, Knoll must:
A. sell the pension fund stock and hold her personal stock.
B. hold the pension fund stock and sell her personal stock.
C. sell both the pension fund stock and her personal stock.
D. hold both the pension fund stock and her personal stock.
D
The corporate finance department of an investment-banking firm decides to compete for the business of ETV Corporation. Knowing that the firm’s brokerage department has a “sell” recommendation on ETV, the director of the corporate finance department writes a letter to the director of the brokerage department asking that the recommendation be changed to “buy.” According to the AIMR Standards of Practice Handbook, the best action for the brokerage department to take is to:
A. assign a new analyst to decide if the stock should receive a “buy” recommendation.
B. have the director of the corporate finance department review the recommendation for the stock rating to ensure its accuracy.
C. change the recommendation to “buy” only after receiving written direction from the director of the corporate finance department.
D. remove ETV Corporation from the research universe and put it on a restricted list giving only factual information about the company.
D
Dave Bauman, CFA, is a portfolio manager who wants to buy Arrow Company stock for his clients’ accounts and his personal account. According to the AIMR Standards of Practice Handbook, Bauman:
A. must buy the stock for his clients’ accounts before buying for his personal account.
B. must wait 30 days after buying the stock for clients before buying for his personal account.
C. may buy for his personal account at any time as long as he discloses the trades to his employer and clients.
D. may buy for his personal account at any time as long as the execution price is not more favorable than the execution price realized by clients.
A
Louis Stark, CFA, is employed in the merger and acquisitions department of an investment firm. His friend, Elizabeth Mackie, CFA, is a portfolio manager in the investment management department of the same firm. Stark is helping a client acquire Gamma Corporation. According to the AIMR Standards of Practice Handbook, which of the following is the most appropriate action to take involving communication between the two departments?
A. Stark may tell Mackie about the pending merger if Mackie promises not to release the information to the public.
B. The investment firm should build a Fire Wall between the merger and acquisitions department and the investment management department.
C. The investment firm must add Gamma Corporation to its list of stocks that cannot be added to portfolios managed by employees of the investment firm.
D. Stark may tell Mackie about the pending merger if Mackie promises in advance not to use this information to help make an investment decision about Gamma Corporation.
B
According to the AIMR Standards of Practice Handbook, AIMR members are permitted to:
A. depend on coworkers, who are AIMR members, to fulfill the obligation of informing
employers of the Code and Standards.
B. use in research reports, without acknowledgment, materials prepared by an AIMR
member employed by another company.
C. be excused for a lack of knowledge of the laws and regulations of countries in which
they provide investment services, but not of the country in which they live and work.
D. waive the requirement to inform their employer, in writing, that AIMR members are
obligated to comply with the Code and Standards, if the employer has acknowledged, in
writing, adoption of the Code and Standards.
D
Sunny Day Investment Consultants has enjoyed growth in new accounts and as a result, has
hired several new analysts, all of whom have the CFA designation. It wishes to promote this
fact by pointing to the presence of so many CFA charterholders, which translates into
superior research, which (in turn) translates into superior returns. Which of the following
statements is most accurate?
A. Violation of Standard I-C, Misrepresentation, because of the misleading statements
regarding the capabilities of the new staff members.
B. Violation of Standard VII-B, which covers how the Chartered Financial Analyst
designation is represented. Stating that CFA charterholders provide “superior” research is
not a dignified use, but instead attempts to exaggerate.
C. No violation. Sunny Day is promoting the worthiness of the CFA designation and
indirectly, promoting the values of the CFA Institute.
D. No violation, though it comes close to violating Standard III-D, Performance Presentation.
In this case, the firm is covered since it did not specifically quote performance numbers
B
Which of the following would constitute a violation of the proper use of the CFA designation:
I. A supervisor illustrating to new employees how CFA charterholders on average earn a higher degree of compensation than non-charterholders.
II. Mailing a factual survey to prospective clients which indicate that firms who employ a high proportion of CFA charterholders, such as themselves, generate above average returns for their
clients.
III. An individual passing the Level II exam and indicating that she is a Level III Candidate without first having registered for next year’s exam.
IV. A CFA charterholder mailing a five-page letter to clients indicating his interpretation of what it
means to have a CFA charter.
A. II and III only
B. I, II, III and IV
C. II, III and IV
D. I only
C
Bobby Tartaglia, CFA, is an analyst covering the airline industry. There is a tremendous
amount of industry information that is available. In preparing a report on the industry,
Bobby must acknowledge all sources of information except in the case where:
A. The conclusions are his own.
B. The report is submitted to other analysts.
C. The report is intended to remain only within the firm.
D. The information is obtained from recognized financial and statistical reporting services.
D
