Ethical and Professional Standards

Question 1

What is the Standards of Practice Handbook for?

Answer 1

Provides guidance to people who grapple with real ethical dilemmas in the investment profession on a daily basis; the Handbook addresses the professional intersection where theory meets practice and where the concept of ethical behavior crosses from the abstract to the concrete.
The Handbook is intended for a diverse and global audience, including CFA Institute members navigating ambiguous ethical situations

Question 2

“Application of the Standard”

Answer 2

Meant to illustrate how the standard applies to hypothetical but factual situations

Question 3

Summary of Changes in the Eleventh Edition

Answer 3

Updates to the guidance and examples within the Handbook; update to the Code of Ethics that embraces the members role of maintaining the social contract between industry and investor; there are also three changes to the Standards of Profession Conduct, which recognize the importance of proper supervision, clear communication with clients and the expanding education programs of CFA Institute

Question 4

Updated CFA Institute Mission

Answer 4

“To lead the investment profession globally by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society”

Question 5

Updated Code of Ethics Principle

Answer 5

Old:
Promote the integrity of and uphold the rules governing capital markets.
New:
Promote the integrity and viability of the global capital markets for the ultimate benefit of society.

Question 6

New Standard Regarding Responsibilities of Supervisors [IV(C)]

Answer 6

Old:
Members and Candidates must make reasonable efforts to detect and prevent violations of applicable laws, rules, regulations, and the Code and Standards by anyone subject to their supervision or authority.
New:
Members and Candidates must make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations, and the Code and Standards.

Question 7

Additional Requirement under the Standard for Communication with Clients and Prospective Clients [V(B)]

Answer 7

Addition:
Disclose to clients and prospective clients significant limitations and risks associated with the investment process.

Question 8

Modification to Standard VII(A)

Answer 8

Old:
Conduct as Members and Candidates in the CFA Program
Members and Candidates must not engage in any conduct that compromises the reputation or integrity of CFA Institute or the CFA designation or the integrity, validity, or security of the CFA examinations.
New:
Conduct as Participants in CFA Institute Programs Members and Candidates must not engage in any conduct that compromises the reputation or integrity of CFA Institute or the CFA designation or the integrity, validity, or security of CFA Institute programs.

Question 9

General Guidance and Example Revision

Answer 9

The guidance and examples were updated to reflect practices and scenarios applicable to today’s investment industry. Two concepts that appear frequently in the updates in this edition relate to the increased use of social media for business communications and the use of and reliance on the output of quantitative models. The use of social media platforms has increased significantly since the publication of the tenth edition. And although financial modeling is not new to the industry, this update reflects upon actions that are viewed as possible contributing factors to the financial crises of the
past decade.

Question 10

CFA Institute Professional Conduct Program

Answer 10

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), which,
in conjunction with the Disciplinary Review Committee (DRC), is responsible for enforcement of the Code and Standards. The DRC is a volunteer committee of CFA charterholders who serve on panels to review conduct and partner with Professional Conduct staff to establish and review professional conduct policies. The CFA Institute
Bylaws and Rules of Procedure for Professional Conduct (Rules of Procedure) form the basic structure for enforcing the Code and Standards.

Question 11

Adoption of the Code and Standards

Answer 11

The Code and Standards apply to individual members of CFA Institute and candidates in the CFA Program. CFA Institute does encourage firms to adopt the Code and Standards, however, as part of their code of ethics. Those who claim compliance should fully understand the requirements of each of the principles of the Code and Standards.

Question 12

The SPC continually evaluates the Code and Standards, as well as the guidance in the Handbook, to ensure that they are

Answer 12

■ representative of high standards of professional conduct,
■ relevant to the changing nature of the investment profession,
■ globally applicable,
■ sufficiently comprehensive, practical, and specific,
■ enforceable, and
■ testable for the CFA Program

Question 13

Why Ethics Matters

Answer 13

Ethics can be defined as a set of moral principles or rules of conduct that provide guidance for our behavior when it affects others. Widely acknowledged fundamental ethical principles include honesty, fairness, diligence, and care and respect for others. Ethical conduct follows those principles and balances self-interest with both the direct and the indirect consequences of that behavior for other people

Question 14

Ethics, Society, and the Capital Markets

Answer 14

CFA Institute added, in 2018, the concept “for the ultimate benefit of society” to its mission. The premise is that we want to live in a socially, politically, and financially stable society that fosters individual well-being and welfare of the public. A key ingredient for this goal is global capital markets that facilitate the efficient allocation
of resources so that the available capital finds its way to places where it most benefits that society. These investments are then used to produce goods and services, to fund innovation and jobs, and to promote improvements in standards of living. Indeed, such a function serves the interests of the society

Question 15

Capital Market Sustainability and the Actions of One

Answer 15

Individuals and firms also have to look at the indirect impacts of their actions on the broader investment community. The increasingly interconnected nature of global finance brings to the fore an added consideration of market sustainability that was, perhaps, less appreciated in years past. In addition to committing to the highest levels of ethical behavior, today’s investment professionals and their employers should consider the long-term health of the market as a whole.

Question 16

The Relationship between Ethics and Regulations

Answer 16

Some equate ethical behavior with legal behavior: If you are following the law, you must be acting appropriately. Ethical principles, like laws and regulations, prescribe appropriate constraints on our natural tendency to pursue self-interest that could harm the interests of others. Laws and regulations often attempt to guide people toward
ethical behavior, but they do not cover all unethical behavior. Ethical behavior is often distinguished from legal conduct by describing legal behavior as what is required and ethical behavior as conduct that is morally correct. Ethical principles go beyond that which is legally sufficient and encompass what is the right thing to do

Question 17

Applying an Ethical Framework

Answer 17

Laws, regulations, professional standards, and codes of ethics can guide ethical behavior, but individual judgment is a critical ingredient in making principled choices and engaging in appropriate conduct. When faced with an ethical dilemma, individuals must have a well-developed set of principles; otherwise, their thought processes can
lead to, at best, equivocation and indecision and, at worst, fraudulent conduct and destruction of the public trust. Establishing an ethical framework for an internal thought process prior to deciding to act is a crucial step in engaging in ethical conduct.

Question 18

Commitment to Ethics by Firms

Answer 18

A firm’s code of ethics risks becoming a largely ignored, dusty compilation if it is not truly integrated into the fabric of the business. The ability to relate an ethical decisionmaking framework to a firm’s code of ethics allows investment professionals to bring the aspirations and principles of the code of ethics to life—transforming it from a compliance exercise to something that is at the heart of a firm’s culture.

Question 19

Ethical Commitment of CFA Institute

Answer 19

An important goal of CFA Institute is to ensure that the organization and its members and candidates develop, promote, and follow the highest ethical standards in the investment industry. The CFA Institute Code of Ethics (Code) and Standards of Professional Conduct (Standards) are the foundation supporting the organization’s quest
to uphold the industry’s highest standards of individual and corporate practice and to help serve the greater good. The Code is a set of principles that define the overarching conduct CFA Institute expects from its members and CFA Program candidates. The
Code works in tandem with the Standards, which outline professional conduct that constitutes fair and ethical business practices.

Question 20

The Code of Ethics
Members of CFA Institute (including CFA charterholders) and candidates for the CFA designation (“Members and Candidates”) must:

Answer 20

■ Act with integrity, competence, diligence, and respect and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets.

■ Place the integrity of the investment profession and the interests of clients above their own personal interests.
■ Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.
■ Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.
■ Promote the integrity and viability of the global capital markets for the ultimate benefit of society.
■ Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.

Question 21

PROFESSIONALISM

Answer 21

A Knowledge of the Law
Members and Candidates must understand and comply with all applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct) of any government, regulatory organization, licensing agency, or professional association governing their professional activities. In the event of conflict, Members and Candidates must comply with the more strict law, rule, or regulation. Members and Candidates must not knowingly participate or assist in and must dissociate from any violation of such laws, rules, or regulations.

B Independence and Objectivity
Members and Candidates must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities. Members and Candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another’s independence and objectivity.

C Misrepresentation
Members and Candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities.

D Misconduct
Members and Candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence.

Question 22

INTEGRITY OF CAPITAL MARKETS

Answer 22

A Material Nonpublic Information
Members and Candidates who possess material nonpublic information that could affect the value of an investment must not act or cause others to act on the information.

B Market Manipulation
Members and Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants

Question 23

DUTIES TO CLIENTS

Answer 23

A Loyalty, Prudence, and Care
Members and Candidates have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment. Members and Candidates must act for the benefit of their clients and place their clients’ interests before their employer’s or their own interests.

B Fair Dealing
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.

C Suitability

1 When Members and Candidates are in an advisory relationship with a client, they must:
a Make a reasonable inquiry into a client’s or prospective client’s
investment experience, risk and return objectives, and financial constraints prior to making any investment recommendation or taking investment action and must reassess and update this information regularly.
b Determine that an investment is suitable to the client’s financial situation and consistent with the client’s written objectives, mandates, and constraints before making an investment recommendation or taking investment action.
c Judge the suitability of investments in the context of the client’s total portfolio.
2 When Members and Candidates are responsible for managing a portfolio to a specific mandate, strategy, or style, they must make only investment recommendations or take only investment actions that are consistent with the stated objectives and constraints of the portfolio.

D Performance Presentation
When communicating investment performance information, Members and Candidates must make reasonable efforts to ensure that it is fair, accurate, and complete.

E Preservation of Confidentiality
Members and Candidates must keep information about current, former, and prospective clients confidential unless:

1 The information concerns illegal activities on the part of the client or prospective client,
2 Disclosure is required by law, or
3 The client or prospective client permits disclosure of the information.

Question 24

DUTIES TO EMPLOYERS

Answer 24

A Loyalty
In matters related to their employment, Members and Candidates must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer.

B Additional Compensation Arrangements
Members and Candidates must not accept gifts, benefits, compensation, or consideration that competes with or might reasonably be expected to create a conflict of interest with their employer’s interest unless they obtain written consent from all parties involved.

C Responsibilities of Supervisors
Members and Candidates must make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations, and the Code and Standards.

Question 25

INVESTMENT ANALYSIS, RECOMMENDATIONS, AND ACTIONS

Answer 25

A Diligence and Reasonable Basis
Members and Candidates must:
1 Exercise diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions.
2 Have a reasonable and adequate basis, supported by appropriate
research and investigation, for any investment analysis, recommendation, or action.
B Communication with Clients and Prospective Clients
Members and Candidates must:
1 Disclose to clients and prospective clients the basic format and general principles of the investment processes they use to analyze investments, select securities, and construct portfolios and must promptly disclose any changes that might materially affect those processes.

2 Disclose to clients and prospective clients significant limitations and
risks associated with the investment process.

3 Use reasonable judgment in identifying which factors are important to their investment analyses, recommendations, or actions and include those factors in communications with clients and prospective clients.

4 Distinguish between fact and opinion in the presentation of investment analysis and recommendations.

C Record Retention
Members and Candidates must develop and maintain appropriate records to support their investment analyses, recommendations, actions, and other investment-related communications with clients and prospective clients.

VI. CONFLICTS OF INTEREST
A Disclosure of Conflicts
Members and Candidates must make full and fair disclosure of all matters
that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients,
and employer. Members and Candidates must ensure that such disclosures
are prominent, are delivered in plain language, and communicate the relevant information effectively.
B Priority of Transactions
Investment transactions for clients and employers must have priority over
investment transactions in which a Member or Candidate is the beneficial
owner.
C Referral Fees
Members and Candidates must disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit
received from or paid to others for the recommendation of products or
services.

Question 26

CONFLICTS OF INTEREST

Answer 26

A Disclosure of Conflicts
Members and Candidates must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients, and employer. Members and Candidates must ensure that such disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively.

B Priority of Transactions
Investment transactions for clients and employers must have priority over investment transactions in which a Member or Candidate is the beneficial owner.

C Referral Fees
Members and Candidates must disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services.

Question 27

RESPONSIBILITIES AS A CFA INSTITUTE MEMBER OR CFA CANDIDATE

Answer 27

A Conduct as Participants in CFA Institute Programs
Members and Candidates must not engage in any conduct that compromises the reputation or integrity of CFA Institute or the CFA designation or the integrity, validity, or security of CFA Institute programs.

B Reference to CFA Institute, the CFA Designation, and the CFA Program
When referring to CFA Institute, CFA Institute membership, the CFA designation, or candidacy in the CFA Program, Members and Candidates must not misrepresent or exaggerate the meaning or implications of membership in CFA Institute, holding the CFA designation, or candidacy in the CFA Program.

Question 28

profession

Answer 28

an occupational community that has specific education, expert knowledge, and framework of practice and behavior that underpins community trust, respect, and recognition

Question 29

Which of the following statements is most accurate? Ethics can be described as:

A. a commitment to upholding the law
B. an individual’s personal opinion about right and wrong
C. a set of moral principles that provide guidance of our behavior

Answer 29

C. is correct
Ethics can be described as a set of moral principles that provide guidance for our behavior; these may be moral principles shared by a community or societal of a group

Question 30

Smith, a research analyst with a brokerage firm, decides to change his recommendation for the common stock of Green Company, Inc., from a “buy” to a “sell.” He mails this change in investment advice to all the firm’s clients on Wednesday. The day after the mailing, a client calls with a buy order for 500 shares of Green Company. In this circumstance, Smith should:

A Accept the order.

B Advise the customer of the change in recommendation before accepting the order.

C Not accept the order because it is contrary to the firm’s recommendation.

Answer 30

SOULUTIONS FOR 30-68 FOUND IN 2020 cfa VOL. 1-6
STARTING PAG 219 FIRST BOOK
B

Question 31

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 31

C

Question 32

Jamison is a junior research analyst with Howard & Howard, a brokerage and investment banking firm. Howard & Howard’s mergers and acquisitions department has represented the Britland Company in all of its acquisitions for the past 20 years. Two of Howard & Howard’s senior officers are directors of various
Britland subsidiaries. Jamison has been asked to write a research report on Britland. What is the best course of action for her to follow?

A. Jamison may write the report but must refrain from expressing any opinions because of the special relationships between the two companies.
B. Jamison should not write the report because the two Howard & Howard officers serve as directors for subsidiaries of Britland.
C. Jamison may write the report if she discloses the special relationships with the company in the report.

Answer 32

C

Question 33

4 Which of the following statements clearly conflicts with the recommended procedures for compliance presented in the CFA Institute Standards of Practice Handbook?

A. Firms should disclose to clients the personal investing policies and procedures established for their employees.
B . Prior approval must be obtained for the personal investment transactions of all employees.
C. For confidentiality reasons, personal transactions and holdings should not be reported to employers unless mandated by regulatory organizations

Answer 33

C

Question 34

Bronson provides investment advice to the board of trustees of a private university endowment fund. The trustees have provided Bronson with the fund’s financial information, including planned expenditures. Bronson receives a phone call on Friday afternoon from Murdock, a prominent alumnus, requesting that Bronson fax him comprehensive financial information about the fund. According to Murdock, he has a potential contributor but needs the information that day to close the deal and cannot contact any of the trustees. Based on the CFA Institute Standards, Bronson should:

A. Send Murdock the information because disclosure would benefit the client.
B. Not send Murdock the information to preserve confidentiality.
C. Send Murdock the information, provided Bronson promptly notifies the trustees.

Answer 34

B

Question 35

Willier is the research analyst responsible for following Company X. All the information he has accumulated and documented suggests that the outlook for the company’s new products is poor, so the stock should be rated a weak “hold.” During lunch, however, Willier overhears a financial analyst from another firm whom he respects offer opinions that conflict with Willier’s forecasts and expectations. Upon returning to his office, Willier releases a strong “buy” recommendation to the public. Willier:

A. Violated the Standards by failing to distinguish between facts and opinions in his recommendation.
B. Violated the Standards because he did not have a reasonable and adequate basis for his recommendation.
C. Was in full compliance with the Standards.

Answer 35

B

Question 36

An investment management firm has been hired by ETV Corporation to work Non an additional public offering for the company. The firm’s brokerage unit now has a “sell” recommendation on ETV, but the head of the investment banking department has asked the head of the brokerage unit to change the recommendation from “sell” to “buy.” According to the Standards, the head of the brokerage unit would be permitted to:

A Increase the recommendation by no more than one increment (in this case, to a “hold” recommendation).
B Place the company on a restricted list and give only factual information about the company.
C Assign a new analyst to decide if the stock deserves a higher rating

Answer 36

B

Question 37

Albert and Tye, who recently started their own investment advisory business, have registered to take the Level III CFA examination. Albert’s business card reads, “Judy Albert, CFA Level II.” Tye has not put anything about the CFA designation on his business card, but promotional material that he designed for the business describes the CFA requirements and indicates that Tye participates in the CFA Program and has completed Levels I and II. According to the
Standards:

A Albert has violated the Standards, but Tye has not.
B Tye has violated the Standards, but Albert has not.
C Both Albert and Tye have violated the Standards.

Answer 37

A

Question 38

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 38

B

Question 38

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 38

C

Question 39

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 39

B

Question 40

2 Jurgen is a portfolio manager. One of her firm’s clients has told Jurgen that he will compensate her beyond the compensation provided by her firm on the basis of the capital appreciation of his portfolio each year. Jurgen should:

A Turn down the additional compensation because it will result in conflicts with the interests of other clients’ accounts.
B Turn down the additional compensation because it will create undue pressure on her to achieve strong short-term performance.
C Obtain permission from her employer prior to accepting the compensation arrangement

Answer 40

C

Question 41

3 One of the discretionary accounts managed by Farnsworth is the Jones Corporation employee profit-sharing plan. Jones, the company president, recently asked Farnsworth to vote the shares in the profit-sharing plan in favor of the slate of directors nominated by Jones Corporation and against the directors sponsored by a dissident stockholder group. Farnsworth does not want to lose this account because he directs all the account’s trades to a brokerage firm
that provides Farnsworth with useful information about tax-free investments. Although this information is not of value in managing the Jones Corporation account, it does help in managing several other accounts. The brokerage firm providing this information also offers the lowest commissions for trades and provides best execution. Farnsworth investigates the director issue, concludes
that the management-nominated slate is better for the long-run performance of the company than the dissident group’s slate, and votes accordingly. Farnsworth:

A Violated the Standards in voting the shares in the manner requested by Jones but not in directing trades to the brokerage firm.
B Did not violate the Standards in voting the shares in the manner requested by Jones or in directing trades to the brokerage firm.
C Violated the Standards in directing trades to the brokerage firm but not in voting the shares as requested by Jones.

Answer 41

B

Question 42

Brown works for an investment counseling firm. Green, a new client of the firm, is meeting with Brown for the first time. Green used another counseling firm for financial advice for years, but she has switched her account to Brown’s firm. After spending a few minutes getting acquainted, Brown explains to Green that she has discovered a highly undervalued stock that offers large potential gains. She recommends that Green purchase the stock. Brown has committed a violation of the Standards. What should she have done differently?

A Brown should have determined Green’s needs, objectives, and tolerance for risk before making a recommendation of any type of security.
B Brown should have thoroughly explained the characteristics of the company to Green, including the characteristics of the industry in which the company operates.
C Brown should have explained her qualifications, including her education, training, and experience and the meaning of the CFA designation.

Answer 42

A

Question 43

Grey recommends the purchase of a mutual fund that invests solely in longterm US Treasury bonds. He makes the following statements to his clients:

I. “The payment of the bonds is guaranteed by the US government; therefore, the default risk of the bonds is virtually zero.”
II. “If you invest in the mutual fund, you will earn a 10% rate of return each year for the next several years based on historical performance of the market.”

Did Grey’s statements violate the CFA Institute Code and Standards?

A Neither statement violated the Code and Standards.
B Only statement I violated the Code and Standards.
C Only statement II violated the Code and Standards.

Answer 43

C

Question 44

6 Anderb, a portfolio manager for XYZ Investment Management Company—a registered investment organization that advises investment firms and private accounts—was promoted to that position three years ago. Bates, her supervisor, is responsible for reviewing Anderb’s portfolio account transactions and her required monthly reports of personal stock transactions. Anderb has been
using Jonelli, a broker, almost exclusively for brokerage transactions for the portfolio account. For securities in which Jonelli’s firm makes a market, Jonelli has been giving Anderb lower prices for personal purchases and higher prices for personal sales than Jonelli gives to Anderb’s portfolio accounts and other investors. Anderb has been filing monthly reports with Bates only for those months in which she has no personal transactions, which is about every fourth month. Which of the following is most likely to be a violation of the Code and
Standards?

A Anderb failed to disclose to her employer her personal transactions.
B Anderb owned the same securities as those of her clients.
C Bates allowed Anderb to use Jonelli as her broker for personal trades

Answer 44

A

Question 45

Which of the following is a correct statement of a member’s or candidate’s duty under the Code and Standards?

A In the absence of specific applicable law or other regulatory requirements, the Code and Standards govern the member’s or candidate’s actions.
B A member or candidate is required to comply only with applicable local laws, rules, regulations, or customs, even though the Code and Standards may impose a higher degree of responsibility or a higher duty on the member or candidate.
C A member or candidate who trades securities in a securities market where no applicable local laws or stock exchange rules regulate the use of material Anonpublic information may take investment action based on material nonpublic information.

Answer 45

A

Question 46

Ward is scheduled to visit the corporate headquarters of Evans Industries. Ward expects to use the information he obtains there to complete his research report on Evans stock. Ward learns that Evans plans to pay all of Ward’s expenses for the trip, including costs of meals, hotel room, and air transportation. Which of the following actions would be the best course for Ward to take under the Code
and Standards?

A Accept the expense-paid trip and write an objective report.
B Pay for all travel expenses, including costs of meals and incidental items.
C Accept the expense-paid trip but disclose the value of the services accepted in the report.

Answer 46

B

Question 47

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 47

B

Question 48

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 48

B

Question 49

1 Michelieu tells a prospective client, “I may not have a long-term track record yet, but I’m sure that you’ll be very pleased with my recommendations and service. In the three years that I’ve been in the business, my equity-oriented clients have averaged a total return of more than 26% a year.” The statement is true, but
Michelieu only has a few clients, and one of his clients took a large position in a penny stock (against Michelieu’s advice) and realized a huge gain. This large return caused the average of all of Michelieu’s clients to exceed 26% a year. Without this one investment, the average gain would have been 8% a year. Has Michelieu violated the Standards?

A No, because Michelieu is not promising that he can earn a 26% return in the future.
B No, because the statement is a true and accurate description of Michelieu’s track record.
C Yes, because the statement misrepresents Michelieu’s track record.

Answer 49

C

Question 50

An investment banking department of a brokerage firm often receives material nonpublic information that could have considerable value if used in advising the firm’s brokerage clients. In order to conform to the Code and Standards, which one of the following is the best policy for the brokerage firm?

A Permanently prohibit both “buy” and “sell” recommendations of the stocks of clients of the investment banking department.
B Establish physical and informational barriers within the firm to prevent the exchange of information between the investment banking and brokerage operations.
C Monitor the exchange of information between the investment banking department and the brokerage operation

Answer 50

B

Question 51

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 51

B

Question 52

Which of the following statements is a stated purpose of disclosure in Standard VI(C)–Referral Fees?

A Disclosure will allow the client to request discounted service fees.
B Disclosure will help the client evaluate any possible partiality shown in the recommendation of services.
C Disclosure means advising a prospective client about the referral arrangement once a formal client relationship has been established.

Answer 52

B

Question 53

Rose, a portfolio manager for a local investment advisory firm, is planning to sell a portion of his personal investment portfolio to cover the costs of his child’s academic tuition. Rose wants to sell a portion of his holdings in Household Products, but his firm recently upgraded the stock to “strong buy.” Which of the following describes Rose’s options under the Code and Standards?

A Based on his firm’s “buy” recommendation, Rose cannot sell the
shares because he would be improperly prospering from the inflated
recommendation.
B Rose is free to sell his personal holdings once his firm is properly informed of his intentions.
C Rose can sell his personal holdings but only when a client of the firm places an order to buy shares of Household

Answer 53

B

Question 54

A 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 54

C

Question 55

Carter works for Invest Today, a local asset management firm. A broker that provides Carter with proprietary research through client brokerage arrangements is offering a new trading service. The broker is offering low-fee, execution-only trades to complement its traditional full-service, execution-andresearch trades. To entice Carter and other asset managers to send additional business its way, the broker will apply the commissions paid on the new service
toward satisfying the brokerage commitment of the prior full-service arrangements. Carter has always been satisfied with the execution provided on the fullservice trades, and the new low-fee trades are comparable to the fees of other brokers currently used for the accounts that prohibit soft dollar arrangements.

A Carter can trade for his accounts that prohibit soft dollar arrangements under the new low-fee trading scheme.
B Carter cannot use the new trading scheme because the commissions are prohibited by the soft dollar restrictions of the accounts.
C Carter should trade only through the new low-fee scheme and should increase his trading volume to meet his required commission commitment.

Answer 55

A

Question 56

Rule has worked as a portfolio manager for a large investment management firm for the past 10 years. Rule earned his CFA charter last year and has decided to open his own investment management firm. After leaving his current employer, Rule creates some marketing material for his new firm. He states in the material, “In earning the CFA charter, a highly regarded credential in the
investment management industry, I further enhanced the portfolio management skills learned during my professional career. While completing the examination process in three consecutive years, I consistently received the highest possible scores on the topics of Ethics, Alternative Investments, and Portfolio Management.” Has Rule violated Standard VII(B)–Reference to CFA Institute, the CFA Designation, and the CFA Program in his marketing material?

A Rule violated Standard VII(B) in stating that he completed the exams in three consecutive years.
B Rule violated Standard VII(B) in stating that he received the highest scores in the topics of Ethics, Alternative Investments, and Portfolio Management.
C Rule did not violate Standard VII(B).

Answer 56

B

Question 57

Stafford is a portfolio manager for a specialized real estate mutual fund. Her firm clearly describes in the fund’s prospectus its soft dollar policies. Stafford decides that entering the CFA Program will enhance her investment decisionmaking skill and decides to use the fund’s soft dollar account to pay the registration and exam fees for the CFA Program. Which of the following statements is most likely correct?

A Stafford did not violate the Code and Standards because the prospectus informed investors of the fund’s soft dollar policies.
B Stafford violated the Code and Standards because improving her investment skills is not a reasonable use of the soft dollar account.
C Stafford violated the Code and Standards because the CFA Program does not meet the definition of research allowed to be purchased with brokerage commissions.

Answer 57

C

Question 58

Long has been asked to be the keynote speaker at an upcoming investment conference. The event is being hosted by one of the third-party investment managers currently used by his pension fund. The manager offers to cover all conference and travel costs for Long and make the conference registrations free for three additional members of his investment management team. To ensure that the conference obtains the best speakers, the host firm has arranged
for an exclusive golf outing for the day following the conference on a local championship-caliber course. Which of the following is least likely to violate Standard I(B)?

A Long may accept only the offer to have his conference-related expenses paid by the host firm.
B Long may accept the offer to have his conference-related expenses paid and may attend the exclusive golf outing at the expense of the hosting firm.
C Long may accept the entire package of incentives offered to speak at this conference.

Answer 58

A

Question 59

1 Andrews, a private wealth manager, is conducting interviews for a new research analyst for his firm. One of the candidates is Wright, an analyst with a local investment bank. During the interview, while Wright is describing his analytical skills, he mentions a current merger in which his firm is acting as the adviser. Andrews has heard rumors of a possible merger between the two companies, but no releases have been made by the companies concerned. Which of the following actions by Andrews is least likely a violation of the Code and Standards?

A Waiting until the next day before trading on the information to allow time for it to become public.
B Notifying all investment managers in his firm of the new information so none of their clients are disadvantaged.
C Placing the securities mentioned as part of the merger on the firm’s restricted trading list.

Answer 59

C

Question 60

Pietro, president of Local Bank, has hired the bank’s market maker, Vogt, to seek a merger partner. Local is currently not listed on a stock exchange and has not reported that it is seeking strategic alternatives. Vogt has discussed the possibility of a merger with several firms, but they have all decided to wait until after the next period’s financial data are available. The potential buyers believe
the results will be worse than the results of prior periods and will allow them to pay less for Local Bank.
Pietro wants to increase the likelihood of structuring a merger deal quickly. Which of the following actions would most likely be a violation of the Code and Standards?

A Pietro could instruct Local Bank to issue a press release announcing that it has retained Vogt to find a merger partner.
B Pietro could place a buy order for 2,000 shares (or four times the average weekly volume) through Vogt for his personal account.
C After confirming with Local’s chief financial officer, Pietro could instruct Local to issue a press release reaffirming the firm’s prior announced earnings guidance for the full fiscal year.

Answer 60

B

Question 60

ABC Investment Management acquires a new, very large account with two concentrated positions. The firm’s current policy is to add new accounts for the purpose of performance calculation after the first full month of management. Cupp is responsible for calculating the firm’s performance returns. Before the end of the initial month, Cupp notices that one of the significant holdings of the new accounts is acquired by another company, causing the value of the investment to double. Because of this holding, Cupp decides to account for the new portfolio as of the date of transfer, thereby allowing ABC Investment to reap the positive impact of that month’s portfolio return.

A Cupp did not violate the Code and Standards because the GIPS standards allow composites to be updated on the date of large external cash flows.
B Cupp did not violate the Code and Standards because companies are allowed to determine when to incorporate new accounts into their composite calculation.
C Cupp violated the Code and Standards because the inclusion of the new account produces an inaccurate calculation of the monthly results according to the firm’s stated policies.

Answer 60

C

Question 61

Cannan has been working from home on weekends and occasionally saves correspondence with clients and completed work on her home computer. Because of worsening market conditions, Cannan is one of several employees released by her firm. While Cannan is looking for a new job, she uses the files she saved at home to request letters of recommendation from former clients. She also provides to prospective clients some of the reports as examples of her abilities.

A Cannan violated the Code and Standards because she did not receive permission from her former employer to keep or use the files after her employment ended.
B Cannan did not violate the Code and Standards because the files were created and saved on her own time and computer.
C Cannan violated the Code and Standards because she is prohibited from saving files on her home computer.

Answer 61

A

Question 62

Quinn sat for the Level III CFA exam this past weekend. He updates his resume with the following statement: “In finishing the CFA Program, I improved my skills related to researching investments and managing portfolios. I will be eligible for the CFA charter upon completion of the required work experience.”

A Quinn violated the Code and Standards by claiming he improved his skills through the CFA Program.
B Quinn violated the Code and Standards by incorrectly stating that he is eligible for the CFA charter.
C Quinn did not violate the Code and Standards with his resume update.

Answer 62

B

Question 63

During a round of golf, Rodriguez, chief financial officer of Mega Retail, mentions to Hart, a local investment adviser and long-time personal friend, that Mega is having an exceptional sales quarter. Rodriguez expects the results to be almost 10% above the current estimates. The next day, Hart initiates the purchase of a large stake in the local exchange-traded retail fund for her personal
account.

A Hart violated the Code and Standards by investing in the exchange-traded fund that included Mega Retail.
B Hart did not violate the Code and Standards because she did not invest directly in securities of Mega Retail.
C Rodriguez did not violate the Code and Standards because the comments made to Hart were not intended to solicit an investment in Mega Retail.

Answer 63

A

Question 64

Park is very frustrated after taking her Level II exam. While she was studying for the exam, to supplement the curriculum provided, she ordered and used study material from a third-party provider. Park believes the additional material focused her attention on specific topic areas that were not tested while ignoring other areas. She posts the following statement on the provider’s discussion board: “I am very dissatisfied with your firm’s CFA Program Level II material.
I found the exam extremely difficult and myself unprepared for specific questions after using your product. How could your service provide such limited instructional resources on the analysis ofinventories and taxes when the exam had multiple questions about them? I will not recommend your products to other candidates.”

A Park violated the Code and Standards by purchasing third-party review material.
B Park violated the Code and Standards by providing her opinion on the difficulty of the exam.
C Park violated the Code and Standards by providing specific information on topics tested on the exam.

Answer 64

C

Question 65

Paper was recently terminated as one of a team of five managers of an equity fund. The fund had two value-focused managers and terminated one of them to reduce costs. In a letter sent to prospective employers, Paper presents, with written permission of the firm, the performance history of the fund to demonstrate his past success.

A Paper did not violate the Code and Standards.
B Paper violated the Code and Standards by claiming the performance of the entire fund as his own.
C Paper violated the Code and Standards by including the historical results of his prior employer

Answer 65

B

Question 66

Generic Asset Management

Answer 66

Generic Asset Management is the institutional asset management division of Generic Inc. and is a registered investment advisory firm specializing in qualitative growth-oriented investment management.

Question 66

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 66

A

Question 67

Unconstrained Activist UK Equity Composite

Answer 67

The Unconstrained Activist UK Equity Composite includes all institutional portfolios invested in both listed and unlisted UK equities that pursue an activist investment policy; there is no restriction on the market capitalization of companies held

Question 68

Emerging Market High Yield Fixed Income Composite

Answer 68

The Emerging Market High Yield Fixed Income Composite includes all institutional and retail portfolios invested in high yield debt securities issued by countries outside the OECD.

Question 69

UK Liquidity Plus Composite

Answer 69

The UK Liquidity Plus Composite includes all institutional portfolios invested in a broad range of short-dated interest-bearing deposits, cash equivalents, short-term commercial paper, and other money market investments issued by major UK clearing banks and lending institutions

Question 70

Leveraged Bond Composite

Answer 70

The Leveraged Bond Composite includes all institutional segregated portfolios invested in a diversified range of high yield corporate and government bonds with the aim of providing investors with a high level of income while seeking to maximize the total return

Question 70

Socially Responsible Investment (SRI) Composite

Answer 70

The Socially Responsible Investment Composite includes all segregated institutional and pooled portfolios that invest in global equity securities issued by companies that make a positive contribution to society and the environment through sustainable and socially responsible practices

Question 71

Global Commodity Composite

Answer 71

The Global Commodity Composite includes institutional portfolios that globally invest in a diversified range of companies that provide exposure to commodities, energy, and materials

Question 72

Large Cap Equity Growth Composite

Answer 72

The Large Cap Equity Growth Composite includes all institutional portfolios that invest in large capitalization US stocks that are considered to have growth in earnings prospects that is superior to that of the average company within the benchmark, the Russell 3000® Growth Index. The targeted tracking error between the composite and the benchmark is less than 3%.

Question 73

Balanced Growth Composite

Answer 73

The Balanced Growth Composite includes all institutional balanced portfolios that invest in large-cap US equities and investment-grade bonds with the goal of providing long-term capital growth and steady income from a well-diversified strategy. Although the strategy allows for equity exposure ranging between 50% and 70%, the typical allocation is between 55% and 65%.

Question 74

2001 Venture Capital Composite

Answer 74

The 2001 Venture Capital Composite includes one fund, whose objective is to seek long-term capital appreciation by acquiring minority interests in earlystage technology companies.

Question 75

Currency Overlay Composite

Answer 75

The Currency Overlay Composite includes all institutional and retail portfolios invested in a broad range of foreign-currency-denominated deposits or instruments, such as forward contracts, futures, or foreign exchange derivatives.

Question 76

Asian Market Neutral Composite

Answer 76

The Asian Market Neutral Composite includes a single hedge fund with a market neutral strategy that invests in publically traded Asian equities with a market capitalization greater than $500 million.

Question 77

2006 Buyout Strategy Fund of Funds Composite

Answer 77

The 2006 Buyout Strategy Fund of Funds Composite includes primary and secondary partnership investments with strategies focused on leveraged and growth-oriented buyouts primarily in the United States.

Question 78

US Core Equity Composite (Terminated Composites)

Answer 78

The US Core Equity Composite includes all institutional portfolios and pooled funds managed to a GARP (growth at a reasonable price) strategy through investment in a high-quality, focused portfolio of domestic, large-capitalization stocks that are expected to generate returns above the S&P 500® Index over a market cycle.

Question 78

Value-Added Strategy Closed-End Real Estate Composite

Answer 78

The Value-Added Strategy Composite includes a single closed-end commingled fund managed by the Firm using a value-added investment strategy with a focus on both income and appreciation.

Question 78

Value-Added Strategy Non-Closed-End Real Estate Composite

Answer 78

The Value-Added Strategy Composite consists of all discretionary openend funds and separate accounts managed by the Firm using a value-added investment strategy with an equal income and appreciation focus and having a minimum portfolio size of $10 million