Ethical and Professional Standards

Question 1

Ethics is most accurately described as a:

A set of moral principles that adhere to legal standards.
B set of moral principles and rules of conduct that guide behavior.
C benchmark for behavior based on an individual’s perception of right and wrong.

Answer 1

B Ethical conduct is behavior that follows moral principles. Moral or ethical principles are beliefs in regards to what is acceptable versus unacceptable behavior – what an individual expects of himself.

Question 2

The investment management profession is most similar to more established professions such as medicine or law with respect to:

A recognition by regulators.
B requiring practitioners to be licensed.
C the need to adapt to societal and technological changes.

Answer 2

C Technological and societal changes are forcing all professions to adapt and evolve in order to retain the public’s trust.

The investment management profession is relatively young and lags behind more established professions with respect to being recognized by regulators. Although many investment management practitioners do have professional certifications, there is no licensing requirement such as those that exist for doctors and lawyers.

Question 3

Which of the following most likely presents the biggest challenge to trust in the investment management profession?

A Practitioners are not required to join a professional body
B Clients are at an informational disadvantage relative to practitioners
C Practitioners are joining professional bodies other than CFA Institute

Answer 3

A Unlike doctors and lawyers, practitioners in the investment management industry are not required to undertake specific training or join a professional body that is dedicated to furthering their professional development. The lack of such a requirement presents a challenge to the public’s trust in the investment management profession.

Many investment management practitioners are joining professional bodies other than CFA Institute. For example, it is not uncommon for practitioners in this industry to join professional bodies that represent actuaries and accountants. Having practitioners joining any professional body is likely to improve the public’s trust in the investment management profession.

While it is true that clients are at an informational disadvantage relative to investment management practitioners, this is also true for all other professions. Just as clients are less knowledgeable about investment risks, fees, etc., patients are relatively uninformed about health issues compared to their doctors. The key to earning and retaining trust in the profession is to manage this asymmetry by giving clients the information that they need to make decisions that are in their interest.

Question 4

Which of the following would most likely be a challenge to ethical behavior?

A A desire to protect clients’ assets
B Placing too much importance on external motivations
C Underestimating the extent to which external factors shape thinking

Answer 4

C Challenges to ethical behavior include one’s overconfidence in their own personal ethical standards and a decision maker’s underestimation of the effect of external factors that shape thinking.

Question 5

The external factors, including environmental or cultural, that shape thinking and decision making are most likely referred to as:

A situational influences.
B behavioral biases.
C the ethical decision-making framework.

Answer 5

A The proper term for these external influences is situational influences. These are factors shaping our thinking, decision making, and general behavior. Situational influences, such as loyalty or bonus systems, can shape thinking and behavior within the investment industry.

Question 6

Which of the following is most likely a challenge to promoting ethics and trust in the investment profession?

A Short-term situational influences are difficult to recognize and consider
B Situational influences cannot motivate individuals to act more ethically
C Individuals tend to place a high level of importance on their internal traits and intrinsic motivations

Answer 6

C A key challenge to ethical behavior is that individuals often place too much emphasis on their internal traits and intrinsic motivations, which have little predictive ability regarding whether someone will behave ethically in a specific situation. In general, individuals are overconfident in their ability to act morally in situations that require sound judgment.

Short-term situational influences are relatively easy to recognize and consider. In many situations, individuals focus on short-term influences and fail to adequately consider long-term consequences.

While situational influences often cause individuals to behave unethically, these pressures can also induce people to act more ethically.

Question 7

To promote ethical behavior, an investment management firm’s code of conduct should most likely:

A foster a strong culture of compliance.
B emphasize the importance of loyalty to fellow employees.
C encourage employees to include consideration of long-term consequences in their decision-making process.

Answer 7

C Individuals tend to find it easier to recognize and consider short-term situational influences when making decisions. To promote ethical behavior, codes of conduct should encourage employees to consider the potential long-term consequences of their decisions.

Loyalty, either to fellow employees or one’s employer, is a strong situational influence that can cause individuals to act unethically or refrain from reporting unethical behavior in order to demonstrate the strength of their commitment.

While a strong compliance policy is necessary to develop an ethical culture, placing too much emphasis on compliance can lead to decisions that meet the literal requirements for compliance, even if they are not necessarily ethical.

Question 8

Which statement most accurately represents CFA Institute’s guidance on what is expected and required of Members and Candidates to meet high ethical standards, as it relates to ethical versus legal standards?

A All ethical behavior is legal
B Illegal behavior may be ethical
C A legal framework is required to ensure ethical behavior

Answer 8

B Ethical behavior and legal behavior do not perfectly overlap.

Ethical behavior may not always be deemed legal. Similarly, it is possible to commit illegal acts that are ethical. Laws, particularly newly enacted ones, are not sufficient to ensure that individuals act in an ethical manner.

Question 9

Which of the following statements about ethics in the investment profession is least likely correct?

A Ethics involves making good choices
B Ethics involves a set of moral and legal principles
C Situational influences can shape individual ethical behaviors

Answer 9

B Ethics is a set of moral principles that are established without consideration of legal principles.

Question 10

Which of the following statements is most accurate? An optimal ethical decision-making framework:

A culminates with decisions and actions.
B considers situational influences in the initial phase.
C allows individuals to move through the various phases of the decision-making process in a non-sequential manner.

Answer 10

C The decision-making process is typically iterative, meaning that individuals will not necessarily go through the various phases of the framework in sequential order. For example, it may be necessary to go back to the identification phase based on insights that were developed in the consideration phase.

A general framework for ethical decision-making begins with the identification phase before moving onto the consideration phase, after which decisions are made and actions are taken. It is important to include a reflection phase that considers whether the decision had its intended effect or any unanticipated consequences.

Question 11

CFA charterholders and candidates in the CFA program must act for the ultimate benefit of:

A society
B capital markets.
C their employer.

Answer 11

A The CFA Institute Code of Ethics states that members and candidates must “promote the integrity and viability of the global capital markets for the ultimate benefit of society.”

Question 12

Which of the following statements is most likely correct regarding the CFA Institute Professional Conduct Program?

A The sanctions imposed by CFA Institute include public censure
B Members and candidates are not required to disclose their involvement in civil litigation on which the courts have yet to rule
C Members and candidates must accept the sanctions proposed by CFA Institute’s Professional Conduct Program staff upon concluding that a violation has occurred.

Answer 12

A CFA Institute may impose sanctions ranging from public censure to revocation of a member’s right to use the CFA designation.

Members or Candidates must self-disclose on the annual Professional Conduct Statement all matters that question their professional conduct, which could include involvement in unresolved civil litigation.

If Professional Conduct Program staff conclude that a violation has occurred, they will propose a sanction that the member or candidate may reject or accept. If the proposed sanction is rejected, the case is referred to the Disciplinary Review Committee, which is the final authority on such matters.

Question 13

Which of the following statements is most accurate? When Professional Conduct Program (PCP) staff rules that a member of CFA Institute has violated the Standards, the next step in the disciplinary process is for:

A the proposed sanction to be imposed.
B the member to decide if he or she will accept the proposed sanction.
C the Disciplinary Review Committee to review the ruling issued by PCP staff.

Answer 13

B Members and candidates deemed by PCP staff to have violated the Standards are not required to accept the ruling and proposed sanction, but rather may decide to reject this decision and the proposed sanction.

If the ruling is rejected, the matter is then referred to a panel composed of DRC members, which will either uphold or overturn the PCP staff’s recommendation.

Question 14

Jim Joyner, CFA, a portfolio manager with Breakstone Asset Management, works with individual investors. CFA Institute’s Disciplinary Review Committee (DRC) recently ruled that Joyner had violated the Standards, and affirmed the Profession Conduct Program staff’s recommendation that his membership be suspended for two years. Which of the following statements is most accurate? Joyner:

A may appeal the DRC’s ruling.
B may continue to work with clients while his suspension is in effect.
C must not engage in any professional activities while his suspension is in effect.

Answer 14

B The range of sanctions that CFA Institute may impose on members and candidates who violate the Standards does not include a prohibition on professional activities. In this example, Joyner may continue to work with clients during his suspension, but he must not use the CFA designation until such time as his membership is reinstated. Joyner may not appeal the ruling issued by the DRC, which is the final authority on such matters.

Question 15

Which of the following statements is most accurate? A disciplinary sanction is sent to the Disciplinary Review Committee for review directly after:

A the Designated Officer deems a sanction is warranted.
B the member or candidate rejects the Designated Officer’s sanction.
C evidence of misconduct is obtained by Professional Conduct Program staff.

Answer 15

B For a sanction to be sent to the Disciplinary Review Committee (DRC), the following must occur:

The member or candidate is believed to have broken the Code or Standards.
The Professional Conduct staff is made aware of the alleged transgression and conducts inquiries.
The Designated Officer decides that a sanction is warranted and proposes a specific sanction to the member or candidate.
The member or candidate rejects the sanction.
The DRC hearing panel acts as an arbitrator.

Question 16

Allan McDonald, CFA, has recently filed for personal bankruptcy after incurring catastrophic costs to provide medical treatment for his mother. No fraudulent acts were committed. Which of the following statements is most accurate? McDonald has:

A not violated the Standards and is not required to disclose this information to his employer.

B already violated the Standards and is required to disclose this information to his employer.

C not violated the Standards, but will if he does not disclose this information to his employer.

Answer 16

A According to Standard I(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.”

In isolation, a personal bankruptcy that did not involve any dishonest, fraudulent, or deceitful acts would not be considered a violation of this Standard. In this example, there is no evidence that McDonald has violated this Standard. Although employers may require individuals to reveal whether they have filed for personal bankruptcy, this Standard does not create any such obligation, and there is no evidence that McDonald’s employer requires such disclosure in this example.

Question 17

Debra Long, CFA, an independent equity analyst, has been offered compensation by a company to issue a research report on its stock. Do the Standards most likely allow Long to accept this offer?

A No
B Yes, if the compensation is structured as a flat fee based on the report’s conclusions, which both parties must agree on prior to the report being written
C Yes, if the compensation is structured as a flat fee that both parties agree on prior to the report being written and is not linked to the report’s conclusions

Answer 17

C The arrangement mentioned in this example is referred to as issuer-paid research and it is allowable within the limits of Standard I(B) - Independence and Objectivity under certain conditions. Specifically, analysts should negotiate compensation that is structured as a flat fee and is not linked to any of the conclusions or recommendations contained in their report. This fee should be negotiated and agreed upon before any work begins.

Question 18

Frank Mariotta, CFA, manages portfolios for several clients of Vesuvius Investments. A client offers Mariotta the use of one of his luxury resort properties if the client’s portfolio outperforms the S&P 500 by at least 100 basis points for 2 consecutive quarters. Mariotta accepts the client’s offer without disclosing the arrangement to his supervisor, who had previously approved a similar arrangement between the same client and another portfolio manager at Vesuvius. Has Mariotta most likely violated the Standards?

A Yes
B No, because his supervisor approved a similar arrangement with the same client
C No, because his interests are already aligned with the interests of his client and his firm

Answer 18

A In general, Standard I(B) - Independence and Objectivity allows members and candidates to accept gifts from clients on the grounds that their interests are already aligned and the client is already providing compensation. However, in this example, Mariotta violates this Standard by failing to inform his supervisor of the gift. Disclosure is required so that employers may assess whether any such gifts have resulted in preferential treatment for the client. The fact that his supervisor approved a similar arrangement between the same client and another portfolio manager does not eliminate Mariotta’s duty to disclose his own arrangement.

Question 19

James Heil, CFA, is updating his investment firm’s compliance manual, which contains the following policy:

“Research analysts must not knowingly omit or misrepresent information or give a wrong impression of this firm or any security, in oral representations, advertising, electronic communications, or publicly disseminated written materials.”

Is this policy most likely consistent with the recommendations for compliance with the Standards?

A Yes
B No, because Standard I(C) - Misrepresentation only references written materials
C No, because Standard I(C) - Misrepresentation includes written materials, whether publicly disseminated or not

Answer 19

C

Question 20

Rosa Garrett, CFA, works as an investment banker for a large firm based in New York. Garrett is asked by her supervisor to work on an acquisition project for two companies based in India. Not knowing the laws and regulations for mergers and acquisitions based in India, Garrett goes to her firm’s library, where she finds reference books for the laws and regulations of India that are a couple of years old. She is told by a paralegal in the firm that only a few minor changes have been made over the years, which the Indian government will not notice if the firm violates, as they are highly inefficient and probably use old reference books anyway when approving the legality of the acquisition. If Garrett uses these reference books, has she most likely violated the Standards?

A Yes
B No, because the laws and regulations have not changed significantly
C No, because it is the responsibility of the firm to have up to date reference materials

Answer 20

A Even if the violations seem minor, charterholders and candidates must adhere to all laws and regulations. Even if it is her firm’s responsibility to provide reference materials, it is Garrett’s responsibility to follow all up-to-date laws and regulations according to Standard I(A) - Knowledge of the Law.

Question 21

Hillary Goff, CFA, is an investment banker with Robertson & Davis, a financial services firm with multiple lines of business. When making presentations to potential new investment banking clients in a range of industries, she promises that her firm will provide full research coverage if the potential client signs on as an investment banking client. Goff does not mention that the two analysts currently employed by her firm both cover companies in various subsectors of the transportation sector. Goff most likely violated the Standards with respect to:

A misrepresentation only.
B independence and objectivity only.
C both misrepresentation and independence and objectivity.

Answer 21

A Goff has violated Standard I(C) - Misrepresentation by giving prospective clients the impression that her firm is currently capable of providing full research coverage when it only employs two analysts who both cover the transportation sector.

Goff does not violate Standard I(B) - Independence and Objectivity by promising research coverage as such promises are consistent with this Standard as long as the subsequent research is not influenced by any commercial relationship between the companies.

Question 22

Kevin Tomey, CFA, is a research analyst covering the mining sector for a major investment bank. Most of the companies Tomey covers have facilities in remote locations. As part of his research of Astralica Minerals, he accepts the company’s offer to fly with some of its executives on a plane that it has chartered due to the lack of any commercial flights to the location of its facility. During the course of his two-day visit, Tomey stays at the company’s custom-built lodgings and attends a dinner with the executives who accompanied him on the charter flight. Neither Tomey personally or his firm reimburses Astralica for the costs associated with his travel and accommodation. Has Tomey most likely violated the Standards?

A No
B Yes, by dining with Astralica executives
C Yes, by accepting the travel and accommodation

Answer 22

A According to Standard I(B) - Independence and Objectivity, 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.”

However, this Standard does not prohibit acceptance of travel and accommodation in certain circumstances. Specifically, the guidance for this Standard tells us that, in the absence of commercial alternatives, “members and candidates may accept modestly arranged travel to participate in appropriate information-gathering events, such as a property tour.” In this example, Tomey does not appear to have foregone any commercial alternative travel or accommodation in order to accept the company’s offer. Additionally, he does not violate this Standard by dining with company executives as there is no indication that he has accepted a lavish or extraordinary meal.

Question 23

Mary Ciccarelli, CFA, is an equity analyst with Strathairn Capital, a financial services firm with multiple lines of business, including sell-side research and investment banking. Ciccarelli’s supervisor, Dale Jackman, informs her that the firm’s review committee will not allow a “sell” rating to be published for Riverdale Industries (RVI), one of the firms she covers. In order to adhere with the recommendations for compliance with the Standards, Ciccarelli should most likely:

A encourage her firm to cease all trading of RVI shares.
B refuse to disseminate any further information about RVI to clients.
C encourage her firm to disseminate only factual information about RVI to clients.

Answer 23

C The recommendations for compliance with Standard I(B) - Independence and Objectivity include the creation of a restricted list in cases when a member or candidate’s employer “is unwilling to permit dissemination of adverse opinions about a corporate client.” In such cases, “members and candidates should encourage the firm to remove the controversial company from the research universe and put it on a restricted list so that the firm disseminates only factual information about the company.”

This is a list that includes all companies the firm is in an investment banking relationship with. Only factual information about those companies is to be given out to clients – no buy or sell information. This is because investment bankers are “temporary insiders” of these companies, privy to inside information, and this information must not be disseminated within the investment firm.

Question 24

How would acts of civil disobedience by a CFA Institute Member be most accurately characterized, relating to its legality, ethics, and compliance with CFA Institute Standards?

A Civil disobedience may be legal, but is unethical and violates CFA Institute Standards in many cases
B Civil disobedience may be legal, but violates CFA Institute Standards when it results in a criminal conviction
C Civil disobedience may be illegal, but it also may be ethical and does not violate CFA Institute Standards in many instances

Answer 24

C CFA Institute does not prohibit civil disobedience. Much of it may, in fact, be illegal. However, these actions may still be ethical if, for example, they involve protesting laws that a member or candidate considers to be unethical.

With respect to the Code and Standards, the critical factor is whether members or candidates have adhered to Standard I(D) - Misconduct, which prohibits them from committing “any act that reflects adversely on their professional reputation, integrity, or competence.”

Question 25

Hamid Bashir, CFA, lives and works in Emergia, a country with a developing economy and securities laws that are less stringent than the CFA Institute Code of Ethics and Standards of Professional Conduct (Code and Standards). Over the past year, Bashir has joined a group of financial professionals advocating for Emergia to adopt the legal framework of Fortania, where securities laws are more stringent than the Code and Standards. Bashir should most likely adhere to: A Fortania's laws. B Emergia's laws. C the Code and Standards.

Answer 25

C Standard I(A) - Knowledge of the Law requires members and candidates to adhere to the most stringent requirements imposed by the laws, rules, and regulations governing their activities or the Code and Standards. In this example, Bashir lives and works in a country with securities laws that impose less stringent requirements and must therefore adhere to the Code and Standards. Bashir is not required to adhere to Fortania's laws, as they do not currently apply to his professional activities.

Question 26

Ken Bush, CFA, has recently joined the fixed income department of a regional bank. After observing some activities that he believes to be illegal, Bush does not report his suspicions to his firm's compliance department, choosing instead to immediately resign and report his suspicions to regulators. Has Bush most likely violated the Standards? A No B Yes, by resigning without reporting his suspicions to his firm's compliance department C Yes, by reporting his suspicions to regulators without reporting his suspicions to his firm's compliance department

Answer 26

A Standard I(A) - Knowledge of the Law requires members and candidates to dissociate from any violation of laws, rules, regulations, or the Standards themselves. This Standard does not require members and candidates to report their suspicions to legal or regulatory authorities (unless such action is specifically required by law and there is no evidence of such a requirement in this example). The guidance for this Standard recommends that members and candidates who have observed what they believe to be illegal or unethical activities begin by reporting these concerns by their firm's compliance department. While Bush may have reported his suspicions to regulators and resigned his position earlier than might be required by this Standard, he has not violated it by doing so.

Question 27

Al Quimby, CFA, has used a quantitative model developed by Flathead Associates for several years, after obtaining written permission from the company to do so. Over the years, he has made several revisions to the model and back-tested it using commonly available data from Standard and Poor's (S&P). When issuing reports based on insights derived from the amended model, it is most likely that Quimby: A must only cite Flathead as a source. B must cite Flathead Associates and S&P as sources. C is not required to cite either Flathead or S&P as sources.

Answer 27

A Standard I(C) - Misrepresentation prohibits plagiarism, which is the act of "copying or using in substantially the same form materials prepared by others without acknowledging the source of the material or identifying the author and publisher of such material." Further, members and candidates "must not copy (or represent as their own) original ideas or material without permission and must acknowledge and identify the source of ideas or material that is not their own." In this example, Quimby must acknowledge Flathead as the original source of the model, despite the fact that he has made his own amendments. However, this Standard does not require Quimby to cite statistics obtained from "recognized financial and statistical reporting services" such as S&P.

Question 28

Denise Gates, CFA, owns a small investment advisory firm specializing in individual accounts. Due to her firm's relatively small size, Gates obtains investment research from a larger investment research firm, for which she used to work. Gates is familiar with the firm's research methods, which she believes to be sound, and repackages the reports she obtains to be distributed to her clients and presented as her firm’s work. Has Gates most likely violated the Standards? A No B Yes, with respect to misrepresentation C Yes, with respect to independence and objectivity

Answer 28

B Gates violates Standard I(C) - Misrepresentation by presenting the reports to clients as if they had been prepared by her firm. There is no indication that Gates has violated Standard I(B) - Independence and Objectivity. Her obligation to her clients is to ensure that she is satisfied that the research she passes along to them has a reasonable and adequate basis. There is no indication that her choice of third-party providers was unduly influenced by her previous work relationship.

Question 29

James Tong, CFA, an analyst based in London, UK, recently published a research report on Plus Alpha Pharmaceuticals recommending the company's stock. Soon after the report was issued, Plus Alpha invites Tong for discussions with some of its senior executives at the company's headquarters in Paris, France. Tong makes the trip on the company's corporate airplane and stays at a modest hotel that the company booked and prepaid for him. Tong later reimburses Plus Alpha for the costs of both his travel and accommodations and submits a full report to his employer in accordance with firm policy. Has Tong most likely violated the Standards? A No B Yes, with respect to his accommodation C Yes, with respect to his travel arrangements

Answer 29

C It does not appear that Tong has violated Standard I(B) - Independence and Objectivity with respect to his accommodation as there is no evidence that he asked the company to prepay his hotel costs, or that he was even aware of this arrangement, and he was right to reimburse this expense. However, Tong violates this Standard by accepting a flight on the Plus Alpha's corporate airplane when commercial alternatives were available. Reimbursing the company for the cost does not eliminate the impact that such a lavish and unnecessary arrangement could have on his objectivity. As noted in the recommended procedures for compliance with this Standard, "when attending meetings at an issuer’s headquarters, members and candidates should pay for commercial transportation and hotel charges. No corporate issuer should reimburse members or candidates for air transportation." While Tong's actions are consistent with his firm's policies, they do not absolve him of the responsibilities created by this Standard to avoid arrangements that could compromise his independence and objectivity.

Question 30

Fred Lange, CFA, a senior portfolio manager for a major Midwest banking organization, frequently goes out to lunch with clients and consumes alcoholic beverages on most of those occasions. Lange's coworkers are aware of his habits, but Lange's drinking has not compromised his ability to do work, as he is regularly recognized for his professional achievements. One afternoon after returning from lunch with a client, Lange misstates his fund's performance in a conversation with a prospective client. This misstatement is quickly corrected by Lange's colleague, Jennifer Helton. Has Lange most likely violated the Standards? A No B Yes, with respect to misconduct C Yes, with respect to misrepresentation

Answer 30

A It does not appear that Lange has violated Standard I(C) - Misrepresentation, as there is no evidence that he deliberately misstated his fund's performance. Lange has not violated Standard I(D) - Misconduct, as his actions do not appear to constitute conduct that "reflects adversely" on his "professional reputation, integrity, or competence." Of note, although it appears that Lange regularly consumes alcohol, there is no evidence that he does so to excess or that such consumption has affected his performance at work.

Question 31

Jessica Walters is a portfolio manager for a large investment firm based in London. One of Walters' clients, Elaine Meyers, is the wife of a top executive at Veridian Dynamics (VDN). Walters notices that Meyers’s portfolio has significantly outperformed those of her other clients this year, due largely to some well-timed trades of VDN shares. Walters is suspicious and believes Meyers is acting on material nonpublic information provided by her husband when trading VDN shares, but Walters decides not to take action, as she has no proof to substantiate her suspicions. Several months after noticing the suspect trades, Walters has not discussed the matter with anyone. Has Walters most likely violated the Standards? A Yes, by failing to take any further action B Yes, by not publically disclosing the possible violation C No, because she lacked proof that a violation had occurred

Answer 31

A Standard I(A) - Knowledge of the Law states that when there is doubt about the action to take, it is best to seek the advice of compliance personnel or legal counsel. She is not required to publicly disclose her suspicions, but she also has a reasonable basis for discussing them with legal authorities, her firm's compliance department, and/or her personal lawyer. By failing to take any further action, Walters has most likely violated this Standard.

Question 32

Jim Babcock, CFA, is a portfolio manager for Walton Investments. A client is impressed with Babcock’s first quarter performance and has offered him tickets to a sold-out concert if Babcock can continue to outperform the client's benchmark over the second quarter of the year. Babcock discloses the details of this proposed arrangement to his supervisor, who has granted written permission. Has Babcock most likely violated the Standards? A No B Yes, by accepting an offer the incentivizes short-term returns C Yes, by failing to disclose this arrangement to his other clients

Answer 32

A According to Standard I(B) - Independence and Objectivity, members and candidates "must not accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another's independence and objectivity." In this case, there is no evidence of the comprise of independence and objectivity since both Babcock's and the client's interests are already aligned. As long as any such gifts are disclosed to one's employer, Standard I(B) - Independence and Objectivity is not violated. The employer can then assess whether the gifts in question have resulted in preferential treatment for the client who has provided them (to the detriment of other clients).

Question 33

David Dryer, CFA, lives and conducts his professional work in a jurisdiction where betting on sporting events is illegal. Twice a year, Dryer travels to Las Vegas, where such gambling is legal, to make sizable bets on the outcomes of several professional basketball games. On his most recent trip to Las Vegas, Dryer incurred significant losses that he has not disclosed to his employer. Has Dryer most likely violated the Standards? A No B Yes, by failing to disclose his gambling losses to his employer C Yes, by engaging in an activity that is illegal in the jurisdiction where he conducts his professional activities

Answer 33

A Standard I(D) - Misconduct prohibits members and candidates from engaging in "any professional conduct involving dishonesty, fraud, deceit." Members and candidates are further prohibited from committing "any act that reflects adversely on their professional reputation, integrity, or competence." Dryer has not violated this Standard in this example. Although betting on sporting events is illegal in the jurisdiction where he conducts his professional activities, he has not violated any laws by gambling in a jurisdiction where this activity is legal. Dryer is not required to report his gambling losses to his employer unless this development has impaired his ability to continue meeting his professional obligations in compliance with all applicable laws, rules, and regulations.

Question 34

Joe Brunt, CFA, is a senior analyst with a major credit rating agency. Kaylee Whiteside is the CFO of Optimal Dynamics, which recently became a client of Brunt's firm. Whiteside offers Brunt the use of her vacation home for one week every quarter that her company's corporate credit rating is either maintained at its current level or upgraded. Brunt agrees to this arrangement on the condition that the evaluation period be extended from every quarter to every year. Has Brunt most likely violated the Standards? A Yes B No, because his interests are already aligned with his client's interest C No, because the compensation does not create short-term performance incentives

Answer 34

A According to Standard I(B) - Independence and Objectivity, 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." Although this Standard allows for the possibility of accepting gifts from clients on the grounds that incentives are already aligned, this exception is not applicable in this example. Brunt has an obligation to issue a credit rating based on diligent and objective analysis but, by accepting Whiteside's offer, he has compromised his ability to do so. The issue of incentives for short-term versus long-term performance is discussed in the context of Standard VI(A) - Disclosure of Conflicts but is not relevant to this example.

Question 35

April Flores, a Level I CFA candidate, has been asked to process transactions that she believes may be illegal. As a first step, she raises her concerns with her firm's compliance department. Two months later, Flores has not heard anything further on this matter and continues to process the types of trades that she had reported. Flores has most likely: A not violated the Standards. B violated the Standards by failing to immediately report her concerns to regulators. C violated the Standards by failing to sufficiently dissociate from activities that she believes may be illegal.

Answer 35

C According to Standard I(A) - Knowledge of the Law, members and candidates "must not knowingly participate or assist in and must dissociate from any violation of such laws, rules, or regulations." In this example, Flores takes an appropriate first step by reporting her concerns to her firm's compliance department. This Standard does not require members and candidates to immediately report their concerns to regulators and/or legal authorities. However, by continuing to process these types of trades after hearing nothing further from her firm's compliance department for two months, Flores has violated this Standard. As noted in the curriculum, "inaction combined with continuing association with those in illegal or unethical conduct may be construed as participation or assistance in the illegal or unethical activity." Flores has taken some action but failed to sufficiently dissociate from the activities that she believes may be illegal.

Question 36

April McFarland is the Chief Compliance Officer for Xavier Investments. Recently, she implemented a firmwide policy allowing Xavier employees to accept meals and entertainment, provided it could not be considered lavish, and prohibiting them from accepting any gifts. The most accurate assessment of this policy is that it is: A identical to the recommendations for compliance with the Standards. B less strict that the recommendations for compliance with the Standards. C more strict that the recommendations for compliance with the Standards.

Answer 36

C According to the recommendations for compliance with Standard I(B) - Independence and Objectivity, members and candidates must "limit the acceptance of gratuities and/or gifts to token items." By prohibiting the acceptance of any gifts, the policy in this example is more strict. Note that this Standard does not prohibit the acceptance of "customary, ordinary business-related entertainment as long as its purpose is not to influence or reward the members or candidates."

Question 37

Samantha Bjork, CFA, has been offered an equity analyst position at a firm that has not adopted a formal code of ethics. Which of the following statements is most likely correct? Bjork: A must refuse to accept a position with any firm that has not adopted a code of ethics. B may accept the position and should encourage the firm to adopt a code of ethics if she does. C must refuse to accept a position with any firm that has not adopted the CFA Institute's Code of Ethics.

Answer 37

B According to the recommended procedures for compliance with Standard I(A) - Knowledge of the Law, members and candidates "should encourage their supervisors or managers to adopt a code of ethics." There is no prohibition against working for a firm that had not adopted either its own code of ethics or CFA Institute's.

Question 38

Alex Holland, CFA, has recently been hired as a quantitative analyst by Oakview Capital. Holland replaced Sheila Colter, CFA, who accepted a similar role with another firm. Holland is preparing a report that includes recommendations based on a model developed by Colter during her time at Oakview. What of the following statements is most accurate? Holland: A is not required to cite Colter in his report. B must cite Colter in his report unless he has her written permission not to do so. C must cite Colter in his report unless he has made material changes to the model.

Answer 38

A In general, Standard I(C) - Misrepresentation requires members and candidates to cite the sources of their work. However, as noted in the guidance for this Standard, "models developed while employed by a firm are the property of the firm. The firm retains the right to continue using the work completed after a member or candidate has left the organization. The firm may issue future reports without providing attribution to the prior analysts." In this example, Holland is not required to cite Colter in his report, but he must not remove her name from any reports that were published during her tenure at Oakview.

Question 39

In accordance with the recommended procedures for compliance with Standard I(B) - Independence and Objectivity, members and candidates should most likely encourage their firm to: A prohibit employee purchases of equities sold as part of an initial public offering (IPO). B prohibit employees from accepting gifts such as business entertainment from investment banking clients. C limit their employees to providing only factual information about companies when they are unwilling to publish adverse opinions.

Answer 39

C The purpose of Standard I(B) - Independence and Objectivity is to protect the integrity of members' and candidates' work and opinions from the effects of real or perceived conflicts of interest. In order to promote compliance with this Standard, members and candidates should encourage their firms to create restricted lists of firms about which they will not allow their employees to issue adverse opinions (perhaps out of concern that such opinions could damage an investment banking relationship). Firms should limit themselves and their employees to providing only factual information about companies on such a list.

Question 40

Trevor Hamlin, CFA, is an independent equity analyst who often provides ratings for companies that are not covered by analysts at major firms. Recently, Hamlin agreed to write a research report on Timtron Industries. The compensation package consisted of an upfront fee, plus the cost of his commercial flight and accommodation at a luxury hotel, where he stayed while visiting their facilities located in a major metropolitan area. In his report, Hamlin made the following disclosure: "As compensation for writing this issuer-paid research report, I received a flat fee of $50,000 that was paid before I began my research and was not contingent on my conclusions. Additionally, my travel costs were reimbursed." Has Hamlin most likely violated the Standards? A No B Yes, with respect to travel funding C Yes, by accepting payment from the firm he covered

Answer 40

B According to Standard I(B) - Independence and Objectivity, 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." In this example, Hamlin compromised his independence and objectivity by accepting the opportunity to stay in a luxury hotel, which would not be the only accommodation available in a major metropolitan area. In order to avoid violating this Standard, Hamlin should have insisted on regular accommodation. Hamlin did not violate this Standard by accepting an upfront payment from Timtron Industries in exchange for writing a report on the company. Analysts can maintain their objectivity while writing issuer-paid research by structuring their compensation in such a way that they have no incentive to be biased. In this example, Hamlin was paid prior to writing his report, with no possibility of earning more or less depending on what he published.

Question 41

Jill Gordon, CFA, manages several portfolios as a portfolio manager for Danilo Investments. One of her clients, who is pleased with her recent performance, offers her the use of a vacation condominium in Mexico for two weeks. Gordon immediately reports this offer to Danilo’s head of compliance, who approves of the arrangement. Has Gordon most likely violated the Standards? A No B Yes, by accepting a gift of greater than nominal value C Yes, by failing to disclose the arrangement to other clients and prospective clients

Answer 41

A Standard I(B) - Independence and Objectivity does not prohibit members and candidates from accepting gifts or other forms of compensation from clients, provided that they disclose such arrangements to their employer, who can then assess whether the member's or candidate's ability to remain independent and objective has been compromised. There is no requirement to disclose such arrangements to other clients or prospective clients. It is not improper to accept an additional benefit from a client, and there is no limitation on what may be accepted. Other clients need not be notified. The only requirement is that the employer grants permission, and it is the employer’s job to monitor the portfolio manager’s behavior to ensure that he or she is properly taking care of all clients.

Question 42

Sebastian Brady, CFA, is a respected equity analyst covering firms in the mining sector for Aculytics Research. CGI Capital, an investment firm, is hosting an upcoming conference and has invited Brady to be one of the speakers at this event. CGI offers to cover the travel and accommodation costs as well as conference registration fees for all invited speakers. Additionally, CGI is offering selected speakers, including Brady, the opportunity to attend a major sporting event being played in the same city a few hours after the conference ends, at no cost to those invited or their firms. Which of the following statements is most accurate? Brady: A must decline the entire offer. B may accept the entire offer as long as he fully discloses the terms to his employer. C may only accept the offer to cover his travel and accommodation expenses and conference registration fee.

Answer 42

C Standard I(B) - Independence and Objectivity requires members and candidates to "use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities." Acceptance of reimbursement for conference-related expenses is acceptable as long as independence and objectivity are not compromised. In this example, it is acceptable that Brady's conference-related expenses are paid by CGI. He is performing a service by giving the talk, and these expenses are not excessive and would not compromise his objectivity. However, the invitation to attend the major sporting event is lavish and must be declined.

Question 43

Ashley Powell, CFA, works as a manager of an international equity fund and has a personal portfolio that includes the stocks of several Chilean companies. Powell also has a strong Twitter following. After reading an article about a violent clash between striking Chilean miners and local police, Powell publishes a blog post that includes her opinion that "the current level of labor unrest could cause investors to pull their capital out of the Chilean market." Although the mining strike covered in the article she read has attracted attention from several international media outlets, Powell is aware that the number of days lost to labor disruptions has steadily declined in Chile over the past decade and she expects this trend to continue, but she does not include this information in her blog post. Over the subsequent month, the main Chilean equity benchmark falls 2.3%. Has Powell most likely violated the Standards? A No B Yes, with respect to misrepresentation C Yes, with respect to market manipulation

Answer 43

B Standard I(C) - Misrepresentation prohibits members and candidates from making "any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities." Misrepresentation includes creating a misleading impression by omitting facts and relevant inputs. In this example, Powell has violated this Standard by failing to refer to the general decline in days lost to labor disruptions in Chile over the past decade, as this omission may mislead her readers regarding the true state of affairs in that country - particularly at a time when a single incident is attracting a disproportionate share of the media's attention. Powell does not appear to have acted to distort prices with the intention of misleading investors, and it is therefore unlikely that she has violated Standard II(B) - Market Manipulation. There is no evidence that Powell has taken advantage of lower valuations to purchase shares either for herself or her fund. Indeed, it is not clear that the 2.3% decline in the benchmark index of Chilean equities represents a poor performance relative to how other asset classes with similar risk profiles performed over the same period.

Question 44

Joe Jacoby, CFA, is discussing with a colleague his understanding of what CFA Institute considers market manipulation, in regards to CFA Institute Standards. He describes two types of market manipulation: Type 1: “Transactions that artificially affect prices or volume to give an inaccurate impression of activity or price movement in a financial instrument” Type 2: “Securing a controlling position in a financial instrument with the intent to exploit and manipulate the price of a related derivative and/or underlying financial asset” Which of the following statements is most likely correct? A Type 1 is an example of information-based manipulation B Type 2 is an example of information-based manipulation C Type 1 and Type 2 are both examples of transaction-based manipulation

Answer 44

C According to the guidance for Standard II(B) - Market Manipulation, both types of transactions described here are examples of transaction-based manipulation. By contrast, information-based manipulation involves activities such as spreading false rumors in order to cause others to trade a certain way.

Question 45

Brad Scheig, CFA, an independent investment advisor, has several clients who hold shares in Energex Frontier (ENGX), an energy exploration company that frequently bids on natural gas leases in auctions. In an effort to boost performance for his client accounts, Scheig visits several online investor forums and anonymously posts comments implying that ENGX will soon be awarded several highly-coveted leases, although he knows from a private conversation with the company's CEO that the firm has already been informed that it will not be awarded these leases when the auction results are announced the next day. Before the end of the trading day, Scheig liquidates his clients' holdings of ENGX shares. Scheig has most likely violated the Standards with respect to: A market manipulation only. B material nonpublic information only. C market manipulation and material nonpublic information.

Answer 45

C Standard II(B) - Market Manipulation prohibits members and candidates from engaging in "practices that distort prices or artificially inflate trading volume with the intent to mislead investors." In this example, Scheig has violated this Standard by attempting to artificially inflate the price of ENGX shares. Scheig has also violated Standard II(A) - Material Nonpublic Information because he has come into possession of information that is both material and nonpublic information (that ENGX will not be awarded the leases) and acted on it by selling shares held in his clients' accounts.

Question 46

Peter Jayne, CFA, an equity analyst, is attending a meeting with the CFO of a large, publicly-traded company. The meeting is also being attended by other analysts and investors. The CFO is updating the group about her company's financials and refers to a plant closure that has yet to be publicly announced. Which of the following statements is most accurate? Jayne: A may act on this information. B must not trade or cause others to trade on this information. C may update his recommendation about the company and share this update with his clients.

Answer 46

B According to Standard (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 other to act on the information." In this example, the information revealed by the CFO is clearly material, but it is also nonpublic. Although it has been mentioned in a gathering of analysts and investors, this information is still considered nonpublic. As noted in the guidance for this Standard, "information that is made available to analysts remains nonpublic until it is made available to investors in general.

Question 47

Emily Champlain, CFA, is the CEO of an online securities exchange. In order to attract interest in new weather derivatives, Champlain issues a press release announcing an agreement that she brokered with a group of exchange members that will ensure a guaranteed minimum trading volume in these securities for the first three months that they are traded on the exchange. With interest in weather derivatives still below expectations after this initial period, Champlain convinces the group to extend their agreement for an additional three months, but no subsequent press release is issued. Has Champlain most likely violated the Standards? A No B Yes, by brokering an agreement to provide artificial liquidity C Yes, by failing to notify investors that the agreement was extended

Answer 47

C According to Standard II(B) - Market Manipulation, member and candidates must not "artificially inflate trading volume with the intent to mislead market participants." In this example, Champlain does not violate this Standard by brokering an agreement to ensure a minimum trading volume because this information has been disclosed to investors and there is therefore no intention to mislead. However, Champlain does violate this Standard when she extends the term of the agreement without announcing this. She has misled investors who are under the impression that the agreement expired after the initial three-month period.

Question 48

Sarah Allen, CFA, is a respected independent equity analyst with a well-deserved reputation as an expert on Peruvian investments. She has a large number of followers on Twitter. During a recent trip to Lima, Allen's mobile phone was stolen and, although she filed a report with the local police, no details of the incident were made public. During the course of filing her report, Allen spoke with a senior police officer, who informed her that he was recently ordered by the Ministry of Justice to terminate an investigation into allegations of corrupt government procurement practices. Upon returning to her hotel, Allen posted the following tweet: "Interesting trip to Lima. My next report will address the Peruvian government's efforts to maintain the rule of law." The next morning, Allen noticed that Peruvian stock prices had fallen sharply. That afternoon, Allen received an email from a client thanking her for having recently issued a "buy" recommendation on a stock, adding "I considered it to be too expensive when your recommendation came out last week, but I bought it this morning after seeing that it was trading at a much more attractive earnings multiple." One week later, Peruvian asset prices returned to their previous levels. Has Allen most likely violated the Standards? A No B Yes, with repect to market manipulation C Yes, with respect to material non-public information

Answer 48

A Allen has not violated the Standards. According to Standard II(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." In this example, Allen's tweet simply stated that she considered her Lima trip to be "interesting" and revealed the topic of her next research report. It is not reasonable to conclude that she wrote this with the intention of misleading market participants, and there is no evidence that her previously-issued "buy" recommendation was based on misleading or incorrect information. Indeed, it is not reasonable to conclude that any subsequent changes in market prices were attributable to her actions. According to Standard II(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." In this example, Allen's only action in the aftermath of receiving (unverified) material non-public information was to disclose that she would be writing her next research report on the topic of "the Peruvian government's efforts to maintain the rule of law," which is not material information.

Question 49

Christina Joseph, CFA, an analyst with a major securities dealer, has just received credible information from a private conversation about a regulatory decision that will have a significant impact on the share prices of mining companies when it is announced tomorrow. Joseph's firm acts as a market maker for the shares of several of the companies that are likely to be affected by this decision. In order to comply with the CFA Standards, Joseph should most likely ask her firm to: A limit its trading activities to the shares of companies on its restricted list. B suspend arbitrage trading in the shares of companies that may be affected until the information is made public. C cease all proprietary trading in the shares of companies that may be affected until the information is made public.

Answer 49

B Standard II(A) - Material Nonpublic Information requires members and candidates who acquire material nonpublic information to refrain from acting or causing others to act on this information. In practice, this means taking steps to prevent the appearance of market manipulation. In this example, Joseph should request that her firm place the companies that may be affected on a restricted list and suspend arbitrage trading in their shares until the information is made public. Choice A is incorrect because Joseph's firm should not limit its trading activities to the shares of companies on its restricted list. There is no reason to suspend or curtail trading in the shares of companies that do not appear on this list. Choice C is incorrect because it would be wrong for Joseph's firm to cease all proprietary trading because suspending its market making activities would send a clear signal that the firm possessed material nonpublic information.

Question 50

Charles Telford, CFA, is a research analyst for Edgemont Investments, and one of the companies he covers is Jackson Dynamics (JDN). Knowing that many of Edgemont's clients own JDN shares, Telford increases his projection of the company's next quarterly earnings in order to augment their returns. Neither Telford or any members of his immediate family owns any JDN shares and his compensation is unaffected by the returns on clients' portfolios. Has Telford most likely violated the Standards? A No, because he served the clients' interests B Yes, with respect to market manipulation only C Yes, with respect to market manipulation and independence and objectivity

Answer 50

B Telford acted with the intention of artificially manipulating the price of JDN shares, which is a violation of Standard II(B) - Market Manipulation. There is no indication that Telford violated Standard I(B) - Independence and Objectivity.

Question 51

Diane Golden, CFA, manages a pension fund that holds a large position in RBM Electronics common stock. Golden also holds RBM shares in her personal account. Golden, along with several analysts from her fund, participates in a conference call with RBM's CFO, who mentions that the firm will be switching microchip suppliers. Golden believes that this change, which had not been publicly disclosed before the call, will positively impact RBM's share price. Which of the following statements is most accurate? Golden: A may purchase RBM shares for the pension fund only. B must not purchase RBM shares for either her personal account or the pension fund. C may purchase RBM shares for her personal account after purchasing shares for the pension fund.

Answer 51

B Standard II(A) - Material Nonpublic Information prohibits members and candidates from acting on or causing others to act on material information that has not been publicly disclosed. In this example, Golden must not purchase RBM shares for either her personal account or on behalf of the pension fund until the information mentioned by the CFO on the conference call has been broadly distributed to the wider investment community. Golden should encourage such distribution.

Question 52

Richard Golic, CFA, is a research analyst covering firms in the consumer electronics sector for G&G Investments. Golic finds that he is able to provide his clients with more insightful analysis by consulting with a network of industry experts, who he compensates. His analysis of these consultations informs the research reports that he distributes to his clients. Has Golic most likely violated the Standards? A No B Yes, with respect to independence and objectivity C Yes, with respect to material nonpublic information

Answer 52

A Standard II(A) - Material Nonpublic Information allows members and candidates to maintain a network of experts and provide compensation for their work, provided they do not solicit, act on, or cause others to act on material nonpublic information. Compensating industry experts for their work does not constitute a violation of Standard I(B) - Independence and Objectivity.

Question 53

Phylicia Chan, CFA, lives and works in a country where laws and regulations governing the activities of financial professionals have historically been less stringent than the CFA Institute Code of Ethics and Standards of Professional Conduct (Code and Standards). In order to demonstrate its commitment to ethical practices, her company considered adopting a code of conduct based on the Code and Standards, but decided not to do so last month when the country's parliament passed several new laws, due to come into effect next year, that create even stricter requirements. Chan has been asked to make trades that she believes are intended to distort the price of securities. As she considers what to do, Chan should most likely adhere to: A the Code and Standards. B her country's current laws. C her country's recently-passed laws.

Answer 53

A Standard I(A) - Knowledge of the Law requires members and candidates to follow the highest requirements imposed by the various laws, rules, and regulations that govern their activities or the Code and Standards. In this example, Chan believes that she has been asked to act in a manner that would violate Standard II(B) - Market Manipulation and she must adhere to the Standards rather than her country's current laws, which are less stringent. Chan is not required to adhere to her country's new laws until they are formally enacted next year.

Question 54

A firm places the shares of one of its investment banking clients on a restricted list and is in possession of material nonpublic information about the issuer. Which of the following statements is most accurate? A The firm's employees may still execute clients' orders to trade the issuer's shares B The firm's employees must liquidate any beneficial ownership of the issuer's shares C The firm must not disseminate any information about the issuer until the material nonpublic information has been published

Answer 54

A The recommended procedures for compliance with Standard II(A) - Material Nonpublic Information include placing the shares of corporate clients on a restricted list when a firm is in possession of material nonpublic information. Firms should closely monitor and limit (if not prohibit) proprietary trading by the firm and personal trading by its employees of shares on the restricted list. However, employees can still execute unsolicited orders for clients wanting to trade shares issued by a firm on their firm's restricted list. Employees are not required to liquidate any beneficial ownership of the shares of firms on such a list. Additionally, firms may still disseminate information about companies on their restricted list, but they should limit this activity to providing factual and public information.

Question 55

Which of the following measures is most consistent with the recommendations for compliance with Standard II(A) - Material Nonpublic Information? A Increasing the number of employees with knowledge of which stocks are on the firm's restricted list B Establishing a firewall to ensure that information shared with buy-side analysts is not also shared with sell-side analysts C Designating a compliance officer for research analysts to consult about which information should be shared with members of the investment banking department

Answer 55

C According to the recommendations for compliance with Standard II(A) - Material Nonpublic Information, firewalls should be established to prevent the communication of material nonpublic information, for example, between research analysts and members of a firm's investment banking department. It is further recommended that a compliance officer be designated to "review and approve communications between departments." Firewalls should not be used to prevent information shared with buy-side analysts from also being shared with sell-side analysts. Rather, firms should adopt disclosure policies designed with the intention of sharing information fairly with all analysts. It is recommended that firms use a restricted list and place companies on it when they are in possession of material nonpublic information. However, broad distribution of this list is not desirable, as such a practice "often triggers the sort of trading the list was developed to avoid."

Question 56

Which of the following statements is most accurate? A CFA charterholder: A will always satisfy the Standards by adhering to all applicable laws. B must adhere to the Standards whenever there is no applicable law or regulation governing his or her professional activities. C may act on material nonpublic information in cases where applicable laws permit such activity and his or her employer has provided written consent.

Answer 56

B Standard I(A) - Knowledge of the Law requires members and candidates to "understand and comply with all applicable laws, rules, and regulations (including the Code and Standards) of any government, regulatory organization, licensing agency, or professional association governing their professional activities." In cases where the Standards and applicable laws impose or permit different actions, members and candidates "must comply with the more strict law, rule, or regulation." It is therefore possible to violate the Standard even when adhering to applicable laws if those laws impose a less strict requirement. Members and candidates must never act on material nonpublic information. Such action is explicitly prohibited by Standard II(A) - Material Nonpublic Information.

Question 57

Nicole Stream, CFA, works for an investment firm that claims to report in compliance with the Global Investment Performance Standards (GIPS). Stream handles the presentation of investment results as well as portfolio management duties. Immediately following distribution of the prior quarter’s composite results to all clients, Stream discovers there has been a typographical error that resulted in a material overstatement of the value of assets in one of the firm's composites. The erroneous data information distributed to clients before the error is discovered. Has Stream most likely violated the Standards? A No B Yes, with respect to misrepresentation C Yes, with respect to performance presentation

Answer 57

A According to Standard I(C) - Misrepresentation, members and candidates "must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities." According to Standard III(D) - Performance Presentation, members and candidates "must make reasonable efforts to ensure that it is fair, accurate, and complete." In this example, there was no intention to knowingly misrepresent the value of the composite's assets, and there is no evidence that Stream failed to make a reasonable effort to ensure that the information provided to clients was accurate. Errors can occur and this one was unintentional. As long as corrective action is taken, the Standards have not been violated.

Question 58

Camilla Carter, CFA, is an investment advisor with Sandhurst Wealth Management. At a weekend social gathering, Carter speaks with her friend Elma Harvey, who reveals that Greg Fallon, one of Carter's clients, and his wife had divorced. The following week, Fallon called Carter to order her to purchase a large number of shares for his account. The two had not previously discussed this potential trade. Rather than executing the order immediately, Carter tells Fallon that she has heard that he is getting a divorce and would like to meet with him to discuss possible changes to his investment objectives and constraints before making any more trades on his behalf. Has Carter most likely violated the Standards? A No B Yes, by failing to maintain client confidentiality C Yes, by failing to immediately execute her client's trade order

Answer 58

Standard III(C) - Suitability requires members and candidates to "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 any investment action." Members and candidates are additionally required to "reassess and update this information regularly." In this example, Carter does not violate this Standard by not immediately executing Fallon's unsolicited trade order because she has reasons to believe that his financial circumstances have changed significantly (or will change in the near future). It may be that Fallon's investment objectives and constraints will not be affected, or Carter may have been misinformed, but her decision to request a meeting before executing this trade is consistent with this Standard. Additionally, Carter has not violated Standard III(E) - Preservation of Confidentiality, as there is no evidence that she has disclosed any information communicated to her by her client.

Question 59

In which of the following circumstances would it be most appropriate to reveal confidential information about a client? A The information has already been disclosed in media reports B The information is not directly relevant to any financial transactions C The client has not consented to the disclosure of information, but such action is required by law

Answer 59

C According to Standard III(E) - Preservation of Confidentiality, members and candidates may, in fact must, disclose confidential client information in circumstances when such disclosure is required by law. This obligation would apply even if the client did not consent to this disclosure. The fact that information has been reported in the media or does not pertain directly to any financial transactions does not mitigate the obligation to keep it confidential.

Question 60

Which of the following statements is least likely to be consistent with the recommendations for compliance with Standard III(E) - Preservation of Confidentiality? Members and candidates: A are only required to maintain the confidentiality of information about current clients. B may share confidential information about a current client if this disclosure is authorized by the client. C should seek legal advice before disclosing any confidential information about a client who is suspected of violating the law.

Answer 60

A Standard III(E) - Preservation of Confidentiality prohibits members and candidates from disclosing confidential information about current, former, and prospective clients unless one or more of the following three conditions are met: The information relates to illegal acts committed by the client. Applicable laws require this information to be disclosed. The current, former, or prospective client has authorized the disclosure of this information.

Question 61

Kenneth Watson, CFA, a commodities analyst based in New York, is preparing to write a research report on Midwest Grains. He is preparing to travel to the company's headquarters in Chicago, Illinois, for interviews with executives. Watson accepts the company's offer to cover the costs of his hotel, which is not lavish, and meals while he is staying in Chicago. During his visit, Watson speaks with analysts from other firms that have also accepted the company's offer. Has Watson most likely violated the Standards? A No B Yes, with respect to independence and objectivity C Yes, with respect to both indepence and objectivity as well as fair dealing

Answer 61

B Standard I(B) - Independence and Objectivity prohibits members and candidates from accepting travel and accommodation from companies that they cover when it is possible to make alternative arrangements. In this example, there is no reason why Midwest Grains should pay for Watson's hotel or meals. Either he or his firm should cover these costs. Standard III(B) - Fair Dealing is not applicable in this example because Watson did not favor one client over another.

Question 62

Trevor Holland, CFA, has three clients who placed orders to purchase shares in an oversubscribed initial public offering (IPO). All three clients have similar investment objectives and constraints, and Holland considers the IPO shares to be suitable for the small-cap growth style that he applies when managing each of their accounts. On the day of the IPO, Holland is able to acquire 1,200 shares in a block trade and, since Client Z is his sister, he is considering three possible allocations, shown below along with each client's order size. Holland's stated policy establishes a minimum lot size of 100 shares when allocating a block trade. Client X Client Y Client Z Order size 10,000 5,000 3,000 Allocation A 700 300 200 Allocation B 400 400 400 Allocation C 800 400 0 A Allocation A B Allocation B C Allocation C

Answer 62

A As noted in the guidance for Standard III(B) - Fair Dealing, in cases when a member or candidate is allocating shares acquired in an oversubscribed IPO among accounts that include those belonging to their family members, “the family-member accounts should not be excluded from buying such shares" as long as those accounts are managed similarly to other clients' accounts. Allocation C, which provides no shares to Client Z, Holland's sister, would be inconsistent with this guidance. Allocation B, which provides an equal number of shares to each client, is also inconsistent with the recommendation that shares be allocated on a pro rata basis according to order size. Allocation A is most consistent with this Standard. If shares were allocated on a strict pro rata basis according to order size, the allocations would be calculated as follows: nClient X=10,00010,000+5,000+3,000×1,200=667 nClient Y=5,00010,000+5,000+3,000×1,200=337 nClient Z=3,00010,000+5,000+3,000×1,200=200 Rounding to the nearest round lot (100 shares), we get 700 shares for Client X, 300 shares for Client Y, and 200 shares for Client Z. Given Holland's policy of a 100-share minimum lot size, the appropriate allocation is 700 shares for Client X, 300 shares for Client Y, and 200 shares for his sister, Client Z.

Question 63

Heather McLean, CFA, lives and works as a portfolio manager in Bernugal, a small, island country that has become a popular tax haven after liberalizing its financial markets. Since these changes were enacted, Bernuguese law no longer imposes a fiduciary duty on any investment professionals. Which of the following statements is least accurate? McLean must adhere to: A Bernuguese laws. B the CFA Standards, which impose a fiduciary duty. C the CFA Standards by acting in the best interests of her clients.

Answer 63

B Standard III(A) - Loyalty, Prudence, and Care requires members and candidates to always acts in the best interests of clients. However, this Standard does not impose a fiduciary duty. Standard I(A) - Knowledge of the Law requires members and candidates to understand and comply with all applicable laws, rules, and regulations.

Question 64

Allison Ostrander, CFA, works for a major trust company and is proud of her investment performance over the past 8 years. Her managed portfolios have averaged a 12% annual return over this time period and she regularly informs her clients of the prior performance. She also shares this information with prospective clients, adding that they should expect an annual return of at least 8% in the future based on her performance history. Has Ostrander most likely violated the Standards? A No B Yes, with respect to performance presentation only C Yes, with respect to performance presentation and misrepresentation

Answer 64

C Standard III(D) Performance Presentation requires members and candidates to communicate performance information in a manner that is "fair, accurate, and complete." According to the guidance for this Standard, members and candidates "should not state or imply that a client will obtain or benefit from a rate of return that was generated in the past." Standard I(C) - Misrepresentation prohibits members and candidates from providing any assurances or implied guarantees regarding the future performance of volatile investments. In this example, Ostrander has violated both of the Standards discussed above.

Question 65

Lisa Binstein is giving a seminar instructing financial professionals on their obligations to clients. Binstein makes the following two statements: Statement 1: “When an investment manager is responsible for managing a pension plan, the actual clients are the beneficiaries of the pension plan rather than the plan sponsor.” Statement 2: “There may be circumstances in which an actual client may not exist.” Which of the following is the most accurate assessment of Binstein's statements? A Both Statement 1 and Statement 2 are consistent with the Standards B Both Statement 1 and Statement 2 are inconsistent with the Standards C Statement 1 is consistent with the Standards, and Statement 2 is inconsistent with the Standards

Answer 65

A In order to fulfill the obligation to clients created by Standard III(A) - Loyalty, Prudence, and Care, it is important to identify the actual client. Statement 1 is correct. When managing pension funds, the manager’s responsibility is to the ultimate beneficiaries, not the sponsor. Statement 2 is also correct. There are situations in which an actual client may not exist. For example, if a member or candidate is managing a fund or an index, he or she may not know the actual client or investor requirements or risk profiles. In this case, the investment mandate must be followed.

Question 66

Anita Vizquel, CFA, is a sole practitioner providing investment advisory services. Based on extensive and ongoing research, Vizquel believes that Viatex Brokerage provides the best execution at a competitive price and she uses the firm for the majority of her clients' trades. In recognition of her loyalty, Viatex provides Vizquel with soft dollar commissions in the form of research reports that Vizquel finds very relevant for some, but not all, of her clients. Has Vizquel violated the CFA Standards? A No B Yes, by using Viatex for the majority of her client's trades C Yes, by accepting research reports that do not benefit all of her clients

Answer 66

A According to Standard III(A) - Loyalty, Prudence, and Care, Vizquel is allowed to accept soft dollar commissions in the form of research if the brokerage provides high quality execution at a reasonable price. This is true even if the research does not directly benefit the client for whom trading is done, as in this example. It is reasonable to conclude that Vizquel would have chosen Viatex to process trades regardless of whether she had a referral fee arrangement with the firm. Similarly, Vizquel does not violate this Standard by using Viatex for the majority of her client's trade. As noted above, Vizquel is confident, based on her extensive and ongoing research, that Viatex provides the best execution at a competitive price.

Question 67

Bruce Adams, CFA, has just finished meeting with his client Martin Stanford, a 42-year-old executive with a below-average willingness to take investment risk despite having a high level of wealth and a long time horizon. Adams arranges a meeting with his supervisor, Lynn Lavictoire, during which they discuss Stanford's file in detail. Later that evening, Adams calls his father, a retired investment advisor, to ask for advice on helping clients become more aware of their ability to take additional investment risk. Has Adams violated the CFA Standards? A No B Yes, by speaking with his father C Yes, by speaking with Lavictoire

Answer 67

A Standard III(E) - Preservation of Confidentiality requires members and candidates to keep client information confidential. However, Adams' discussion of the details of Stanford's case with his supervisor is not a violation of this Standard. In the conversation with his father, Adams asks for advice on a general topic, and there is no evidence to suggest that confidential information about Stanford, or any other client, was disclosed.

Question 68

Gary Elkdale, CFA, advises individual investors for Redemption Wealth Management. Last year, one of his clients, Sharon Hines, filed a written complaint with Redemption accusing Elkdale of breaching the terms of her investment policy statement (IPS) by purchasing shares of a technology company that subsequently filed for bankruptcy. After the complaint was filed, Elkdale vigorously defended his decision to his firm's compliance department, providing documentation supporting his claim that this transaction offered an opportunity for diversification and was consistent with the overall portfolio strategy agreed to by Hines. Because he was confident that the complaint would not be upheld, Elkdale claimed that he was not the subject of a written complaint when completing his annual Professional Conduct Statement. Later, Redemption's compliance department cleared Elkdale of any wrongdoing. Has Elkdale most likely violated the Standards? A No B Yes, with respect to suitability C Yes, with respect to misrepresentation

Answer 68

C By falsely reporting that he was not the subject of a written complaint in his Professional Conduct Statement prior to the matter being resolved, Elkdale violated Standard I(C) - Misrepresentation. He should not assume there was no wrongdoing before it was officially declared by the compliance department. There is no indication that Elkdale violated Standard III(C) - Suitability, which requires members and candidates to "judge the suitability of investments in the context of the client's total portfolio."

Question 69

Which of the following statements is most accurate? Standard III(D) - Performance Presentation: A discourages the presentation of single representative accounts. B requires the same performance information to be presented to all audiences. C prohibits statements regarding the expected future performance of risky securities.

Answer 69

A According to the recommendations for compliance with Standard III(D) - Performance Presentation, members and candidates should present the performance of weighted average composites of portfolios managed according to similar mandates rather than the performance of a single representative account. This Standard does not require the same performance information to be presented to all audiences. Members and candidates are allowed and encouraged to account for each audience's level of knowledge and sophistication. Although members and candidates must not make misleading statements about reasonably expected future returns, it is not accurate to say that this Standard prohibits all statements about the expected future performance of risky securities. According to Standard III(D) - Performance Presentation, "when communicating investment performance information, Members and Candidates must make reasonable efforts to ensure that it is fair, accurate, and complete." The Standard requires full disclosure of performance data to clients as well as prospective clients. When communicating investment performance information, members and candidates must ensure that not only is it fair and accurate but also complete.

Question 70

Jeri Hosmer, CFA, has been researching Digger Energy (DGE) and has a client for whom the company's stock is a suitable investment. She establishes her client's position by placing a series of smaller orders over the course of a two-week period. Although her intention was to minimize the price impact associated with acquiring a relatively large number of thinly-traded shares, DGE's stock price increased significantly over that period. Has Hosmer most likely violated the Standards? A No B Yes, with respect to market manipulation C Yes, with respect to loyalty, prudence, and care

Answer 70

A As noted in the guidance for Standard II(B) - Market Manipulation, it is "not intended to preclude transaction undertaken on legitimate trading strategies." The price of thinly-traded shares can be significantly affected by large trades and Hosmer does not violate this Standard by structuring the purchase as a series of smaller trades. Although her client may have ended up paying a higher price on a volume-weighted average basis than she would have preferred, there is no evidence that Hosmer has violated Standard III(A) - Loyalty, Prudence, and Care.

Question 71

Ann Vendig, CFA, manages investments for a family partnership. Vendig has discovered evidence of transactions diverting the partnership's assets into the personal account of one of its members and suspects that this activity violates applicable laws. As a first step, she consults with her firm's compliance department. Has Vendig most likely complied with the Standards? A Yes B No, because she did not report her suspicions to the relevant legal authorities C No, because she did not report the activity to members of the partnership who have been affected by these transactions

Answer 71

A In this circumstance, per Standard III(E) - Preservation of Confidentiality, the first step is to consult the compliance department and/or seek independent legal advice regarding how to proceed. There may be applicable laws or regulations which would ultimately require Vendig to report her suspicions to the relevant legal authorities, but she would not violate this Standard by consulting with her firm's compliance department before deciding on an appropriate next step.

Question 72

Irma Ehrlich, CFA, is an advisor who works with individual investors. Recently, three of Ehrlich's clients submitted buy orders for shares of Brightwell Manufacturing (BWM). Ehrlich was able to complete a block purchase order of BWM shares, which she allocated among the three clients on a pro rata basis according to order size. Each client was assigned a different execution price based on the time their order was received. Has Ehrlich most likely violated the Standards? A No B Yes, with her method of allocating shares C Yes, with her method of assigning execution prices

Answer 72

C Standard III(B) - Fair Dealing requires members and candidates to "deal fairly with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities." Ehrlich violates this Standard by assigning different execution prices for shares acquired in a block trade. As noted in the recommended procedures for compliance, all clients participating in a block trade should be assigned the same price and charged the same commission. However, Ehrlich's decision to execute a block trade and assign the shares on a pro rata basis according to order size is consistent with this Standard.

Question 73

Matthew Brolin, CFA, is a portfolio manager with Bluenose Investments and has recently made a significant purchase of shares in Invotech Corp. In a television interview this morning, Brolin claimed that he had a private conversation with Invotech's CEO, who told him that they will be announcing a major expansion next week. Invotech's share price increased by 14% over the course of the trading day. In reality, Brolin has never spoken with Invotech's CEO or any of the company's senior executives. Brolin has most likely violated the CFA Standards with respect to: A market manipulation. B preservation of confidentiality. C material nonpublic information.

Answer 73

A According to Standard II(B) - Market Manipulation, member and candidates must not "engage in practices that distort prices… with the intent to mislead market participants." By fabricating a positive rumor about a company in which he had just made a significant investment, Brolin has committed information-based manipulation. Brolin has not violated Standard III(E) - Client Confidentiality because Invotech's CEO is not a client and this "information" has no basis in reality. It is unlikely that Brolin has violated Standard II(A) - Material Nonpublic Information, which applies to factual information.

Question 74

William Thorpe, CFA, is a portfolio manager who serves both individual and institutional clients. Due to a heavy workload, Thorpe is struggling to keep up with his clients. One task which takes up a large amount of Thorpe's time is proxy voting. Which of the following statements is least likely correct, as it relates to Thorpe's responsibility regarding voting of proxies? Thorpe: A must vote proxies in an informed and responsible manner. B is required to vote proxies only when specifically instructed to do so by his clients. C may choose not to vote proxies based on an analysis of the net benefit such action would provide the client.

Answer 74

B According to Standard III(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." Proxies have economic value and Thorpe must vote them responsibly on behalf of his clients, even when he is not specifically instructed to do so. While this obligation applies to votes on non-routine matters, members and candidates are not required to vote proxies in cases when a cost-benefit analysis shows that the client would not benefit.

Question 75

Victor Costa, CFA, managing director of Venturion Investments, knows that his firm has been struggling for the last two years during an economic downturn. Costa was given a report to market the firm, which showed the firm to have the best returns in the firm's history. While speaking with potential new clients, Costa hands out the report to attempt to bring new clients into the firm. Has Costa most likely violated the Standards? A Yes B No, because he did not create the research report C No, because he did not know the actual return figures for the firm

Answer 75

A While Costa may not have explicitly known the report was misleading or false, given the economic condition and general knowledge he had, he should have known there was something wrong or biased with the performance report. By handing out the report, he violates Standard III(D) - Performance Presentation and Standard I(C) - Misrepresentation.

Question 76

Last year, Tom Ennis, CFA, set up an irrevocable trust for his long-time client, Sam Bennett, to transfer his company's shares to his son Taylor, 23, in a tax-efficient manner. The terms of the trust specify that Taylor Bennett cannot access any of the assets held in trust while his father is alive, but the assets are no longer legally part of Sam Bennett's estate. As trustee, Ennis has sole authority to exercise proxy votes for the shares held in trust until Sam Bennett's death. Recently, Sam Bennett asked Ennis to vote with management on an important matter to be decided at his company's shareholder meeting next week. The next day, Taylor Bennett asks Ennis to vote the proxies against management on this matter. In order to comply with the CFA Standards, Ennis should most likely: A abstain from voting. B vote with management. C vote against management.

Answer 76

C Standard III(A) - Loyalty, Prudence, and Care requires members and candidates to act in the best interest of their client. In this example, when exercising the proxies, Ennis' client is Taylor Bennett because he is the ultimate beneficiary of the assets being held in trust. Because the trust is irrevocable, Sam Bennett has given up control over them. Ennis must therefore vote against management's proposal in accordance with Taylor Bennett's wishes. Ennis would also be violating this Standard by abstaining from voting on an important matter, particularly after receiving instructions on how to vote from his client.

Question 77

Jack Fahey, CFA, is a portfolio manager of Pacific Sunrise Investments, which does not claim compliance with the Global Investment Performance Standards (GIPS). When presenting the historical performance of his small-cap growth composite, Fahey notes that only fee-paying accounts are included, but he does not mention that both discretionary and non-discretionary accounts are included. Has Fahey most likely violated the Standards? A Yes, with respect to performance presentation only B Yes, with respect to both performance presentation and misrepresenation C No, because Pacific Sunrise Investments does not claim compliance with GIPS

Answer 77

B According to Standard I(C) - Misrepresentation, members and candidates "must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities." Standard III(D) - Performance Presentation requires members and candidates to make reasonable efforts to present performance information in a manner that is "fair, accurate, and complete." In this example, Fahey violates both of these Standards by failing to note that the small-cap growth composite includes both discretionary and non-discretionary accounts, as the composite's performance may misrepresent his abilities as a portfolio manager. The compliance status of Fahey's firm with GIPS is irrelevant to whether he has personally violated these Standards.

Question 78

Teddy Larson, CFA, a portfolio manager with Pedigo Investments, exercises proxies on behalf of his clients most of the time, but not in every case. When Larson does exercise these proxies, he often does so in accordance with management's recommendations. Has Larson most likely violated the Standards? A No B Yes, by failing to vote all proxies C Yes, by often voting proxies in accordance with management's recommendations

Answer 78

A According to the guidance for Standard III(A) - Loyalty, Prudence, and Care, members and candidates are required to exercise proxies on behalf of clients "in an informed and responsible manner." Voting in accordance with management does not necessarily constitute a violation of this Standard, as long as care was taken to ensure that the vote was cast in the interest of the client. This Standard does not require proxies to be voted in cases when a cost-benefit analysis shows that the client would not benefit from such action.

Question 79

Chris Collins, CFA is responsible for disseminating his firm's latest investment recommendations to clients. The Standards are least likely to require Collins to: A ensure that all clients receive all recommendations at the same time. B distribute any updates to his firm's guidelines for pre-dissemination policies. C encourage his firm to shorten the time frame between investment decision and dissemination.

Answer 79

A The relevant Standard is Standard III(B) - Fair Dealing, which states that 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." While it is important for clients to receive recommendations in a timely fashion, remember that "fair" is not the same as "equal." All customers do not need to receive all recommendations. Instead, Collins can focus on only the recommendations for securities that the clients have expressed a prior interest in or have been deemed appropriate given their objectives and constraints. For example, not all clients have an interest in participating in IPOs. By shortening the time frame between investment decision and dissemination, Collins can reduce the risk of information leak to clients at different times.

Question 80

Gerald Johnson, CFA, manages a hedge fund with a mandate to invest in thinly-traded stocks issued by consumer technology firms. Over the course of three months, Johnson's fund acquires twenty percent of the shares issued by Botchford Electronics (BTC) with a series of small orders intended to minimize the volume-weighted average purchase price. Johnson continues to follow BTC closely and is sufficiently impressed with its growth prospects that he authorizes his fund to purchase some of the company's debt. Has Johnson most likely violated the Standards? A No B Yes, with respect to suitability C Yes, with respect to market manipulation.

Answer 80

B Johnson has not violated Standard II(B) - Market Manipulation, which allows for the use of legitimate strategies designed to minimize the price impact associated with trading relatively illiquid securities. There is no indication that Johnson has acted with the intention of misleading market participants. However, Johnson has violated Standard III(C) - Suitability by authorizing his fund to purchase BTC's debt. This transaction is inconsistent with the fund's mandate of investing in consumer technology stocks.

Question 81

Bradley Edwards, CFA, recently left Redwood Associates, where he was part of a team of managers, to start his own fund. With written permission from Redwood, he distributes marketing materials for his new firm that reference the performance of the fund he worked on for several years at Redwood in order to highlight his investment abilities. Has Edwards most likely violated the Standards? A No B Yes, by including results that he achieved while at his former employer C Yes, by representing that this was his performance, with no mention of the other managers

Answer 81

C Standard III(D) - Performance Presentation requires members and candidates to "make reasonable efforts" to ensure that performance information is communicated in a "fair, accurate, and complete" manner. In this example, there is selective disclosure. It is acceptable to reference results achieved at a prior firm, but it must have been fully disclosed that the fund was managed by a team.

Question 82

Signy Falco, CFA, is an investment advisor with Hollyoak Associates, where she oversees the discretionary accounts of individual investors. One of Falco's long-time clients, Raymond Sun, has ordered her to execute an order to purchase shares of Boxtop Technologies (BXT). Upon receiving this order, Falco reviews Sun's investment policy statement (IPS), which the two updated three months ago during their annual review meeting. Falco is concerned because the transaction that Sun has ordered would cause his portfolio's allocation to equities to be both significantly different from its current level and inconsistent with his IPS. In order to adhere to the Standards, Falco is least likely to: A work with Sun to update his IPS. B comply with Sun's order to execute the trade immediately. C recommend that Sun convert his account status to non-discretionary.

Answer 82

B Standard III(C) - Suitability requires members and candidates to "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." In this example, Falco has received an order for a trade that she knows to be inconsistent with her client's IPS. Immediately executing this order without further discussing its potential impact with her client would be the course of action that is least consistent with this Standard. As noted in the guidance for this Standard, if Sun refuses to amend his IPS and/or change his account's status to non-discretionary, Falco should consider whether it is proper for her to continue in an advisory role with this client.

Question 83

Harold Kaplan, CFA, manages three equity mutual funds, all which have similar mandates. Kaplan holds a large position in A&B Energy (ABE) in one of his funds, but he is concerned that this fund is overexposed to fluctuations in the price of this stock. In particular, Kaplan notes that returns on ABE have been low relative to stocks issued by its competitors during a period of rising energy prices. In order to support the price of ABE shares, Kaplan trades these stocks between his funds. The strategy turns out to be successful as the higher price of ABE shares more than offsets the commissions incurred to trade between funds. Has Kaplan most likely violated the Standards? A No B Yes, with respect to suitability C Yes, with respect to market manipulation

Answer 83

C Kaplan has violated Standard II(B) - Market Manipulation by executing trades intended to provide artificial support to the price of ABE shares. There is no indication that Kaplan has violated Standard III(C) - Suitability as all three of the funds he manages have similar mandates.

Question 84

Last year, Brock Martin, CFA, moved to ADL Investments after 12 years as a portfolio manager with Ursus Capital. Martin also arranged for ADL to hire Michelle Topp and Christopher Aldridge, his longtime associates at Ursus with whom he continues to work closely. Several of Martin's current clients at ADL were with him at Ursus and moved their accounts after he joined his new firm. In order to present ten years of historical returns in a document prepared by ADL's marketing department, Martin includes the performance of his composites and their relevant benchmarks for the past year at ADL as well as the previous nine years at Ursus. The document, which is distributed to prospective clients, does not disclose that this performance record, which is accurately presented, was achieved at two separate firms. Has Martin most likely violated the Standards? A Yes B No, because he presented accurate information and included at least 10 years of returns C No, because his methodology for making investment decisions and key personnel have not changed

Answer 84

A Standard III(D) - Performance Presentation requires "fair, accurate, and complete" presentation of performance information. Martin violates this Standard by failing to disclose that he accumulated his performance record while at two different firms. The fact that he continues to work with Topp and Aldridge does not eliminate this disclosure requirement.

Question 85

Bruce Bollinger, CFA, a portfolio manager, is meeting with a client, Rebecca Jansen, for the first time. During the course of the meeting, Bollinger describes several possible investment strategies and recommends a stock that has a low correlation with the asset classes in the partial list of assets that Jansen has provided. Has Bollinger most likely violated the Standards? A No B Yes, with respect to suitability C Yes, with respect to suitability and loyalty, prudence, and care

Answer 85

C Standard III(C) - Suitability requires members and candidates who are in an advisory role to 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." This Standard further requires members and candidates to "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." In this example, Bollinger has recommended a specific stock during his initial meeting with Jansen - before he could possibly have developed an investment policy statement or acquired a sufficient understanding of her objectives and constraints. Bollinger has also violated Standard III(A) - Loyalty, Prudence, and Care by failing to consider Jansen's entire portfolio before making an investment recommendation. He has only seen the partial list of assets that she has provided in this initial meeting.

Question 86

Connor Wilson, CFA, is the sole proprietor of Blue Mountain Investments. Wilson developed a stock-picking model, which he has backtested using actual market data dating back ten years. Blue Mountain advertises these as actual returns to prospective clients in order to raise capital for a new closed-end fund that Wilson will manage according to his model's recommendations. The nature of the return data is not disclosed to investors. Has Wilson most likely violated the Standards? A No B Yes, with respect to performance presentation only C Yes, with respect to both performance presentation and misrepresentation

Answer 86

C The recommended procedures for compliance with Standard III(D) - Performance Presentation include disclosure of when simulated results have been used. As noted in the guidance for Standard I(C) - Misrepresentation, "the outcomes of models shall not be presented as fact." In this example, Wilson violates both of these Standards by failing to disclose that the returns presented to prospective clients are simulated.

Question 87

Robert Choi, CFA, works for Challenger Asset Management, which offers its clients ten emerging market equity funds. All ten funds had negative five-year returns, although each has outperformed its benchmark. Choi approves an advertisement that includes a statement that the company's funds have provided investors with "positive excess returns" for investors seeking exposure to these markets. Each fund's five-year returns are presented alongside the returns of their relevant benchmark and a website where potential clients can obtain more detailed information is listed. Has Choi most likely violated the Standards? A No B Yes, by failing to provide sufficient information C Yes, by misleading potential clients with the implication that returns have been positive

Answer 87

A According to Standard III(D) - Performance Presentation, members and candidates must ensure that communication of performance is "fair, accurate, and complete." In this example, the claim of positive excess returns is accurate because, although the funds have posted negative returns, each fund has outperformed its relevant benchmark. The clients are also given a presentation of the five-year returns with the benchmark returns, eliminating any potential misinterpretation. When the format of communications does not allow for a detailed presentation, it is recommended that a reference to the limited nature of the information be made, and more detailed information must be provided upon request.

Question 88

Laurent Kayombo, CFA, manages the International Advanced Technology Fund (IATF), which invests in the stocks of companies that produce leading-edge consumer technology products. Recently, Carolyn Jefferson, Chief Investment Officer of the Thornton Automotive Pension Plan (TAPP) allocated EUR 15 million to the IATF after an extensive review process determined that this decision is consistent with the TAPP's investment objectives and constraints. Which of the following statements is most accurate? Kayomobo must manage these funds in accordance with: A the IATF's mandate. B the interests of TAPP's sponsor. C the interests of TAPP's beneficiaries.

Answer 88

A As noted in the guidance for Standard III(C) - Suitability, members and candidates who manage money for a pooled fund must make investment decisions "in a manner consistent with the stated mandate." In this example, Jefferson is required to act in accordance with the interests of TAPP's beneficiaries as she has been entrusted to manage their assets. However, Kayombo is not responsible for considering the interests of TAPP's beneficiaries or the interests of any other investors. Rather, he is required to adhere to his fund's mandate.

Question 89

Danielle Fisher, CFA, manages funds for individual investors. Whenever she learns that a security's rating has been upgraded or downgraded, she emails this information to all of her clients for whom it is relevant and then makes sure to inform all clients of these changes before processing orders to trade in the affected securities. Fisher ensures that she has individual meetings with each of her clients at least once annually, during which they discuss the performance statements that she provides semi-annually, as well as any new circumstances that would require updates to his or her investment policy statement. Has Fisher most likely failed to meet the recommended procedures for compliance with the Standards? A No B Yes, with respect to fair dealing C Yes, with respect to loyalty, prudence, and care

Answer 89

C Standard III(A) - Loyalty, Prudence, and Care requires members and candidates who manage funds for clients to provide performance statements at least quarterly. In this example, Fisher only provides performance statements on a semi-annual basis. Fisher's actions with respect to communicating rating changes before processing orders are consistent with Standard III(B) - Fair Dealing.

Question 90

Which of the following best describes a recommendation for compliance with Standard III(B) - Fair Dealing? A Notify all parties in the firm as well as all clients that a recommendation will be updated B Limit the number of people within the firm with access to its guidelines for pre-dissemination policies C Shorten the time frame between when a recommendation is decided and when it is disseminated to clients

Answer 90

C Standard III(B) - Fair Dealing requires members and candidates to "deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities." The recommendations for compliance with this Standard include shortening the time frame between making recommendation decisions and disseminating those recommendations to clients. It is not necessary to notify all clients about a recommendation update. The updates can be selectively given to clients based on their unique needs, investment criteria, and investment objectives. The guidelines for pre-dissemination behavior should be published and made widely available. However, the number of people who know that a recommendation is going to be distributed should be minimized.

Question 91

Walter Simon, CFA, manages an equity fund. One of the investors in Simon's fund is the Prince Family Trust, which is administered by its trustee, David Bollinger. The Trust’s beneficiary is Debbie Prince, who requires long-term care for a chronic illness. The Trust generates income to help pay for Debbie’s care, and any additional costs are covered by her sister and legal guardian, Ann Prince. Simon's duty of loyalty is most likely owed to: A Ann Prince. B Debbie Prince. C his fund's mandate.

Answer 91

C According to Standard III(A) - Loyalty, Prudence, and Care, fund managers must remain faithful to their fund's statement mandate rather than acting in the interests of one or more particular investors. As a trustee, Bollinger owes his duty of loyalty to Debbie Prince, who is the ultimate beneficiary.

Question 92

Judy Knight, CFA, a portfolio manager with RNW Capital, is advising Ronald Hampton, a client who is considering investing in mortgage-backed securities. Knight believes that Carter Finley, a colleague at RNW, is qualified to advise Hampton on the risks and limitations of these securities and advises Hampton that her firm can help him with this investment decision. After later learning that Finley does not have relevant expertise in these securities, Knight does not discuss the matter further with Hampton. Has Knight most likely violated the Standards? A Yes, with respect to misrepresentation B Yes, with respect to misrepresentation and suitability C No, because she did not knowingly mislead Hampton

Answer 92

A Knight does not initially violate Standard I(C) - Misrepresentation as she does not knowingly misrepresent her firm's capabilities. However, she does violate this Standard by failing to inform Hampton after learning that Finley does not have the expertise that she originally believed he did. In order to avoid violating this Standard, Knight should have corrected the representation of her firm's capabilities that she made to Hampton. There is no indication that Knight has violated Standard III(C) - Suitability. These securities may fit within Hampton's investment objectives and constraints as well as his existing portfolio.

Question 93

Paul Sparfeld, CFA, is in charge of presenting performance results for his investment firm, a sole proprietorship with three employees. Which of the following performance presentation policies adopted by Sparfeld's firm is least likely consistent with the recommendations for compliance with the Standards? A Applying the GIPS standards. B Presenting composite returns that include both actual and simulated data C Removing the contribution of terminated portfolios when presenting historical returns

Answer 93

C According to the recommendations for compliance with Standard III(D) - Performance Presentation, terminated accounts should be included when calculating historical performance. The point at which accounts were terminated should be clearly indicated. Removing the contribution of such accounts misrepresents historical performance. Compliance with GIPS standards is the best method to adhere to this Standard. It is also not a violation of this Standard to present returns that include both actual and simulated data, provided simulated returns are clearly identified as such.

Question 94

Nicholas Boudreaux, CFA, manager of a high yield bond fund, is giving a presentation at an investment conference. In order to finish within his allocated time, Boudreaux includes only a brief summary of his fund's returns over the past five years alongside the performance of an appropriate benchmark over the same period. Later, in response to an audience member's question, Boudreaux notes that more detailed information on his fund's performance is available to all clients upon request. He encourages prospective clients who would like more information to become clients. Has Boudreaux most likely violated the Standards? A No B Yes, with respect to performance presentation only C Yes, with respect to both performance presentation and misrepresentation

Answer 94

B Boudreaux violates Standard III(D) - Performance Presentation by making detailed information available upon request only to clients but not prospective clients. Based on this Standard, supporting details should be made available to both clients and prospective clients. Boudreaux has complied with Standard I(C) - Misrepresentation by including an appropriate benchmark by which his fund's performance may be assessed. There is no indication that he has knowingly presented inaccurate or misleading information.

Question 95

Juan Ortiz, CFA, an independent equity analyst, has recently decided to send his research reports to clients via email rather than mailing hard copies. After he has sent his reports, he calls a select group of clients to discuss his recommendations in further detail. This service is available to all clients willing to pay for the higher level of service that Ortiz describes on his website. Has Ortiz most likely violated the Standards? A No B Yes, with respect to fair dealing C Yes, with respect to loyalty, prudence, and care

Answer 95

A Standard III(B) - Fair Dealing does not prohibit the provision of additional services to clients who pay for it, provided that all clients are given the opportunity to do so and its availability is disclosed. There is no indication that Ortiz has violated Standard III(A) - Loyalty, Prudence, and Care.

Question 96

Mainthwaite Investments has adopted a trade allocation policy that allows its employees to make purchases for their personal accounts from undersubscribed bond issues if prior approval has been granted by the firm. In cases when an issue is oversubscribed, employees are prohibited from purchasing for their personal accounts and a block order that is filled for the firm must be distributed to clients on a pro rata basis, with deviations allowed to account for minimum lot sizes. Is this policy, which is disclosed to all clients and prospective clients, most likely consistent with the Standards? A Yes B No, because Mainthwaite should allocate block orders on a strictly pro rata basis C No, because Mainthwaite should not allow its employees to personally benefit from a new bond issue

Answer 96

A Standard III(B) - Fair Dealing requires members and candidates to "deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities." Although the guidance for this Standard recognizes pro rata distribution as a fair and objective method of allocating securities offered in oversubscribed issues, it allows for deviations in order to avoid going below a specified minimum lot size. This Standard does not strictly prohibit employees from making purchases from undersubscribed bond issues or initial public offerings (IPOs) -- only in cases when these are oversubscribed.

Question 97

Fareed Khan, CFA, provides wealth management advice to high net worth individuals. Khan's policy is to meet with each of his clients every six months to review and update their investment policy statement (IPS). Davina George, one of Khan's clients, recently informed him that she would be making significant withdrawals from her portfolio to cover unexpected costs associated with caring for her elderly mother. Although Khan met with George for their regularly scheduled review session six weeks ago, he offers to meet with her again the following week to discuss potential changes to her IPS. George accepts his offer. Has Khan most likely violated the Standards? A No B Yes, with respect to suitability C Yes, with respect to fair dealing

Answer 97

A Khan has not violated the Standards. His policy of meeting with clients every six months to review and update their IPS is consistent with the recommendations for compliance with Standard III(C) - Suitability. Khan further complies with this Standard by meeting with George ahead of schedule after learning about a potentially significant change in her financial circumstances. Khan does not violate Standard III(B) - Fair Dealing by arranging another meeting with George. There is no indication that this has disadvantaged his other clients.

Question 98

Erica Zhang, CFA, an analyst with Clear Vision Financial, sends her latest report on Florex Pharmaceuticals (FLP) to all of her firm's clients. Upon receiving Zhang's report, which includes a "buy" recommendation, Helen Teasdale calls Flynn Edmond, CFA, her investment advisor at Clear Vison, to order the purchase of FLP shares. Edmond executes the order immediately in order to allow Teasdale the opportunity to act on this information and later calls her to schedule a meeting to update her investment policy statement (IPS), which currently prohibits holding high beta stocks such as FLP. Which of the following statements is most accurate? A Only Zhang has violated the Standards B Only Edmond has violated the Standards C Both Edmond and Zhang have violated the Standards

Answer 98

B In this example, only Edmond has violated Standard III(C) - Suitability. As noted in the guidance for this Standard, "the responsibility for determining the suitability of an investment for clients can be conferred only on members and candidates who have an advisory relationship with clients." Edmond is Teasdale's advisor and is required to ensure that investment decisions are consistent with the terms of her IPS. Trading first and then changing her IPS later does not retroactively permit this transaction. As noted in the guidance for this Standard, when a client makes an unsolicited trade order that the member or candidate knows is unsuitable, "the member or candidate should refrain from making the trade until he or she discusses the concerns with the client." However, as a sell-side analyst, Zhang does not have the opportunity to determine the suitability of this investment for specific clients such as Teasdale.

Question 99

Penny Schmidt, CFA, works with high net worth clients at an investment firm. Schmidt regularly issues her investment recommendations. However, these recommendations are only provided to clients for whom the recommendation is deemed suitable or clients who have shown an interest in similar investments. In addition, she chooses to discuss recommendations in more detail with a select group of clients who pay a higher fee for this option. The fee schedule is disclosed to all clients and prospective clients. Has Schmidt most likely violated the Standards? A No B Yes, by failing to distribute her recommendations to all her clients simultaneously C Yes, by discussing the recommendations in greater detail with a select group of clients

Answer 99

A Standard III(B) - Fair Dealing requires members and candidates to "deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities." However, dealing fairly and objectively does not require equal treatment. Members and candidates are allowed to choose which clients receive recommendations, as long as the selection criteria are fair and objective rather than designed to benefit preferred clients. Additional levels of service for higher fees are consistent with this Standard as long as the fee schedule is disclosed to all clients and prospective clients.

Question 100

Clayton Hamner, CFA, an independent equity analyst, produces research reports and recommendations for his 25 high net worth clients, all of whom have been informed of the different levels of services available to them. Recently, Hamner distributed his latest report on Acton Pharmaceuticals (APH) in an email that was sent simultaneously to the 18 clients who either currently hold APH shares or for whom this investment is suitable. After sending that email, Hamner followed up with seven of those clients, all of whom pay for premium service, to discuss his report in greater detail. Of those calls, Hamner's first is to his sister, whose account generates a significant share of his income. Has Hamner most likely violated the Standards? A No B Yes, by not disseminating his report to all clients C Yes, by calling his sister before calling other clients

Answer 100

A Standard III(B) - Fair Dealing requires members and candidates to "deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities." Fair treatment does not mean equal treatment, and this Standard does allow for the provision of different levels of service provided that this information is disclosed, as it is in this example. Hamner is permitted to follow up with certain clients after issuing his recommendation, and he is not required to follow up with all of his clients who pay for this premium service simultaneously. There is no indication that he systematically advantages his sister by, for example, always calling her first when following up to provide his premium level of service. As noted in the recommendations for compliance with this Standard, it is not necessary to distribute reports and recommendations to all clients, only to "all relevant clients."

Question 101

Ken Sharp, CFA, has noticed that his firm is not consistent in the way it presents investment performance data to clients in their account statements. Specifically, the firm exercises discretion in deciding whether monthly returns are based on the last business day or the last trading day of the month. Upon learning of this practice, Sharp raises the matter with his supervisor, Gayle Nunez, and documents his concerns in an email to his firm's compliance department. Has Sharp most likely complied with the Standards? A No B Yes, by raising the matter with Nunez and documenting his concerns C Yes, because the Standards allow firms discretion in choosing month-end dates

Answer 101

B Standard III(D) - Performance Presentation requires members and candidates to "make reasonable efforts" to ensure that performance information is communicated in a manner that is "fair, accurate, and complete." Firms must report such information in a manner that is consistent. In this example, the firm may initially choose to report returns based on either the last trading day of the month or the last business day, but it must not change this methodology on a month-by-month basis. Although a member or candidate responsible for this reporting decision would likely have violated this Standard, Sharpe has complied with its requirements by raising the matter with Nunez and documenting his concerns.

Question 102

Amy Mazur, CFA, an independent investment advisor, meets with all of her new clients for several hours to learn about their investment objectives and constraints, as well as their level of understanding of the investment process. Based on the information that she obtains in these meetings, she develops for each client a thorough investment policy statement (IPS) that clearly defines her responsibilities as an advisor and establishes a schedule to review and update the document every two years. In a separate document, Mazur provides her long-term capital market expectations and recommended strategic asset allocation. Are Mazur's practices most likely consistent with the recommendations for compliance with the Standards? A Yes B No, because her schedule for reviewing her clients' investment policy statements is inadequate C No, because she does not incorporate her capital market expectations into her clients' investment policy statements

Answer 102

The recommendations for compliance with Standard III(C) - Suitability call for investment policy statements to be reviewed at least annually, unless specific circumstances necessitate more frequent revision. Investment decisions made in accordance with an outdated IPS may be unsuitable if a client's circumstances or market conditions have changed. According to the guidance for this Standard, long-term capital market expectations may be "presented in separate documents or incorporated in the IPS or in appendices to the IPS." There is no requirement or recommendation concerning whether these expectations must or should be incorporated directly into an IPS.

Question 103

Alan Culpepper is a Level II CFA Candidate and holds a position as head of investment research for a small securities firm. Culpepper wants to correctly follow the firm’s soft dollar policies. He wishes to pay for his CFA registration fees from the firm’s soft dollar account. Soft dollar policies are fully disclosed to the clients. Furthermore, Culpepper believes all clients will benefit from his enhanced skills. Has Culpepper most likely violated the Standards? A No B Yes, with respect to misrepresentation C Yes, with respect to loyalty, prudence, and care

Answer 103

C According to the guidance for Standard III(A) - Loyalty, Prudence, and Care, soft dollar commissions, or soft commissions, are an asset of the client and may therefore only be used for the benefit of the client. In this example, Culpepper would not violate this Standard by using these commissions to purchase research because this would directly assist him in making investment decisions on behalf of the client. However, using a client's assets to further his general education would constitute a violation of this Standard.

Question 104

Which of the following statements is most accurate with respect to the recommended procedures for compliance with Standard III(B) - Fair Dealing? A Inequitable trade allocation methods are prohibited, regardless of whether they are disclosed B Policies and procedures designed to promote fair dealing should be uniform across all firms C Firms may charge clients for access to advanced notice of recommendations as long as the fee structure is adequately disclosed

Answer 104

A The recommendations for compliance with Standard III(B) - Fair Dealing recognize that the ideal combination of policies and procedures to achieve this compliance may vary according to "the nature and size of the organization and the type of securities involved." All firms should have written policies and procedures, but uniformity across firms is not required. Firms may offer different levels of services, but must not give any clients advanced notice of recommendations, even if this is disclosed and available to all who are willing to pay for it. Similarly, inequitable trade allocation methods are never permitted, even if this practice is disclosed.

Question 105

Rashida James, CFA, is a portfolio manager who works with institutional investors. James learns from her husband that the pension plan for which he is a trustee has recently decided to replace one of the firms managing its funds. The next day, James calls another of the pension plan's trustees before this information becomes public knowledge to offer her services as a portfolio manager. James has most likely violated the CFA Standards concerning: A misconduct B client confidentiality. C material non-public information.

Answer 105

A Standard I(D) - Misconduct requires members and candidates to refrain from committing any act that reflects adversely on their professional reputation, integrity, or competence. In this case, James has sought to take advantage of the information shared by her husband that has not been made public. By calling the other trustee to offer her services, James has acted without integrity. The correct course of action would have been to wait for this information to be confirmed in a public statement or for the pension plan's trustees to properly ask her to make her case for replacing the outgoing manager. Choice B is incorrect because James has not revealed any confidential client information. Choice C is incorrect because James has not acted on material non-public information in a way that could affect the value of investments. The actions in this case pertain most directly to Standard I(D).

Question 106

Ashley Powell, CFA, works as a manager of an international equity fund and has a personal portfolio that includes the stocks of several Chilean companies. Powell also has a strong Twitter following. After reading an article about a violent clash between striking Chilean miners and local police, Powell publishes a blog post that includes her opinion that "the current level of labor unrest could cause investors to pull their capital out of the Chilean market." Although the mining strike covered in the article she read has attracted attention from several international media outlets, Powell is aware that the number of days lost to labor disruptions has steadily declined in Chile over the past decade and she expects this trend to continue, but she does not include this information in her blog post. Over the subsequent month, the main Chilean equity benchmark falls 2.3%. Has Powell most likely violated the Standards? A No B Yes, with respect to misrepresentation C Yes, with respect to market manipulation

Answer 106

B Standard I(C) - Misrepresentation prohibits members and candidates from making "any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities." Misrepresentation includes creating a misleading impression by omitting facts and relevant inputs. In this example, Powell has violated this Standard by failing to refer to the general decline in days lost to labor disruptions in Chile over the past decade, as this omission may mislead her readers regarding the true state of affairs in that country - particularly at a time when a single incident is attracting a disproportionate share of the media's attention. Powell does not appear to have acted to distort prices with the intention of misleading investors, and it is therefore unlikely that she has violated Standard II(B) - Market Manipulation. There is no evidence that Powell has taken advantage of lower valuations to purchase shares either for herself or her fund. Indeed, it is not clear that the 2.3% decline in the benchmark index of Chilean equities represents a poor performance relative to how other asset classes with similar risk profiles performed over the same period.

Question 107

Joe Jacoby, CFA, is discussing with a colleague his understanding of what CFA Institute considers market manipulation, in regards to CFA Institute Standards. He describes two types of market manipulation: Type 1: “Transactions that artificially affect prices or volume to give an inaccurate impression of activity or price movement in a financial instrument” Type 2: “Securing a controlling position in a financial instrument with the intent to exploit and manipulate the price of a related derivative and/or underlying financial asset” Which of the following statements is most likely correct? A Type 1 is an example of information-based manipulation B Type 2 is an example of information-based manipulation C Type 1 and Type 2 are both examples of transaction-based manipulation

Answer 107

C According to the guidance for Standard II(B) - Market Manipulation, both types of transactions described here are examples of transaction-based manipulation. By contrast, information-based manipulation involves activities such as spreading false rumors in order to cause others to trade a certain way.

Question 108

Brad Scheig, CFA, an independent investment advisor, has several clients who hold shares in Energex Frontier (ENGX), an energy exploration company that frequently bids on natural gas leases in auctions. In an effort to boost performance for his client accounts, Scheig visits several online investor forums and anonymously posts comments implying that ENGX will soon be awarded several highly-coveted leases, although he knows from a private conversation with the company's CEO that the firm has already been informed that it will not be awarded these leases when the auction results are announced the next day. Before the end of the trading day, Scheig liquidates his clients' holdings of ENGX shares. Scheig has most likely violated the Standards with respect to: A market manipulation only. B material nonpublic information only. C market manipulation and material nonpublic information.

Answer 108

C Standard II(B) - Market Manipulation prohibits members and candidates from engaging in "practices that distort prices or artificially inflate trading volume with the intent to mislead investors." In this example, Scheig has violated this Standard by attempting to artificially inflate the price of ENGX shares. Scheig has also violated Standard II(A) - Material Nonpublic Information because he has come into possession of information that is both material and nonpublic information (that ENGX will not be awarded the leases) and acted on it by selling shares held in his clients' accounts.

Question 109

Peter Jayne, CFA, an equity analyst, is attending a meeting with the CFO of a large, publicly-traded company. The meeting is also being attended by other analysts and investors. The CFO is updating the group about her company's financials and refers to a plant closure that has yet to be publicly announced. Which of the following statements is most accurate? Jayne: A may act on this information. B must not trade or cause others to trade on this information. C may update his recommendation about the company and share this update with his clients.

Answer 109

B According to Standard (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 other to act on the information." In this example, the information revealed by the CFO is clearly material, but it is also nonpublic. Although it has been mentioned in a gathering of analysts and investors, this information is still considered nonpublic. As noted in the guidance for this Standard, "information that is made available to analysts remains nonpublic until it is made available to investors in general.

Question 110

Emily Champlain, CFA, is the CEO of an online securities exchange. In order to attract interest in new weather derivatives, Champlain issues a press release announcing an agreement that she brokered with a group of exchange members that will ensure a guaranteed minimum trading volume in these securities for the first three months that they are traded on the exchange. With interest in weather derivatives still below expectations after this initial period, Champlain convinces the group to extend their agreement for an additional three months, but no subsequent press release is issued. Has Champlain most likely violated the Standards? A No B Yes, by brokering an agreement to provide artificial liquidity C Yes, by failing to notify investors that the agreement was extended

Answer 110

C According to Standard II(B) - Market Manipulation, member and candidates must not "artificially inflate trading volume with the intent to mislead market participants." In this example, Champlain does not violate this Standard by brokering an agreement to ensure a minimum trading volume because this information has been disclosed to investors and there is therefore no intention to mislead. However, Champlain does violate this Standard when she extends the term of the agreement without announcing this. She has misled investors who are under the impression that the agreement expired after the initial three-month period.

Question 111

Sarah Allen, CFA, is a respected independent equity analyst with a well-deserved reputation as an expert on Peruvian investments. She has a large number of followers on Twitter. During a recent trip to Lima, Allen's mobile phone was stolen and, although she filed a report with the local police, no details of the incident were made public. During the course of filing her report, Allen spoke with a senior police officer, who informed her that he was recently ordered by the Ministry of Justice to terminate an investigation into allegations of corrupt government procurement practices. Upon returning to her hotel, Allen posted the following tweet: "Interesting trip to Lima. My next report will address the Peruvian government's efforts to maintain the rule of law." The next morning, Allen noticed that Peruvian stock prices had fallen sharply. That afternoon, Allen received an email from a client thanking her for having recently issued a "buy" recommendation on a stock, adding "I considered it to be too expensive when your recommendation came out last week, but I bought it this morning after seeing that it was trading at a much more attractive earnings multiple." One week later, Peruvian asset prices returned to their previous levels. Has Allen most likely violated the Standards? A No B Yes, with repect to market manipulation C Yes, with respect to material non-public information

Answer 111

A Allen has not violated the Standards. According to Standard II(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." In this example, Allen's tweet simply stated that she considered her Lima trip to be "interesting" and revealed the topic of her next research report. It is not reasonable to conclude that she wrote this with the intention of misleading market participants, and there is no evidence that her previously-issued "buy" recommendation was based on misleading or incorrect information. Indeed, it is not reasonable to conclude that any subsequent changes in market prices were attributable to her actions. According to Standard II(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." In this example, Allen's only action in the aftermath of receiving (unverified) material non-public information was to disclose that she would be writing her next research report on the topic of "the Peruvian government's efforts to maintain the rule of law," which is not material information.

Question 112

Christina Joseph, CFA, an analyst with a major securities dealer, has just received credible information from a private conversation about a regulatory decision that will have a significant impact on the share prices of mining companies when it is announced tomorrow. Joseph's firm acts as a market maker for the shares of several of the companies that are likely to be affected by this decision. In order to comply with the CFA Standards, Joseph should most likely ask her firm to: A limit its trading activities to the shares of companies on its restricted list. B suspend arbitrage trading in the shares of companies that may be affected until the information is made public. C cease all proprietary trading in the shares of companies that may be affected until the information is made public.

Answer 112

B Standard II(A) - Material Nonpublic Information requires members and candidates who acquire material nonpublic information to refrain from acting or causing others to act on this information. In practice, this means taking steps to prevent the appearance of market manipulation. In this example, Joseph should request that her firm place the companies that may be affected on a restricted list and suspend arbitrage trading in their shares until the information is made public. Choice A is incorrect because Joseph's firm should not limit its trading activities to the shares of companies on its restricted list. There is no reason to suspend or curtail trading in the shares of companies that do not appear on this list. Choice C is incorrect because it would be wrong for Joseph's firm to cease all proprietary trading because suspending its market making activities would send a clear signal that the firm possessed material nonpublic information.

Question 113

Charles Telford, CFA, is a research analyst for Edgemont Investments, and one of the companies he covers is Jackson Dynamics (JDN). Knowing that many of Edgemont's clients own JDN shares, Telford increases his projection of the company's next quarterly earnings in order to augment their returns. Neither Telford or any members of his immediate family owns any JDN shares and his compensation is unaffected by the returns on clients' portfolios. Has Telford most likely violated the Standards? A No, because he served the clients' interests B Yes, with respect to market manipulation only C Yes, with respect to market manipulation and independence and objectivity

Answer 113

B Telford acted with the intention of artificially manipulating the price of JDN shares, which is a violation of Standard II(B) - Market Manipulation. There is no indication that Telford violated Standard I(B) - Independence and Objectivity.

Question 114

Diane Golden, CFA, manages a pension fund that holds a large position in RBM Electronics common stock. Golden also holds RBM shares in her personal account. Golden, along with several analysts from her fund, participates in a conference call with RBM's CFO, who mentions that the firm will be switching microchip suppliers. Golden believes that this change, which had not been publicly disclosed before the call, will positively impact RBM's share price. Which of the following statements is most accurate? Golden: A may purchase RBM shares for the pension fund only. B must not purchase RBM shares for either her personal account or the pension fund. C may purchase RBM shares for her personal account after purchasing shares for the pension fund.

Answer 114

B Standard II(A) - Material Nonpublic Information prohibits members and candidates from acting on or causing others to act on material information that has not been publicly disclosed. In this example, Golden must not purchase RBM shares for either her personal account or on behalf of the pension fund until the information mentioned by the CFO on the conference call has been broadly distributed to the wider investment community. Golden should encourage such distribution.

Question 115

Richard Golic, CFA, is a research analyst covering firms in the consumer electronics sector for G&G Investments. Golic finds that he is able to provide his clients with more insightful analysis by consulting with a network of industry experts, who he compensates. His analysis of these consultations informs the research reports that he distributes to his clients. Has Golic most likely violated the Standards? A No B Yes, with respect to independence and objectivity C Yes, with respect to material nonpublic information

Answer 115

A Standard II(A) - Material Nonpublic Information allows members and candidates to maintain a network of experts and provide compensation for their work, provided they do not solicit, act on, or cause others to act on material nonpublic information. Compensating industry experts for their work does not constitute a violation of Standard I(B) - Independence and Objectivity.

Question 116

Phylicia Chan, CFA, lives and works in a country where laws and regulations governing the activities of financial professionals have historically been less stringent than the CFA Institute Code of Ethics and Standards of Professional Conduct (Code and Standards). In order to demonstrate its commitment to ethical practices, her company considered adopting a code of conduct based on the Code and Standards, but decided not to do so last month when the country's parliament passed several new laws, due to come into effect next year, that create even stricter requirements. Chan has been asked to make trades that she believes are intended to distort the price of securities. As she considers what to do, Chan should most likely adhere to: A the Code and Standards. B her country's current laws. C her country's recently-passed laws.

Answer 116

A Standard I(A) - Knowledge of the Law requires members and candidates to follow the highest requirements imposed by the various laws, rules, and regulations that govern their activities or the Code and Standards. In this example, Chan believes that she has been asked to act in a manner that would violate Standard II(B) - Market Manipulation and she must adhere to the Standards rather than her country's current laws, which are less stringent. Chan is not required to adhere to her country's new laws until they are formally enacted next year.

Question 117

A firm places the shares of one of its investment banking clients on a restricted list and is in possession of material nonpublic information about the issuer. Which of the following statements is most accurate? A The firm's employees may still execute clients' orders to trade the issuer's shares B The firm's employees must liquidate any beneficial ownership of the issuer's shares C The firm must not disseminate any information about the issuer until the material nonpublic information has been published

Answer 117

A The recommended procedures for compliance with Standard II(A) - Material Nonpublic Information include placing the shares of corporate clients on a restricted list when a firm is in possession of material nonpublic information. Firms should closely monitor and limit (if not prohibit) proprietary trading by the firm and personal trading by its employees of shares on the restricted list. However, employees can still execute unsolicited orders for clients wanting to trade shares issued by a firm on their firm's restricted list. Employees are not required to liquidate any beneficial ownership of the shares of firms on such a list. Additionally, firms may still disseminate information about companies on their restricted list, but they should limit this activity to providing factual and public information.

Question 118

Which of the following measures is most consistent with the recommendations for compliance with Standard II(A) - Material Nonpublic Information? A Increasing the number of employees with knowledge of which stocks are on the firm's restricted list B Establishing a firewall to ensure that information shared with buy-side analysts is not also shared with sell-side analysts C Designating a compliance officer for research analysts to consult about which information should be shared with members of the investment banking department

Answer 118

C According to the recommendations for compliance with Standard II(A) - Material Nonpublic Information, firewalls should be established to prevent the communication of material nonpublic information, for example, between research analysts and members of a firm's investment banking department. It is further recommended that a compliance officer be designated to "review and approve communications between departments." Firewalls should not be used to prevent information shared with buy-side analysts from also being shared with sell-side analysts. Rather, firms should adopt disclosure policies designed with the intention of sharing information fairly with all analysts. It is recommended that firms use a restricted list and place companies on it when they are in possession of material nonpublic information. However, broad distribution of this list is not desirable, as such a practice "often triggers the sort of trading the list was developed to avoid."

Question 119

Which of the following statements is most accurate? A CFA charterholder: A will always satisfy the Standards by adhering to all applicable laws. B must adhere to the Standards whenever there is no applicable law or regulation governing his or her professional activities. C may act on material nonpublic information in cases where applicable laws permit such activity and his or her employer has provided written consent.

Answer 119

B Standard I(A) - Knowledge of the Law requires members and candidates to "understand and comply with all applicable laws, rules, and regulations (including the Code and Standards) of any government, regulatory organization, licensing agency, or professional association governing their professional activities." In cases where the Standards and applicable laws impose or permit different actions, members and candidates "must comply with the more strict law, rule, or regulation."

Question 120

Nicole Stream, CFA, works for an investment firm that claims to report in compliance with the Global Investment Performance Standards (GIPS). Stream handles the presentation of investment results as well as portfolio management duties. Immediately following distribution of the prior quarter’s composite results to all clients, Stream discovers there has been a typographical error that resulted in a material overstatement of the value of assets in one of the firm's composites. The erroneous data information distributed to clients before the error is discovered. Has Stream most likely violated the Standards? A No B Yes, with respect to misrepresentation C Yes, with respect to performance presentation

Answer 120

A According to Standard I(C) - Misrepresentation, members and candidates "must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities." According to Standard III(D) - Performance Presentation, members and candidates "must make reasonable efforts to ensure that it is fair, accurate, and complete." In this example, there was no intention to knowingly misrepresent the value of the composite's assets, and there is no evidence that Stream failed to make a reasonable effort to ensure that the information provided to clients was accurate. Errors can occur and this one was unintentional. As long as corrective action is taken, the Standards have not been violated.

Question 121

Camilla Carter, CFA, is an investment advisor with Sandhurst Wealth Management. At a weekend social gathering, Carter speaks with her friend Elma Harvey, who reveals that Greg Fallon, one of Carter's clients, and his wife had divorced. The following week, Fallon called Carter to order her to purchase a large number of shares for his account. The two had not previously discussed this potential trade. Rather than executing the order immediately, Carter tells Fallon that she has heard that he is getting a divorce and would like to meet with him to discuss possible changes to his investment objectives and constraints before making any more trades on his behalf. Has Carter most likely violated the Standards? A No B Yes, by failing to maintain client confidentiality C Yes, by failing to immediately execute her client's trade order

Answer 121

A Standard III(C) - Suitability requires members and candidates to "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 any investment action." Members and candidates are additionally required to "reassess and update this information regularly." In this example, Carter does not violate this Standard by not immediately executing Fallon's unsolicited trade order because she has reasons to believe that his financial circumstances have changed significantly (or will change in the near future). It may be that Fallon's investment objectives and constraints will not be affected, or Carter may have been misinformed, but her decision to request a meeting before executing this trade is consistent with this Standard. Additionally, Carter has not violated Standard III(E) - Preservation of Confidentiality, as there is no evidence that she has disclosed any information communicated to her by her client.

Question 122

In which of the following circumstances would it be most appropriate to reveal confidential information about a client? A The information has already been disclosed in media reports B The information is not directly relevant to any financial transactions C The client has not consented to the disclosure of information, but such action is required by law

Answer 122

C According to Standard III(E) - Preservation of Confidentiality, members and candidates may, in fact must, disclose confidential client information in circumstances when such disclosure is required by law. This obligation would apply even if the client did not consent to this disclosure. The fact that information has been reported in the media or does not pertain directly to any financial transactions does not mitigate the obligation to keep it confidential.

Question 123

Which of the following statements is least likely to be consistent with the recommendations for compliance with Standard III(E) - Preservation of Confidentiality? Members and candidates: A are only required to maintain the confidentiality of information about current clients. B may share confidential information about a current client if this disclosure is authorized by the client. C should seek legal advice before disclosing any confidential information about a client who is suspected of violating the law.

Answer 123

A Standard III(E) - Preservation of Confidentiality prohibits members and candidates from disclosing confidential information about current, former, and prospective clients unless one or more of the following three conditions are met: The information relates to illegal acts committed by the client. Applicable laws require this information to be disclosed. The current, former, or prospective client has authorized the disclosure of this information.

Question 124

Kenneth Watson, CFA, a commodities analyst based in New York, is preparing to write a research report on Midwest Grains. He is preparing to travel to the company's headquarters in Chicago, Illinois, for interviews with executives. Watson accepts the company's offer to cover the costs of his hotel, which is not lavish, and meals while he is staying in Chicago. During his visit, Watson speaks with analysts from other firms that have also accepted the company's offer. Has Watson most likely violated the Standards? A No B Yes, with respect to independence and objectivity C Yes, with respect to both indepence and objectivity as well as fair dealing

Answer 124

B Standard I(B) - Independence and Objectivity prohibits members and candidates from accepting travel and accommodation from companies that they cover when it is possible to make alternative arrangements. In this example, there is no reason why Midwest Grains should pay for Watson's hotel or meals. Either he or his firm should cover these costs. Standard III(B) - Fair Dealing is not applicable in this example because Watson did not favor one client over another.

Question 125

Trevor Holland, CFA, has three clients who placed orders to purchase shares in an oversubscribed initial public offering (IPO). All three clients have similar investment objectives and constraints, and Holland considers the IPO shares to be suitable for the small-cap growth style that he applies when managing each of their accounts. On the day of the IPO, Holland is able to acquire 1,200 shares in a block trade and, since Client Z is his sister, he is considering three possible allocations, shown below along with each client's order size. Holland's stated policy establishes a minimum lot size of 100 shares when allocating a block trade. ``` Client X Client Y Client Z Order size 10,000 5,000 3,000 Allocation A 700 300 200 Allocation B 400 400 400 Allocation C 800 400 0 Which of the allocations being considered by Holland is most consistent with the Standards? ``` A Allocation A B Allocation B C Allocation C

Answer 125

A As noted in the guidance for Standard III(B) - Fair Dealing, in cases when a member or candidate is allocating shares acquired in an oversubscribed IPO among accounts that include those belonging to their family members, “the family-member accounts should not be excluded from buying such shares" as long as those accounts are managed similarly to other clients' accounts. Allocation C, which provides no shares to Client Z, Holland's sister, would be inconsistent with this guidance. Allocation B, which provides an equal number of shares to each client, is also inconsistent with the recommendation that shares be allocated on a pro rata basis according to order size. Allocation A is most consistent with this Standard. If shares were allocated on a strict pro rata basis according to order size, the allocations would be calculated as follows: nClient X=10,00010,000+5,000+3,000×1,200=667 nClient Y=5,00010,000+5,000+3,000×1,200=337 nClient Z=3,00010,000+5,000+3,000×1,200=200 Rounding to the nearest round lot (100 shares), we get 700 shares for Client X, 300 shares for Client Y, and 200 shares for Client Z. Given Holland's policy of a 100-share minimum lot size, the appropriate allocation is 700 shares for Client X, 300 shares for Client Y, and 200 shares for his sister, Client Z.

Question 126

Heather McLean, CFA, lives and works as a portfolio manager in Bernugal, a small, island country that has become a popular tax haven after liberalizing its financial markets. Since these changes were enacted, Bernuguese law no longer imposes a fiduciary duty on any investment professionals. Which of the following statements is least accurate? McLean must adhere to: A Bernuguese laws. B the CFA Standards, which impose a fiduciary duty. C the CFA Standards by acting in the best interests of her clients.

Answer 126

B Standard III(A) - Loyalty, Prudence, and Care requires members and candidates to always acts in the best interests of clients. However, this Standard does not impose a fiduciary duty. Standard I(A) - Knowledge of the Law requires members and candidates to understand and comply with all applicable laws, rules, and regulations.

Question 127

Allison Ostrander, CFA, works for a major trust company and is proud of her investment performance over the past 8 years. Her managed portfolios have averaged a 12% annual return over this time period and she regularly informs her clients of the prior performance. She also shares this information with prospective clients, adding that they should expect an annual return of at least 8% in the future based on her performance history. Has Ostrander most likely violated the Standards? A No B Yes, with respect to performance presentation only C Yes, with respect to performance presentation and misrepresentation

Answer 127

C Standard III(D) Performance Presentation requires members and candidates to communicate performance information in a manner that is "fair, accurate, and complete." According to the guidance for this Standard, members and candidates "should not state or imply that a client will obtain or benefit from a rate of return that was generated in the past." Standard I(C) - Misrepresentation prohibits members and candidates from providing any assurances or implied guarantees regarding the future performance of volatile investments. In this example, Ostrander has violated both of the Standards discussed above.

Question 128

Lisa Binstein is giving a seminar instructing financial professionals on their obligations to clients. Binstein makes the following two statements: Statement 1: “When an investment manager is responsible for managing a pension plan, the actual clients are the beneficiaries of the pension plan rather than the plan sponsor.” Statement 2: “There may be circumstances in which an actual client may not exist.” Which of the following is the most accurate assessment of Binstein's statements? A Both Statement 1 and Statement 2 are consistent with the Standards B Both Statement 1 and Statement 2 are inconsistent with the Standards C Statement 1 is consistent with the Standards, and Statement 2 is inconsistent with the Standards

Answer 128

A In order to fulfill the obligation to clients created by Standard III(A) - Loyalty, Prudence, and Care, it is important to identify the actual client. Statement 1 is correct. When managing pension funds, the manager’s responsibility is to the ultimate beneficiaries, not the sponsor. Statement 2 is also correct. There are situations in which an actual client may not exist. For example, if a member or candidate is managing a fund or an index, he or she may not know the actual client or investor requirements or risk profiles. In this case, the investment mandate must be followed.

Question 129

Anita Vizquel, CFA, is a sole practitioner providing investment advisory services. Based on extensive and ongoing research, Vizquel believes that Viatex Brokerage provides the best execution at a competitive price and she uses the firm for the majority of her clients' trades. In recognition of her loyalty, Viatex provides Vizquel with soft dollar commissions in the form of research reports that Vizquel finds very relevant for some, but not all, of her clients. Has Vizquel violated the CFA Standards? A No B Yes, by using Viatex for the majority of her client's trades C Yes, by accepting research reports that do not benefit all of her clients

Answer 129

A According to Standard III(A) - Loyalty, Prudence, and Care, Vizquel is allowed to accept soft dollar commissions in the form of research if the brokerage provides high quality execution at a reasonable price. This is true even if the research does not directly benefit the client for whom trading is done, as in this example. It is reasonable to conclude that Vizquel would have chosen Viatex to process trades regardless of whether she had a referral fee arrangement with the firm. Similarly, Vizquel does not violate this Standard by using Viatex for the majority of her client's trade. As noted above, Vizquel is confident, based on her extensive and ongoing research, that Viatex provides the best execution at a competitive price.

Question 130

Bruce Adams, CFA, has just finished meeting with his client Martin Stanford, a 42-year-old executive with a below-average willingness to take investment risk despite having a high level of wealth and a long time horizon. Adams arranges a meeting with his supervisor, Lynn Lavictoire, during which they discuss Stanford's file in detail. Later that evening, Adams calls his father, a retired investment advisor, to ask for advice on helping clients become more aware of their ability to take additional investment risk. Has Adams violated the CFA Standards? A No B Yes, by speaking with his father C Yes, by speaking with Lavictoire

Answer 130

A Standard III(E) - Preservation of Confidentiality requires members and candidates to keep client information confidential. However, Adams' discussion of the details of Stanford's case with his supervisor is not a violation of this Standard. In the conversation with his father, Adams asks for advice on a general topic, and there is no evidence to suggest that confidential information about Stanford, or any other client, was disclosed.

Question 131

Gary Elkdale, CFA, advises individual investors for Redemption Wealth Management. Last year, one of his clients, Sharon Hines, filed a written complaint with Redemption accusing Elkdale of breaching the terms of her investment policy statement (IPS) by purchasing shares of a technology company that subsequently filed for bankruptcy. After the complaint was filed, Elkdale vigorously defended his decision to his firm's compliance department, providing documentation supporting his claim that this transaction offered an opportunity for diversification and was consistent with the overall portfolio strategy agreed to by Hines. Because he was confident that the complaint would not be upheld, Elkdale claimed that he was not the subject of a written complaint when completing his annual Professional Conduct Statement. Later, Redemption's compliance department cleared Elkdale of any wrongdoing. Has Elkdale most likely violated the Standards? A No B Yes, with respect to suitability C Yes, with respect to misrepresentation

Answer 131

C By falsely reporting that he was not the subject of a written complaint in his Professional Conduct Statement prior to the matter being resolved, Elkdale violated Standard I(C) - Misrepresentation. He should not assume there was no wrongdoing before it was officially declared by the compliance department. There is no indication that Elkdale violated Standard III(C) - Suitability, which requires members and candidates to "judge the suitability of investments in the context of the client's total portfolio."

Question 132

Which of the following statements is most accurate? Standard III(D) - Performance Presentation: A discourages the presentation of single representative accounts. B requires the same performance information to be presented to all audiences. C prohibits statements regarding the expected future performance of risky securities.

Answer 132

A According to the recommendations for compliance with Standard III(D) - Performance Presentation, members and candidates should present the performance of weighted average composites of portfolios managed according to similar mandates rather than the performance of a single representative account. This Standard does not require the same performance information to be presented to all audiences. Members and candidates are allowed and encouraged to account for each audience's level of knowledge and sophistication. Although members and candidates must not make misleading statements about reasonably expected future returns, it is not accurate to say that this Standard prohibits all statements about the expected future performance of risky securities. According to Standard III(D) - Performance Presentation, "when communicating investment performance information, Members and Candidates must make reasonable efforts to ensure that it is fair, accurate, and complete." The Standard requires full disclosure of performance data to clients as well as prospective clients. When communicating investment performance information, members and candidates must ensure that not only is it fair and accurate but also complete.

Question 133

Jeri Hosmer, CFA, has been researching Digger Energy (DGE) and has a client for whom the company's stock is a suitable investment. She establishes her client's position by placing a series of smaller orders over the course of a two-week period. Although her intention was to minimize the price impact associated with acquiring a relatively large number of thinly-traded shares, DGE's stock price increased significantly over that period. Has Hosmer most likely violated the Standards? A No B Yes, with respect to market manipulation C Yes, with respect to loyalty, prudence, and care

Answer 133

A As noted in the guidance for Standard II(B) - Market Manipulation, it is "not intended to preclude transaction undertaken on legitimate trading strategies." The price of thinly-traded shares can be significantly affected by large trades and Hosmer does not violate this Standard by structuring the purchase as a series of smaller trades. Although her client may have ended up paying a higher price on a volume-weighted average basis than she would have preferred, there is no evidence that Hosmer has violated Standard III(A) - Loyalty, Prudence, and Care.

Question 134

Ann Vendig, CFA, manages investments for a family partnership. Vendig has discovered evidence of transactions diverting the partnership's assets into the personal account of one of its members and suspects that this activity violates applicable laws. As a first step, she consults with her firm's compliance department. Has Vendig most likely complied with the Standards? A Yes B No, because she did not report her suspicions to the relevant legal authorities C No, because she did not report the activity to members of the partnership who have been affected by these transactions

Answer 134

A In this circumstance, per Standard III(E) - Preservation of Confidentiality, the first step is to consult the compliance department and/or seek independent legal advice regarding how to proceed. There may be applicable laws or regulations which would ultimately require Vendig to report her suspicions to the relevant legal authorities, but she would not violate this Standard by consulting with her firm's compliance department before deciding on an appropriate next step.

Question 135

Irma Ehrlich, CFA, is an advisor who works with individual investors. Recently, three of Ehrlich's clients submitted buy orders for shares of Brightwell Manufacturing (BWM). Ehrlich was able to complete a block purchase order of BWM shares, which she allocated among the three clients on a pro rata basis according to order size. Each client was assigned a different execution price based on the time their order was received. Has Ehrlich most likely violated the Standards? A No B Yes, with her method of allocating shares C Yes, with her method of assigning execution prices

Answer 135

C Standard III(B) - Fair Dealing requires members and candidates to "deal fairly with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities." Ehrlich violates this Standard by assigning different execution prices for shares acquired in a block trade. As noted in the recommended procedures for compliance, all clients participating in a block trade should be assigned the same price and charged the same commission. However, Ehrlich's decision to execute a block trade and assign the shares on a pro rata basis according to order size is consistent with this Standard.

Question 136

Matthew Brolin, CFA, is a portfolio manager with Bluenose Investments and has recently made a significant purchase of shares in Invotech Corp. In a television interview this morning, Brolin claimed that he had a private conversation with Invotech's CEO, who told him that they will be announcing a major expansion next week. Invotech's share price increased by 14% over the course of the trading day. In reality, Brolin has never spoken with Invotech's CEO or any of the company's senior executives. Brolin has most likely violated the CFA Standards with respect to: A market manipulation. B preservation of confidentiality. C material nonpublic information.

Answer 136

A According to Standard II(B) - Market Manipulation, member and candidates must not "engage in practices that distort prices… with the intent to mislead market participants." By fabricating a positive rumor about a company in which he had just made a significant investment, Brolin has committed information-based manipulation. Brolin has not violated Standard III(E) - Client Confidentiality because Invotech's CEO is not a client and this "information" has no basis in reality. It is unlikely that Brolin has violated Standard II(A) - Material Nonpublic Information, which applies to factual information.

Question 137

William Thorpe, CFA, is a portfolio manager who serves both individual and institutional clients. Due to a heavy workload, Thorpe is struggling to keep up with his clients. One task which takes up a large amount of Thorpe's time is proxy voting. Which of the following statements is least likely correct, as it relates to Thorpe's responsibility regarding voting of proxies? Thorpe: A must vote proxies in an informed and responsible manner. B is required to vote proxies only when specifically instructed to do so by his clients. C may choose not to vote proxies based on an analysis of the net benefit such action would provide the client.

Answer 137

B According to Standard III(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." Proxies have economic value and Thorpe must vote them responsibly on behalf of his clients, even when he is not specifically instructed to do so. While this obligation applies to votes on non-routine matters, members and candidates are not required to vote proxies in cases when a cost-benefit analysis shows that the client would not benefit.

Question 138

Victor Costa, CFA, managing director of Venturion Investments, knows that his firm has been struggling for the last two years during an economic downturn. Costa was given a report to market the firm, which showed the firm to have the best returns in the firm's history. While speaking with potential new clients, Costa hands out the report to attempt to bring new clients into the firm. Has Costa most likely violated the Standards? A Yes B No, because he did not create the research report C No, because he did not know the actual return figures for the firm

Answer 138

A While Costa may not have explicitly known the report was misleading or false, given the economic condition and general knowledge he had, he should have known there was something wrong or biased with the performance report. By handing out the report, he violates Standard III(D) - Performance Presentation and Standard I(C) - Misrepresentation.

Question 139

Last year, Tom Ennis, CFA, set up an irrevocable trust for his long-time client, Sam Bennett, to transfer his company's shares to his son Taylor, 23, in a tax-efficient manner. The terms of the trust specify that Taylor Bennett cannot access any of the assets held in trust while his father is alive, but the assets are no longer legally part of Sam Bennett's estate. As trustee, Ennis has sole authority to exercise proxy votes for the shares held in trust until Sam Bennett's death. Recently, Sam Bennett asked Ennis to vote with management on an important matter to be decided at his company's shareholder meeting next week. The next day, Taylor Bennett asks Ennis to vote the proxies against management on this matter. In order to comply with the CFA Standards, Ennis should most likely: A abstain from voting. B vote with management. C vote against management.

Answer 139

C Standard III(A) - Loyalty, Prudence, and Care requires members and candidates to act in the best interest of their client. In this example, when exercising the proxies, Ennis' client is Taylor Bennett because he is the ultimate beneficiary of the assets being held in trust. Because the trust is irrevocable, Sam Bennett has given up control over them. Ennis must therefore vote against management's proposal in accordance with Taylor Bennett's wishes. Ennis would also be violating this Standard by abstaining from voting on an important matter, particularly after receiving instructions on how to vote from his client.

Question 140

Jack Fahey, CFA, is a portfolio manager of Pacific Sunrise Investments, which does not claim compliance with the Global Investment Performance Standards (GIPS). When presenting the historical performance of his small-cap growth composite, Fahey notes that only fee-paying accounts are included, but he does not mention that both discretionary and non-discretionary accounts are included. Has Fahey most likely violated the Standards? A Yes, with respect to performance presentation only B Yes, with respect to both performance presentation and misrepresenation C No, because Pacific Sunrise Investments does not claim compliance with GIPS

Answer 140

B According to Standard I(C) - Misrepresentation, members and candidates "must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities." Standard III(D) - Performance Presentation requires members and candidates to make reasonable efforts to present performance information in a manner that is "fair, accurate, and complete." In this example, Fahey violates both of these Standards by failing to note that the small-cap growth composite includes both discretionary and non-discretionary accounts, as the composite's performance may misrepresent his abilities as a portfolio manager. The compliance status of Fahey's firm with GIPS is irrelevant to whether he has personally violated these Standards.

Question 141

Teddy Larson, CFA, a portfolio manager with Pedigo Investments, exercises proxies on behalf of his clients most of the time, but not in every case. When Larson does exercise these proxies, he often does so in accordance with management's recommendations. Has Larson most likely violated the Standards? A No B Yes, by failing to vote all proxies C Yes, by often voting proxies in accordance with management's recommendations

Answer 141

A According to the guidance for Standard III(A) - Loyalty, Prudence, and Care, members and candidates are required to exercise proxies on behalf of clients "in an informed and responsible manner." Voting in accordance with management does not necessarily constitute a violation of this Standard, as long as care was taken to ensure that the vote was cast in the interest of the client. This Standard does not require proxies to be voted in cases when a cost-benefit analysis shows that the client would not benefit from such action.

Question 142

Chris Collins, CFA is responsible for disseminating his firm's latest investment recommendations to clients. The Standards are least likely to require Collins to: A ensure that all clients receive all recommendations at the same time. B distribute any updates to his firm's guidelines for pre-dissemination policies. C encourage his firm to shorten the time frame between investment decision and dissemination.

Answer 142

C The relevant Standard is Standard III(B) - Fair Dealing, which states that 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." While it is important for clients to receive recommendations in a timely fashion, remember that "fair" is not the same as "equal." All customers do not need to receive all recommendations. Instead, Collins can focus on only the recommendations for securities that the clients have expressed a prior interest in or have been deemed appropriate given their objectives and constraints. For example, not all clients have an interest in participating in IPOs. By shortening the time frame between investment decision and dissemination, Collins can reduce the risk of information leak to clients at different times.

Question 143

Gerald Johnson, CFA, manages a hedge fund with a mandate to invest in thinly-traded stocks issued by consumer technology firms. Over the course of three months, Johnson's fund acquires twenty percent of the shares issued by Botchford Electronics (BTC) with a series of small orders intended to minimize the volume-weighted average purchase price. Johnson continues to follow BTC closely and is sufficiently impressed with its growth prospects that he authorizes his fund to purchase some of the company's debt. Has Johnson most likely violated the Standards? A No B Yes, with respect to suitability C Yes, with respect to market manipulation.

Answer 143

B Johnson has not violated Standard II(B) - Market Manipulation, which allows for the use of legitimate strategies designed to minimize the price impact associated with trading relatively illiquid securities. There is no indication that Johnson has acted with the intention of misleading market participants. However, Johnson has violated Standard III(C) - Suitability by authorizing his fund to purchase BTC's debt. This transaction is inconsistent with the fund's mandate of investing in consumer technology stocks.

Question 144

Bradley Edwards, CFA, recently left Redwood Associates, where he was part of a team of managers, to start his own fund. With written permission from Redwood, he distributes marketing materials for his new firm that reference the performance of the fund he worked on for several years at Redwood in order to highlight his investment abilities. Has Edwards most likely violated the Standards? A No B Yes, by including results that he achieved while at his former employer C Yes, by representing that this was his performance, with no mention of the other managers

Answer 144

C Standard III(D) - Performance Presentation requires members and candidates to "make reasonable efforts" to ensure that performance information is communicated in a "fair, accurate, and complete" manner. In this example, there is selective disclosure. It is acceptable to reference results achieved at a prior firm, but it must have been fully disclosed that the fund was managed by a team.

Question 145

Signy Falco, CFA, is an investment advisor with Hollyoak Associates, where she oversees the discretionary accounts of individual investors. One of Falco's long-time clients, Raymond Sun, has ordered her to execute an order to purchase shares of Boxtop Technologies (BXT). Upon receiving this order, Falco reviews Sun's investment policy statement (IPS), which the two updated three months ago during their annual review meeting. Falco is concerned because the transaction that Sun has ordered would cause his portfolio's allocation to equities to be both significantly different from its current level and inconsistent with his IPS. In order to adhere to the Standards, Falco is least likely to: A work with Sun to update his IPS. B comply with Sun's order to execute the trade immediately. C recommend that Sun convert his account status to non-discretionary.

Answer 145

B Standard III(C) - Suitability requires members and candidates to "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." In this example, Falco has received an order for a trade that she knows to be inconsistent with her client's IPS. Immediately executing this order without further discussing its potential impact with her client would be the course of action that is least consistent with this Standard. As noted in the guidance for this Standard, if Sun refuses to amend his IPS and/or change his account's status to non-discretionary, Falco should consider whether it is proper for her to continue in an advisory role with this client.

Question 146

Harold Kaplan, CFA, manages three equity mutual funds, all which have similar mandates. Kaplan holds a large position in A&B Energy (ABE) in one of his funds, but he is concerned that this fund is overexposed to fluctuations in the price of this stock. In particular, Kaplan notes that returns on ABE have been low relative to stocks issued by its competitors during a period of rising energy prices. In order to support the price of ABE shares, Kaplan trades these stocks between his funds. The strategy turns out to be successful as the higher price of ABE shares more than offsets the commissions incurred to trade between funds. Has Kaplan most likely violated the Standards? A No B Yes, with respect to suitability C Yes, with respect to market manipulation

Answer 146

C Kaplan has violated Standard II(B) - Market Manipulation by executing trades intended to provide artificial support to the price of ABE shares. There is no indication that Kaplan has violated Standard III(C) - Suitability as all three of the funds he manages have similar mandates.

Question 147

Last year, Brock Martin, CFA, moved to ADL Investments after 12 years as a portfolio manager with Ursus Capital. Martin also arranged for ADL to hire Michelle Topp and Christopher Aldridge, his longtime associates at Ursus with whom he continues to work closely. Several of Martin's current clients at ADL were with him at Ursus and moved their accounts after he joined his new firm. In order to present ten years of historical returns in a document prepared by ADL's marketing department, Martin includes the performance of his composites and their relevant benchmarks for the past year at ADL as well as the previous nine years at Ursus. The document, which is distributed to prospective clients, does not disclose that this performance record, which is accurately presented, was achieved at two separate firms. Has Martin most likely violated the Standards? A Yes B No, because he presented accurate information and included at least 10 years of returns C No, because his methodology for making investment decisions and key personnel have not changed

Answer 147

A Standard III(D) - Performance Presentation requires "fair, accurate, and complete" presentation of performance information. Martin violates this Standard by failing to disclose that he accumulated his performance record while at two different firms. The fact that he continues to work with Topp and Aldridge does not eliminate this disclosure requirement.

Question 148

Bruce Bollinger, CFA, a portfolio manager, is meeting with a client, Rebecca Jansen, for the first time. During the course of the meeting, Bollinger describes several possible investment strategies and recommends a stock that has a low correlation with the asset classes in the partial list of assets that Jansen has provided. Has Bollinger most likely violated the Standards? A No B Yes, with respect to suitability C Yes, with respect to suitability and loyalty, prudence, and care

Answer 148

C Standard III(C) - Suitability requires members and candidates who are in an advisory role to 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." This Standard further requires members and candidates to "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." In this example, Bollinger has recommended a specific stock during his initial meeting with Jansen - before he could possibly have developed an investment policy statement or acquired a sufficient understanding of her objectives and constraints. Bollinger has also violated Standard III(A) - Loyalty, Prudence, and Care by failing to consider Jansen's entire portfolio before making an investment recommendation. He has only seen the partial list of assets that she has provided in this initial meeting.

Question 149

Connor Wilson, CFA, is the sole proprietor of Blue Mountain Investments. Wilson developed a stock-picking model, which he has backtested using actual market data dating back ten years. Blue Mountain advertises these as actual returns to prospective clients in order to raise capital for a new closed-end fund that Wilson will manage according to his model's recommendations. The nature of the return data is not disclosed to investors. Has Wilson most likely violated the Standards? A No B Yes, with respect to performance presentation only C Yes, with respect to both performance presentation and misrepresentation

Answer 149

C The recommended procedures for compliance with Standard III(D) - Performance Presentation include disclosure of when simulated results have been used. As noted in the guidance for Standard I(C) - Misrepresentation, "the outcomes of models shall not be presented as fact." In this example, Wilson violates both of these Standards by failing to disclose that the returns presented to prospective clients are simulated.

Question 150

Robert Choi, CFA, works for Challenger Asset Management, which offers its clients ten emerging market equity funds. All ten funds had negative five-year returns, although each has outperformed its benchmark. Choi approves an advertisement that includes a statement that the company's funds have provided investors with "positive excess returns" for investors seeking exposure to these markets. Each fund's five-year returns are presented alongside the returns of their relevant benchmark and a website where potential clients can obtain more detailed information is listed. Has Choi most likely violated the Standards? A No B Yes, by failing to provide sufficient information C Yes, by misleading potential clients with the implication that returns have been positive

Answer 150

A According to Standard III(D) - Performance Presentation, members and candidates must ensure that communication of performance is "fair, accurate, and complete." In this example, the claim of positive excess returns is accurate because, although the funds have posted negative returns, each fund has outperformed its relevant benchmark. The clients are also given a presentation of the five-year returns with the benchmark returns, eliminating any potential misinterpretation. When the format of communications does not allow for a detailed presentation, it is recommended that a reference to the limited nature of the information be made, and more detailed information must be provided upon request.

Question 151

Laurent Kayombo, CFA, manages the International Advanced Technology Fund (IATF), which invests in the stocks of companies that produce leading-edge consumer technology products. Recently, Carolyn Jefferson, Chief Investment Officer of the Thornton Automotive Pension Plan (TAPP) allocated EUR 15 million to the IATF after an extensive review process determined that this decision is consistent with the TAPP's investment objectives and constraints. Which of the following statements is most accurate? Kayomobo must manage these funds in accordance with: A the IATF's mandate. B the interests of TAPP's sponsor. C the interests of TAPP's beneficiaries.

Answer 151

A As noted in the guidance for Standard III(C) - Suitability, members and candidates who manage money for a pooled fund must make investment decisions "in a manner consistent with the stated mandate." In this example, Jefferson is required to act in accordance with the interests of TAPP's beneficiaries as she has been entrusted to manage their assets. However, Kayombo is not responsible for considering the interests of TAPP's beneficiaries or the interests of any other investors. Rather, he is required to adhere to his fund's mandate.

Question 152

Danielle Fisher, CFA, manages funds for individual investors. Whenever she learns that a security's rating has been upgraded or downgraded, she emails this information to all of her clients for whom it is relevant and then makes sure to inform all clients of these changes before processing orders to trade in the affected securities. Fisher ensures that she has individual meetings with each of her clients at least once annually, during which they discuss the performance statements that she provides semi-annually, as well as any new circumstances that would require updates to his or her investment policy statement. Has Fisher most likely failed to meet the recommended procedures for compliance with the Standards? A No B Yes, with respect to fair dealing C Yes, with respect to loyalty, prudence, and care

Answer 152

C Standard III(A) - Loyalty, Prudence, and Care requires members and candidates who manage funds for clients to provide performance statements at least quarterly. In this example, Fisher only provides performance statements on a semi-annual basis. Fisher's actions with respect to communicating rating changes before processing orders are consistent with Standard III(B) - Fair Dealing.

Question 153

Which of the following best describes a recommendation for compliance with Standard III(B) - Fair Dealing? A Notify all parties in the firm as well as all clients that a recommendation will be updated B Limit the number of people within the firm with access to its guidelines for pre-dissemination policies C Shorten the time frame between when a recommendation is decided and when it is disseminated to clients

Answer 153

C Standard III(B) - Fair Dealing requires members and candidates to "deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities." The recommendations for compliance with this Standard include shortening the time frame between making recommendation decisions and disseminating those recommendations to clients. It is not necessary to notify all clients about a recommendation update. The updates can be selectively given to clients based on their unique needs, investment criteria, and investment objectives. The guidelines for pre-dissemination behavior should be published and made widely available. However, the number of people who know that a recommendation is going to be distributed should be minimized.

Question 154

Walter Simon, CFA, manages an equity fund. One of the investors in Simon's fund is the Prince Family Trust, which is administered by its trustee, David Bollinger. The Trust’s beneficiary is Debbie Prince, who requires long-term care for a chronic illness. The Trust generates income to help pay for Debbie’s care, and any additional costs are covered by her sister and legal guardian, Ann Prince. Simon's duty of loyalty is most likely owed to: A Ann Prince. B Debbie Prince. C his fund's mandate.

Answer 154

C According to Standard III(A) - Loyalty, Prudence, and Care, fund managers must remain faithful to their fund's statement mandate rather than acting in the interests of one or more particular investors. As a trustee, Bollinger owes his duty of loyalty to Debbie Prince, who is the ultimate beneficiary.

Question 155

Judy Knight, CFA, a portfolio manager with RNW Capital, is advising Ronald Hampton, a client who is considering investing in mortgage-backed securities. Knight believes that Carter Finley, a colleague at RNW, is qualified to advise Hampton on the risks and limitations of these securities and advises Hampton that her firm can help him with this investment decision. After later learning that Finley does not have relevant expertise in these securities, Knight does not discuss the matter further with Hampton. Has Knight most likely violated the Standards? A Yes, with respect to misrepresentation B Yes, with respect to misrepresentation and suitability C No, because she did not knowingly mislead Hampton

Answer 155

A Knight does not initially violate Standard I(C) - Misrepresentation as she does not knowingly misrepresent her firm's capabilities. However, she does violate this Standard by failing to inform Hampton after learning that Finley does not have the expertise that she originally believed he did. In order to avoid violating this Standard, Knight should have corrected the representation of her firm's capabilities that she made to Hampton. There is no indication that Knight has violated Standard III(C) - Suitability. These securities may fit within Hampton's investment objectives and constraints as well as his existing portfolio.

Question 156

Paul Sparfeld, CFA, is in charge of presenting performance results for his investment firm, a sole proprietorship with three employees. Which of the following performance presentation policies adopted by Sparfeld's firm is least likely consistent with the recommendations for compliance with the Standards? A Applying the GIPS standards. B Presenting composite returns that include both actual and simulated data C Removing the contribution of terminated portfolios when presenting historical returns

Answer 156

C According to the recommendations for compliance with Standard III(D) - Performance Presentation, terminated accounts should be included when calculating historical performance. The point at which accounts were terminated should be clearly indicated. Removing the contribution of such accounts misrepresents historical performance. Compliance with GIPS standards is the best method to adhere to this Standard. It is also not a violation of this Standard to present returns that include both actual and simulated data, provided simulated returns are clearly identified as such.

Question 157

Nicholas Boudreaux, CFA, manager of a high yield bond fund, is giving a presentation at an investment conference. In order to finish within his allocated time, Boudreaux includes only a brief summary of his fund's returns over the past five years alongside the performance of an appropriate benchmark over the same period. Later, in response to an audience member's question, Boudreaux notes that more detailed information on his fund's performance is available to all clients upon request. He encourages prospective clients who would like more information to become clients. Has Boudreaux most likely violated the Standards? A No B Yes, with respect to performance presentation only C Yes, with respect to both performance presentation and misrepresentation

Answer 157

B Boudreaux violates Standard III(D) - Performance Presentation by making detailed information available upon request only to clients but not prospective clients. Based on this Standard, supporting details should be made available to both clients and prospective clients. Boudreaux has complied with Standard I(C) - Misrepresentation by including an appropriate benchmark by which his fund's performance may be assessed. There is no indication that he has knowingly presented inaccurate or misleading information.

Question 158

Juan Ortiz, CFA, an independent equity analyst, has recently decided to send his research reports to clients via email rather than mailing hard copies. After he has sent his reports, he calls a select group of clients to discuss his recommendations in further detail. This service is available to all clients willing to pay for the higher level of service that Ortiz describes on his website. Has Ortiz most likely violated the Standards? A No B Yes, with respect to fair dealing C Yes, with respect to loyalty, prudence, and care

Answer 158

A Standard III(B) - Fair Dealing does not prohibit the provision of additional services to clients who pay for it, provided that all clients are given the opportunity to do so and its availability is disclosed. There is no indication that Ortiz has violated Standard III(A) - Loyalty, Prudence, and Care.

Question 159

Connor Raymond has recently completed his MBA studies and received his CFA charter. While seeking a full-time position, he receives an offer to work for Alpha Partners on a part-time basis. The terms of this verbal agreement include payment of a flat fee for each research report Raymond completes and do not require him to work exclusively for Alpha Partners. Several months later, without seeking approval from his part-time employer, Raymond submits a draft of his latest report to Dunkirk Capital, where he has been offered a full-time position. Has Raymond most likely violated the Standards? A Yes B No, because his actions are not subject to a written agreement C No, because his agreement does not require him to work exclusively for Alpha Partners

Answer 159

A Standard IV(A) - Loyalty requires members and candidates to "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." In this example, Raymond violates this Standard by sharing his report without obtaining the written consent of Alpha Partners. Alpha Partners pays Raymond his research reports so the reports are owned by Alpha Partners. Although his agreement is not in writing and does not contain an exclusivity clause, that does not lessen his obligation of loyalty to the employer that has commissioned his work.

Question 160

James Kapp, CFA, an investment manager for a mutual fund that follows socially responsible investment guidelines, frequently participates in nonviolent protests to advocate for animal rights. Kapp has been arrested several times over the past year for such protests, but these activities have not affected his ability to carry out his responsibilities at work. Kapp's supervisor, also a CFA charterholder, became aware of these arrests last week and called a meeting to discuss the matter. Have the Standards most likely been violated? A No B Yes, only with respect with misconduct only C Yes, with respect to both misconduct and responsibilities of supervisors

Answer 160

A The relevant Standards are: ``` Standard I(D) - Misconduct Standard IV(C) - Responsibilities of Supervisors If an activity does not reflect adversely on the member's or candidate’s professional reputation, integrity, or competence, the activity is considered a personal cause or belief and it does not violate any CFA Institute Standards. ``` Since nonviolent protests are not related to the firm’s line of business, the supervisor is not at fault for Kapp's activities. Duties of supervisors do not extend to monitoring employee's personal activities that do not reflect on his or her professional reputation, integrity, or competence.

Question 161

Nathan Bradley, CFA, an independent equity analyst, accepts an offer from Whitten Manufacturing (WMN) to write a research report analyzing the company's stock. Before undertaking any work on the report, Bradley agrees to accept a flat fee and a fixed number of WMN stock options as compensation. Neither the value of the fee or the number of options Bradley receives is linked to his report's conclusions or recommendations. One year after the report is issued, Bradley exercises the options. Has Bradley most likely violated the Standards? A No B Yes, with respect to independence and objectivity only C Yes, with respect to both independence and objectivity and additional compensation arrangments

Answer 161

B Issuer-paid research, such as the work described in this example, is allowed by Standard I(B) - Independence and Objectivity under certain conditions. Bradley would not have violated this Standard by accepting a flat fee that was agreed in advance of him undertaking any work and was not linked to his report's conclusions or recommendations. However, Bradley does violate this Standard by accepting a compensation package that includes options to purchase WMN shares as this type of equity-based compensation could reasonably be expected to influence his ability to remain independent and objective. Bradly will likely be biased to release a positive report as that will increase the value of his stock options of WMN. There is no indication that Bradley has violated Standard IV(B) - Additional Compensation Arrangements, which prohibits members and candidates from accepting compensation for work that conflicts with the interest of their employer without receiving written consent from all parties involved.

Question 162

Robert Conner, CFA, has decided to leave his position at Futurevest Capital in order to start his own investment advisor firm. Having already given notice of his pending departure, he agrees to help train his replacement. Before the formal end of his tenure with Futurevest, Connor signs an agreement to lease office space for his new firm. The office is more lavish than Connor originally intended and the lease payments are correspondingly higher than he had budgeted, but he manages to keep his new firm profitable in its first year of operations by charging clients higher service fees. Has Connor most likely violated the Standards? A No B Yes, with respect to loyalty C Yes, with respect to loyalty, prudence, and care

Answer 162

A Standard IV(A) - Loyalty requires members and candidates to protect the interests of their employer by not engaging in any conduct that would harm or deprive it of their skills and abilities. In this example, Connor has not violated this Standard by making arrangements to start his own firm as he is permitted to make arrangements to enter competitive practice. Although Connor may be leasing a more lavish office and charging clients higher fees than he had originally planned, there is no evidence that he has violated Standard III(A) - Loyalty, Prudence, and Care. Clients of Connor's new firm have the option to move their accounts elsewhere if they believe that they are being overcharged.

Question 163

Patrick McLeod, CFA, engages in independent practice for pay. Because this work does not compete with his employer and only requires five hours of his time per week, he neither sought nor received written permission in advance. Barbara Tunstill, CFA, has recently joined a new firm and calls the clients of her former employer that she can remember for the purpose of soliciting their business. Graham Olds, CFA, began engaging in independent practice for pay that competes with his employer after receiving written permission to do so from all parties involved. Which of the following statements is most accurate? A Only Tunstill has violated the Standards B All three charterholders have adhered to the Standards C Only McLeod and Tunstill have complied with the Standards

Answer 163

B None of the charterholders in this example have violated the Standards. Standard IV(A) - Loyalty allows members and candidates to engage in independent practice that competes with their employer, provided they have permission to do so. Standard IV(B) - Additional Compensation Arrangement requires members and candidates to receive written permission from all parties involved before engaging in any paid work that could reasonably be expected to conflict with the interests of their employer. McLeod does not require written consent to engage in paid work that does not compete with his employer and requires a relatively small amount of his time. Tunstill does not violate Standard IV(A) by soliciting the business of former clients after starting at a new firm without relying on any resources that are the property of her former employer. Olds has not violated the Standards. By obtaining written permission from all parties involved before engaging in paid work that competes with his employer, Olds has also complied with the Standards.

Question 164

Ben Bell, CFA, is considering leaving his employer, Steelhead Investments (SI), to accept a portfolio manager position with Newtown Capital. During his interview with Newtown, Bell discusses his ability to attract new business, including the accounts of current SI clients. He specifically names two clients with whom he has established a close working relationship as individuals who he intends to contact after his tenure with SI officially ends. Bell most likely violated the Standards with respect to: A loyalty only. B preservation of confidentiality only. C both loyalty and preservation of confidentiality.

Answer 164

C Bell has violated Standard III(E) - Preservation of Confidentiality by revealing the names of the clients whose business he intends to solicit after he formally leaves SI. This is confidential information belonging to those clients. Bell has also violated Standard IV(A) - Loyalty, which states that members and candidates must not "divulge confidential information, or otherwise cause harm to their employer." Bell revealed the names of his firm's clients, which is confidential information belonging to the firm.

Question 165

A firm's code of ethics should most likely: A be shared with clients. B include detailed procedures for compliance. C contain legal terminology to increase the likelihood of compliance.

Answer 165

A As noted in the recommendations for compliance with Standard IV(C) - Responsibilities of Supervisors, all firms should have a stand-alone code of ethics that is distinct from the procedures for compliance. These codes "should be written in plain language and should address general fiduciary concepts. They should be unencumbered by numerous detailed procedures." Codes should be shared with clients and members and candidates should encourage their firms to do so.

Question 166

Emily Rushton, CFA, accepts a performance bonus from a client after receiving verbal consent to do so from her supervisor. Has Rushton most likely adhered to the Standards? A No B Yes, because she has her supervisor's consent C Yes, because her interests are aligned with those of her client and her employer

Answer 166

A Standard IV(B) - Additional Compensation Arrangements requires members and candidates to obtain the written, not verbal, consent of all parties involved before accepting any compensation that might reasonably be expected to create a conflict with their employer's interests. Written consent may be an email or some other digital format, as long as it can be documented.

Question 167

Thomas Easterling, CFA, is the Director of Research for Spruce Grove Capital (SGC). Easterling is careful to avoid giving even the appearance of exerting undue pressure on the analysts who work under his supervision. Although this is not official firm policy, Easterling and his analysts are aware that SGC will not distribute reports recommending the sale of shares issued by companies with which it has an investment banking relationship. Over the years that he has held his current position, Easterling has noted his opposition to this practice in conversations with SGC's senior executives, but he has accepted that it will likely continue and believes that he can provide his analysts - mostly recent business school graduates - with training and skills that they can use after they leave SGC to work for other firms. Has Easterling most likely violated the Standards? A No B Yes, with respect to loyalty C Yes, with respect to independence and objectivity

Answer 167

C According to Standard IV(A) - Loyalty, 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." There is no indication that Easterling has violated this Standard in this example. At most, the scenario indicates that he works to improve the skills of the analysts he supervises while privately hoping that they will one day have the opportunity to apply these skills in a workplace environment that does not attempt to unduly influence the conclusions of their work. In the guidance for Standard I(B) - Independence and Objectivity, we learn that managers, such as Easterling in this example, "have a responsibility to provide an environment in which analysts are neither coerced nor enticed into issuing research that does not reflect their true opinions." Easterling has violated Standard I(B) when he continues to work for a firm that refuses to be independent and objective with its reporting standard. Note that Easterling has likely also violated Standard I(A) - Knowledge of the Law by failing to take sufficient action to dissociate from the firm's practice of refusing to publish reports recommending the sale of shares issued by its investment banking clients.

Question 168

Carole Nguyen, CFA, a portfolio manager with Washburn Capital, is preparing for a meeting with a prospective client, Katherine Tracy. Nguyen asks her associate, Travis Berg, to send a summary of Washburn's performance over the past five years directly to Tracy. In an effort to demonstrate Washburn's responsiveness, Berg sends the summary to Tracy immediately after collecting the performance data. Later, Nguyen realizes that Berg has included inaccurate data. After an investigation determines that Berg's error was unintentional, Berg sends Tracy a new version of the performance summary with accurate information. Has Nguyen most likely violated the Standards? A Yes B No, because Berg's error was unintentional C No, because she responded promptly after detecting the error

Answer 168

A Nguyen violates Standard IV(C) - Responsibilities of Supervisors by failing to provide Berg with proper instructions and adequately oversee his work. At a minimum, Nguyen should have delegated her responsibility to review the summary prepared by Berg before it was sent to the prospective client. Additionally, Tracy should have been provided with the correct information as soon as the error was discovered rather than after an investigation was conducted.

Question 169

Russell Bellamy, CFA, a manager with a regional bank, sends out a regular newsletter to clients on a monthly basis. Independent of his position, Bellamy has been appointed to the Board of a nonprofit organization that provides grants to local artists. In his latest newsletter to clients, Bellamy mentions his appointment as well as the fact that the organization recently announced the start of a fundraising campaign. Has Bellamy most likely violated the Standards? A No B Yes, with respect to loyalty C Yes, with respect to preservation of confidentiality

Answer 169

A Bellamy has not violated Standard III(E) - Preservation of Confidentiality as he has not revealed any confidential information about his clients. He would have violated this Standard if he had, for example, provided his clients' contact information to the nonprofit organization. Bellamy has not violated Standard IV(A) - Loyalty as he has not revealed any confidential information belonging to his employer.

Question 170

Patrick Cobb, CFA, works as a portfolio manager at Paradiso Asset Management (PAM), which manages investments for large, institutional investors. PAM's minimum account size is $20 million. Twice a week, Cobb volunteers to serve meals at a local homeless shelter, Hospitality at the Heart (HH). The chair of the HH board has asked Cobb to manage the charity's portfolio, valued at $8 million, in return for compensation of 0.06% of assets under management annually. Domingo Rivera, another portfolio manager at PAM, overheard Cobb discussing details for this potential arrangement and accused his colleague of being disloyal to his employer and engaging in independent practice. Has Cobb most likely violated the Standards? A No, because HH's account is too small for PAM B No, because he has not accepted the offer from HH's board C Yes, because he has not received written permission from PAM

Answer 170

B According to Standard IV(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." Cobb's work as a portfolio manager for PAM is related to the work that he has been asked to do on behalf of HH, for which he would receive compensation. Therefore, Cobb would violate this Standard if he accepted the offer without receiving written consent from PAM after having provided a detailed description of the arrangement with HH. However, Cobb does not violate this Standard merely by having received an offer and discussing it. The fact that the value of the HH account is less than the minimum size of accounts managed by PAM does not relieve Cobb of the obligation created by this Standard.

Question 171

Matthew Quinn, CFA, is fired by his firm after it was discovered that he was repeatedly reimbursed for expenses that he had not actually incurred. This pattern of activity was discovered as an offshoot of an unrelated performance audit. Investigators noted that Quinn made no attempt to conceal his activities and used methods that could be easily traced. Quinn’s supervisor, Kimberley Constantine, CFA, reports the incident to CFA Institute's Professional Conduct Program - an act that some of her colleagues believed was unnecessary given that Quinn had already been fired. Which of the following statements is most accurate? A Only Quinn has violated the Standards B Only Constantine has violated the Standards C Both Quinn and Constantine have violated the Standards

Answer 171

C Standard I(D) - Misconduct prohibits members and candidates from engaging in "any professional conduct involving dishonesty, fraud, or deceit." Quinn violates this Standard by repeatedly filing fraudulent expense claims. Standard IV(C) - Responsibilities of Supervisors requires members and candidates to "make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations and the Code and Standards." Constantine violates this Standard by failing to provide adequate supervision. Specifically, we are told that Quinn "made no attempt to conceal his activities and used methods that could be easily traced." Constantine clearly did not meet her obligation to make reasonable efforts to detect violations.

Question 172

Amy Yellowstone, CFA, is an equity analyst with Prateon Securities. She has been offered a contract to co-author a report to be published by the World Bank. Under the terms of the offer, she would be required to contribute to the report 20 hours a week over a three-month period with no additional obligation and would be compensated at a flat monthly rate. Which of the following statements is most accurate? In order to comply with the Standards, Yellowstone: A must obtain written approval from her supervisor at Prateon Securities before accepting the contract position. B may accept the offer without the approval of her supervisor at Prateon Securities because it is for a contract position. C may accept the offer without the approval of her supervisor at Prateon Securities because the firm does not compete with the World Bank, which is an intergovernmental organization.

Answer 172

A According to Standard IV(B) - Additional Compensation Arrangements, members and candidates are prohibited from accepting compensation for work 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." There is no exception to the requirement to obtain written permission based on whether the offer is for contract work rather than regular employment. In this example, while the World Bank may not compete with Prateon Securities in the sense that the two entities are not competing for customers, having Yellowstone devote a significant amount of time to the writing of this report would conflict with the firm's interests. At a minimum, Prateon Securities and the World Bank would be competing for Yellowstone's time and talent during the term of the contract.

Question 173

Laura Savard, CFA, has been self-employed for several years, advising charitable foundations on portfolio manager decisions. Recently, Savard received an offer to do the same work within Piedmont Advisors that could provide her with greater resources than she had available to her as an independent practitioner, but which charges fees that are more than most charitable foundations are willing to pay. Before accepting her new position, Savard asked for, and received, written permission from Piedmont to continue her existing working arrangement with three clients (who also provided written consent) until they could decide whether to continue with Savard at Piedmont, or choose another advisor. Savard provided her supervisor at Piedmont with the details of her compensation arrangement and the duration of the period that she would continue to advise the three clients, but she refused to identify these foundations. Has Savard most likely violated the Standards? A No B Yes, because she must reveal the identities of the clients that she will continue to work for C Yes, because the terms of her compensation arrangements with her existing clients are confidential

Answer 173

A Savard has not violated the Standards. According to Standard IV(B) - Additional Compensation Arrangements, members and candidates are permitted to do work that competes with their employer as long as they do so with the written approval of all parties involved, which is observed in this example. In order to be able to assess the true cost of the services being provided, employers are entitled to know the details of compensation arrangements for outside work and the duration of the agreement. However, this Standard does not entitle employers to know the identities of an employee's outside clients. Had Savard provided Piedmont with the identities of her existing clients, particularly before accepting her new position, she would have violated Standard III(E) - Preservation of Confidentiality.

Question 174

James Knight, CFA, has recently been offered a promotion to a supervisory role in his investment firm’s compliance department. Upon a cursory review of the firm’s compliance manual, Knight realizes that the firm's compliance policies and procedures are severely flawed. Which of the following statements is most accurate? Knight: A must decline the offer in writing. B may accept the offer if he receives written assurance that the firm will conduct a review of its compliance policies and procedures. C may accept the offer if he receives written assurance that he will not be held responsible for matters that pre-date review of the firm's compliance policies and procedures.

Answer 174

A According to the guidance for Standard IV(C) - Responsibilities of Supervisors, members and candidates who do not believe that their firm's compliance policies would allow them to execute their supervisory responsibilities effectively "should decline in writing to accept supervisory responsibility until the firm adopts reasonable procedures to allow adequate exercise of supervisory responsibility." In this example, since the firm's compliance policies and procedures are severely flawed, Knight should not accept the promotion offer. It would have been okay to accept the offer if the firm's compliance policies and procedures were adequate but could use some improvements (i.e., not severely flawed). In that case, Knight may accept the promotion and make effort to improve the existing policies when he is in the position to do so.

Question 175

Jeff Day, CFA, has left the firm where he worked for 22 years and wants to contact all his former clients. He has not signed a non-compete agreement with his former employer. Which of the following statements is most accurate? Day: A must not contact his former clients because client records are firm property. B may work with any former clients who contact him independently, but he must not solicit their business. C may contact former clients if he relies on the knowledge that he gained while working for his former employer.

Answer 175

C Standard IV(A) - Loyalty requires members and candidates to act for the benefit of their employer and must not divulge confidential information or otherwise engage in conduct that is detrimental to their employer's interests. While it is accurate to say that client records are firm property and must not be taken by departing employees, this does not prohibit members and candidates from soliciting the business of former clients based on simple knowledge of their names and existence.

Question 176

Brenda Heaney, CFA, is currently a senior portfolio manager for Hemphill Investments, but she has plans to start her own firm and has given notice of her pending departure. Heaney takes a paid holiday before officially leaving Hemphill. She uses this holiday to file regulatory paperwork on behalf of her new firm and to sign a lease for office space. She resigns from Hemphill shortly after returning to the office from this holiday and begins contacting all her former clients to solicit their business after starting at her new firm. Has Heaney most likely violated the Standards? A No B Yes, by soliciting the business of her former clients C Yes, by making arrangements to start new firm while still employed by Hemphill

Answer 176

A It is acceptable, under Standard IV(A) - Loyalty, to make arrangements to start a new business while still employed at the old firm, as long as it does not take an unreasonable amount of time away from job duties. Soliciting the business of former clients using simple knowledge of their names and existence is also permitted by this Standard, but the contact information must be obtained from public sources. In this example, there is no evidence that Heaney has relied upon contact information or lists that have been improperly obtained from her former employer.

Question 177

Cynthia Harkin, CFA, accepts a discount on a car purchase from a client who owns an automobile dealership. Harkin discloses this arrangement to her employer in accordance with the firm's policies and has been granted written approval to accept it. Has Harkin most likely violated the Standards? A No B Yes, with respect to additional compensation arrangements only C Yes, with respect to both additional compensation arrangements and independence and objectivity

Answer 177

A Standard I(B) - Independence and Objectivity does not prohibit members and candidates from accepting gifts from clients, as long as any such additional compensation is disclosed to their employer. The employers can monitor the employees' actions in order to ensure that no clients are disadvantaged by the potential preferential treatment given to clients who have chosen to provide additional compensation. Standard IV(B) - Additional Compensation Arrangements pertains to gifts or compensation from entities, such as brokers, that may be trying to influence members and candidates to act in ways that go against the interests of their clients and/or employer. Gifts from clients are unlikely to fall under this category because the nature of this relationship is such that both the member or candidate and his or her firm, at least in theory, have every incentive to act in the best interest of the client and are already accepting compensation to provide a service.

Question 178

While working as an unpaid intern for Harborview Investments, Jenna Martin registers to take the Level I CFA exam. One of her projects at Harborview was the development of a financial model used to value commodity derivatives. After completing the Level I CFA exam, and while awaiting her results, Martin accepts a paid position with Dynavest Capital and receives written approval of her request to take the model that she developed during her time at Haborview to her new firm. She also takes the handwritten notes that she compiled while developing the model, without seeking approval to do so, since she was permitted to take the model itself. After formally starting with her new firm, Martin solicits the business of clients who she worked for while in her unpaid role at Harborview. Has Martin most likely violated the Standards? A No B Yes, by taking Harborview's property to Dynavest C Yes, by soliciting the business of Harborview's clients

Answer 178

B Martin violates Standard IV(A) - Loyalty by taking her handwritten notes, which belong to Harborview, without the firm's consent. The fact that the firm approved her request to take the model does not eliminate the requirement for her to seek and obtain approval before taking her handwritten notes as well. Martin does not violate this Standard by soliciting the business of Harborview's clients after her relationship with that firm has ended as long as she obtains the clients' contact information through public records.

Question 179

Shirley Rucker, CFA, has notified her employer that she will be leaving to join a competing firm. Which of the following statements best represents Rucker's obligation with respect to firm property? A She may retain copies of files that she has saved to her personal computer B She must not use records belonging to her current firm to benefit her new firm, including knowledge of her current firm's clients C Firm records should be erased from her personal computer or returned to her current employer unless the firm gives her permission to retain them

Answer 179

C According to Standard IV(A) - Loyalty, members and candidates should either erase or return firm records before departing. This includes deleting any copies of files that have been stored on a personal computer. Such files are firm property and may only be kept with the firm's consent. Simple knowledge of client names is acceptable to retain. Any further client information should be obtained from public sources.

Question 180

Which of the following statements is most accurate? Firms should be encouraged to adopt supervision systems that: A penalize the supervisor for failing to detect workplace violations. B allow supervisors and those to whom they have delegated authority to anticipate potential misconduct. C establish trust by relying on assurances from those who have committed misconduct that they will not reoffend.

Answer 180

B According to the guidance for Standard IV(C) - Responsibilities of Supervisors, supervisory systems (policies, procedures, etc.) should be designed to detect and prevent potential violations. Compliance procedures should be in place prior to the occurrence of a violation to be effective; it should allow activities that will likely result in misconduct to be detected. If members and candidates have made reasonable efforts to institute an adequate compliance program, they are not in violation of Standard IV(C) even if they fail to detect violations. Also, it is not enough to solely rely on an employee's assurances that the wrongdoing will not reoccur.

Question 181

A supervisor who discovers evidence that an employee has violated firm policies should most likely: A suspend the employee immediately. B increase oversight of the employee's activities. C provide the employee with additional compliance training.

Answer 181

B The recommended procedures for compliance with Standard IV(C) - Responsibilities of Supervisors include taking the following steps upon discovering evidence that an employee has violated firm policies: Respond promptly Thoroughly investigate the activities to determine the scope of any wrongdoing Increase supervision of their activities or place limits on what he or she may do Review the firm's policies and procedures for any changes that may be needed to prevent future violations Suspension may be necessary, but such a decision would typically follow a period of increased oversight. Additional compliance training is likely an insufficient response to discovering evidence of a violation.

Question 182

Roger Green, CFA, has been offered the position of Head of Equity Research at First Canadian Bank (FCB). Green has long coveted this position and sees it as an opportunity to provide leadership toward positive changes within FCB. He would like to use the influence that would accompany this position to ensure that analysts' bonuses are based on the accuracy of their forecasts rather than the current formula, which calculates bonuses for all employees based on FCB's overall revenues. Additionally, Green would like to implement an ongoing program of ethics and compliance education to replace the current practice of not offering such education beyond what is covered during an employee's initial training. Green is uncertain that he will be able to generate enough support among his colleagues to have these two desired changes implemented, but he decides to accept the position. Which if the following statements is most accurate? By accepting the position of FCB's Head of Equity Research, Green has: A not violated the Standards. B violated the Standards by accepting the supervisory role without being certain that he can achieve changes to FCB's incentive structure. C violated the Standards by accepting the supervisory role without being certain that he can achieve changes to FCB's ethics and compliance education program.

Answer 182

A According to the guidance for Standard IV(C) - Responsibilities of Supervisors, a member or candidate should decline to accept a supervisory role (in writing) if he or she "clearly cannot discharge supervisory responsibilities because of the absence of a compliance system or because of an inadequate compliance system." In this example, FCB's current policy with respect to determining analysts' bonuses could certainly be improved by adopting Green's desired change of accuracy-based bonuses. Moreover, the bank's current ethics and compliance education program appears to be insufficient. However, while FCB's current policies (or at least the two mentioned in this example) may be imperfect and Green cannot be certain that he will be able to achieve the changes he desires, the guidance says that such uncertainty "should not prevent a member or candidate from working with his or her own superiors and within the firm structure to develop and implement effective compliance tools..." In summary, Green may eventually determine that the most appropriate action is to refuse to continue in his supervisory role, but he does not violate the Standards by virtue of accepting this role with the intention of working with other senior managers and executives to improve FCB's current policies.

Question 183

Thomas Nolte, CFA, works for an investment firm and has a large roster of clients who are personally loyal to him based on years of dedicated service. Nolte has made plans to start his own investment firm, which will directly compete with his employer. He expects most of his clients will follow him. Before giving notice of his departure, and without notifying his employer, he submits the appropriate regulatory papers required to start his own firm. Has Nolte most likely violated the Standards? A No B Yes, by failing to notify his employer that he has submitted regulatory papers C Yes, by making plans to compete with his employer before giving notice of his departure

Answer 183

A Standard IV(A) Loyalty states that "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." In this example, Nolte is not actively soliciting clients. Instead, he is just making preparations to set up his own shop. There is no violation of this Standard as long as the activity does not distract him excessively from his current position and is done on his own time.

Question 184

Enrico Traina, CFA, owns and operates a small investment advisory firm. When dealing with clients, Traina only recommends securities that appear on his list of approved investments, but he does not mention that the due diligence on the securities that appear on this list has been conducted by one of the brokerage firms that he uses to execute trades for his clients' accounts. Traina believes that the broker's research methods are sound and is careful to recommend stocks that are consistent with a client's investment policy statement (IPS). Traina has most likely violated the Standards with respect to: A misrepresentation only. B communication with clients and prospective clients only. C both misrepresentation and communication with clients and prospective clients.

Answer 184

C Triana violates Standard I(C) - Misrepresentation by knowingly omitting to mention that the due diligence on the securities he recommends has been conducted by a third party. Failing to mention this fact is also a violation of Standard V(B) - Communication with Clients and Prospective Clients, which requires members and candidates to disclose "the basic format and general principles of the investment process they use to analyze investments, select securities, and construct portfolios."

Question 185

Derek Becker, CFA, a research analyst with Colgate Investments, is part of a team that is collectively responsible for producing a report on the life insurance industry. Becker does not agree with the group's consensus and does not believe that the methodology used to arrive at this consensus is sound. However, he does believe that the report's conclusions have a reasonable and adequate basis within the context of this methodology. Becker should most likely: A include his name among the report's authors. B decline to have his name appear as one of the report's authors. C refuse to participate in future reports based on this methodology, but include his name among this report's authors.

Answer 185

B According to the guidance for Standard V(A) - Diligence and Reasonable Basis, members and candidates who lack confidence in the process used to arrive at a group consensus should dissociate from the group's work and have their name removed from any work based on the process it employs.

Question 186

Steve Boswell, CFA, is a small-cap manager for a mutual fund. He has an investment mandate that he will invest entirely in U.S. stocks and only in stocks with a market capitalization below $400 million. Recently, he has struggled to find companies to invest in and has gradually moved 12% of the portfolio to small-cap emerging market firms. However, his performance still significantly exceeds his peer group benchmark. Has Boswell most likely violated CFA Institute Standards? A No B Yes, with respect to diligence and reasonable basis C Yes, with respect to communication with clients and prospective clients

Answer 186

C Boswell has violated Standard V(B) Communication with Clients and Prospective Clients, which states that members and candidates must: Disclose to clients and prospects 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. Disclose to clients and prospective clients significant limitations and risks associated with the investment process. 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. Distinguish between fact and opinion in the presentation of investment analyses and recommendations." The Standard requires that Boswell follow the mandate, which is to invest exclusively in the stocks of US companies with a market capitalization of less than $400 million. If he deviates from this mandate, all current and prospective clients must be notified. However, there is no indication that he lacks a reasonable basis for his security selections.

Question 187

Adam Fleisher, CFA, is a money manager who works with individual investors. Recently, Fleisher's wife, Joan, told him that Royal Petroleum, a major oil and gas producer, had made a $50,000 donation to an international charity for which she serves as a director. The donation would help fund development work with rural communities in Indonesia. Upon hearing this, Fleisher concluded that Royal Petroleum must have discovered new oil reserves near these communities and is seeking to foster goodwill with the local population. Although his wife told him that news of the donation had not yet been made public, as soon as the market opened the next morning, Fleisher purchased Royal Petroleum stock for all of his clients for whom he believes it is an appropriate investment. Two weeks later, Royal Petroleum announced that it had discovered significant new oil reserves in Indonesia as well as a revenue-sharing agreement that would ensure a good relationship with the local population. Within minutes of this announcement, Royal Petroleum's share price rose by 10%. Has Fleisher most likely violated the Standards? A No B Yes, with respect to diligence and reasonable basis C Yes, with respect to material nonpublic information

Answer 187

B Standard V(A) - Diligence and Reasonable Basis requires members and candidates to exercise diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions. In this example, Fleisher has violated this Standard by failing to have a reasonable basis for purchasing Royal Petroleum shares for his clients. Although his instincts were ultimately shown to be accurate, there is no evidence that Fleisher conducted the necessary due diligence before acting on behalf of his clients. Fleisher did not violate Standard II(A) - Material Nonpublic Information because, although the information that he acted on was nonpublic, a $50,000 donation would not have a material impact on the price of a major oil and gas producer's shares.

Question 188

Calvin Beauregard, CFA, works as an analyst with a securities dealer. For each potential investment that he is assigned to work on, Beauregard adheres to local laws by retaining electronic copies of all relevant documents for six years, at which point they are removed from the firm's server. Documents that are produced as hard copies are scanned and saved in digital form before the original copies are securely shredded. Has Beauregard most likely violated the Standards? A No B Yes, by destroying hard copies of documents C Yes, by retaining records for less than seven years

Answer 188

A Beauregard has not violated the Standards. According to Standard V(C) - Record Retention, members and candidates must maintain hard or soft copies of all documents that support their "investment analyses, recommendations, actions, and other investment-related communications with clients and prospective clients." While CFA Institute recommends that records be maintained for a period of seven years, Beauregard does not violate this Standard by maintaining his records for the six-year period required by local laws. If Beauregard did not take proper measures to ensure that hard copies of documents were shredded in a secure manner, he may be at risk of violating Standard III(E) - Preservation of Confidentiality. However, the evidence suggests that these documents were disposed of in an appropriate manner. Standard V(C) - Record Retention does not prohibit members and candidates from destroying hard copies of documents as long as electronic copies are retained.

Question 189

Richard Frizell, CFA, worked as part of a three-member team that recently completed a research report on Lukesrun that includes a "buy" recommendation for the company's stock. The team submits this report to his firm's review committee, which approves it for distribution to clients. Before the approved version of the report can be sent to clients, Frizell receives revised economic data from a government statistics agency that he believes will result in significantly lower earnings for companies in Lukesrun's sector than he had previously forecast. In order to comply with the Standards, Frizell should most likely: A have his name removed from the report before it is sent to clients. B act to prevent the report from being sent to clients until the authors consider this new information. C send a supplementary report with his assessment of this new information to all clients who receive the original report.

Answer 189

B Standard V(A) - Diligence and Reasonable Basis requires members and candidates to exercise "diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions." In this example, Frizell has an obligation to act to prevent clients from receiving a report that he believes should be updated in light of the new information he has received. It is not sufficient for him to send a supplementary report or have his name removed from the report before it is sent to clients. He is required to take steps to prevent the report from being sent to clients in its current form.

Question 190

Jennifer Mitchell, CFA, is responsible for approving “selected investment managers” to manage assets on behalf of her firm's clients. Recently, Mitchell has been reading media coverage of Jim Taylor, a well-respected equity manager. She attends an investment conference and is quite impressed with a presentation given by Taylor. Upon returning to her office from the conference, Mitchell adds Taylor to the firm's list of approved managers. Has Mitchell most likely violated the Standards? A No B Yes, with respect to diligence and reasonable basis only C Yes, with respect to both diligence and reasonable basis and communication with clients

Answer 190

B According to Standard V(A) - Diligence and Reasonable Basis, members and candidates must exercise "diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions." Mitchell has violated this Standard by failing to conduct sufficient due diligence before adding Taylor to a list of approved managers. It is insufficient to evaluate a manager's suitability solely based on media coverage and a single conference presentation. However, Mitchell has not violated Standard V(B) - Communication with Clients because the list of approved managers represents her firm's opinion of managers who are believed to be qualified. There is no issue of failing to distinguish between fact and opinion. Instead, there is only a lack of sufficient due diligence in arriving at that opinion.

Question 191

Brian Orton, CFA, runs a small investment management firm and lacks the resources to hire his own research analysts. As a cost-effective alternative, Orton obtains third-party research reports and sends full, unedited versions of selected reports to clients in envelopes displaying his firm's logo. In each envelope, Orton includes a letter, written on his firm's letterhead, in which he shares his comments on each of the enclosed reports. Based on his initial research and ongoing scrutiny, Orton believes that the research reports he sends to clients have an adequate basis, although he does not always agree with their conclusion. Has Orton most likely violated the Standards? A No B Yes, with respect to misrepresentation C Yes, with respect to diligence and reasonable basis

Answer 191

A Standard I(C) - Misrepresentation prohibits members and candidates from taking credit for work that they have not done. There is no indication that Orton has claimed to be the author of the reports that he sends to his clients. He does not violate this Standard by sending these reports in envelopes displaying his firm's logo or by including a letter with his comments on his firm's letterhead. Orton does not appear to have violated Standard V(A) - Diligence and Reasonable Basis as it is noted that he researched the providers before choosing them and conducts ongoing scrutiny of their work. He is not required to agree with the conclusions of all (or any) reports that he sends to his clients, as long as he believes that they have an adequate basis.

Question 192

All analysts at Trenton Investments, including Mike Goguen, CFA, utilize the same top-down multi-factor model to determine the fair market value of potential investments. Clients are aware of the general model but not its factors, although they are not proprietary. Recommendations are made based on the calculated multi-factor values relative to observed market values of assets. Trenton recently changed the model to a bottom-up multi-factor model in an attempt to more accurately price assets. In an email to all of his current and prospective clients, Goguen included the exact specification of the new multi-factor model and stated that more accurate asset valuations are expected from the new model. Has Goguen most likely violated the Standards? A No B Yes, because he should have notified existing clients prior to notifying prospective clients C Yes, because he suggested that the new model will generate more accurate asset valuations

Answer 192

A According to Standard V(B) - Communication with Clients and Prospective Clients, clients must be made aware of the investment process used by the member and must be informed of any changes to this process. Additionally, members must include factors relevant to the analysis, determined using their reasonable judgment, in communications with clients. A change from a top-down to a bottom-up multi-factor model is likely important information to clients even if the specific factors are generally unknown to the public. Goguen has informed all clients and prospects of the change in the model and has stated an expectation of improved results from the model without guaranteeing results or stating the improvement as fact.

Question 193

A portfolio manager increases the maximum that a fund can invest in mid-cap companies from $500 million to $600 million due to inflation. The manager’s investment process remains the same and she plans to inform the customer of this update during the scheduled revision of the Investment Policy Statement at the beginning of next year. Has the manager most likely violated the Standards? A No B Yes, with respect to fair dealing C Yes, with respect to communication with clients and prospective clients

Answer 193

C Raising the ceiling is a mandate change that must be disclosed in accordance with Standard V(B) - Communication with Clients and Prospective Clients. It is not compliant to wait until the beginning of the next year to inform customers of the update. There is no indication that Standard III(B) - Fair Dealing has been violated.

Question 194

Stella Hanson, CFA, analyzes derivatives and offers recommendations. Stella's primary analysis tool is an in-house derivatives valuation model. To comply with the Standards, Hanson is least likely required to: A understand the model's parameters. B understand the model's assumptions and limitations. C be capable of discussing the model's technical aspects in detail.

Answer 194

C Standard V(A) - Diligence and Reasonable Basis requires members and candidates to ​have "a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action." This Standard also applies to using computer models. Specifically, the guidance for this Standard requires members and candidates to understand a model's parameters and limitations, as well as the assumptions on which it is based, but it does not require detailed technical expertise. This would apply to both a secondary (in-house) model and a third-party (externally created) model.

Question 195

Peter White, CFA, is the manager of an international equity fund that holds the stocks of many Latin American companies. He personally holds many of the same stocks in his fund, as well as others that are not included among his fund's holdings. White's comments on developments in Latin American markets are closely followed, particularly his posts on social media. After observing some gang activity during a visit to Colombia's capital, White tweets,"I've seen an increase in Bogota gang violence. This will drive investors from Colombian stocks." Within the next hour, Colombian stock prices fall significantly. White believes that the market has overreacted and takes advantage of the opportunity to purchase shares for his fund at what he considers attractive valuations. Has White most likely violated the Standards? A No B Yes, with respect to market manipulation C Yes, with respect to communication with clients and prospective clients

Answer 195

C White has violated Standard V(B) - Communication with Clients and Prospective Clients by failing to identify his opinion about how investors will react to news of an increase in Bogota gang violence. It is not even clear that this statement, which appears to be based on one personal observation, is accurate. White does not appear to have violated Standard II(B) - Market Manipulation as there is no evidence that he acted to distort prices with the intention of misleading market participants.