Ethics and Professional Standards

Question 1

Ethics can be described as:
A. A commitment to upholding the law.
B. An individual’s personal opinion about right and wrong.
C. A set of moral principles that provide guidance for our behaviour

Answer 1

C. A set of moral principles that provide guidance for our behaviour

Question 2

Standards of conduct:
A. Are a necessary component of any code of ethics.
B. Serve as a general guide regarding proper conduct by members of a group.
C. Serve as a benchmark for the minimally acceptable behaviour required of members of a group.

Answer 2

C. Serve as a benchmark for the minimally acceptable behaviour required of members of a group.

Question 3

Investment professionals have a special responsibility to act ethically because:
A. The industry is heavily regulated.
B. They are entrusted to protect clients’ assets.
C. The profession requires compliance with its code of ethics.

Answer 3

B. They are entrusted to protect clients’ assets.

Question 4

Professionals use their specialised knowledge and skills:
A. In service to others.
B. To advance their career.
C. For the exclusive benefit of their employers.

Answer 4

A. In service to others.

Question 5

A profession’s code of ethics:
A. Includes standards of conduct or specific benchmarks for behaviour.
B. Ensures that all members of a profession with act ethically at all times.
C. Publicly communicates the shared principles and expected behaviours of a profession’s members.

Answer 5

C. Publicly communicates the shared principles and expected behaviours of a profession’s members.

Question 6

Which of the following will most likely determine whether an individual will behave unethically?
A. The person’s character.
B. The person’s internal traits and intrinsic motivation.
C. External factors, such as environmental or cultural elements.

Answer 6

C. External factors, such as environmental or cultural elements.

Question 7

Which of the following statements is most accurate?
A. All legal behaviour is ethical behaviour.
B. Some ethical behaviour may be illegal.
C. Legal standards represent the highest standard.

Answer 7

B. Some ethical behaviour may be illegal, such as civil disobedience.

Question 8

Which of the following statements is most accurate?
A. Increased regulations are the most useful means to reduce unethical behaviour by market participants.
B. Regulators quickly design and implement laws and regulations to address practices that adversely affect the fairness and efficiency of markets.
C. New laws designed to reduce or eliminate conduct that adversely affects the market can create opportunities for different, but similarly problematic, conduct.

Answer 8

C. New laws designed to reduce or eliminate conduct that adversely affects the market can create opportunities for different, but similarly problematic, conduct.

Question 9

A financial adviser has been offered a special bonus to the team that attracts the most new investors into the firm’s investment funds.

Which situational influence is likely to have the most effect on the financial adviser’s efforts to get new clients to invest in funds? His relationship with:
A. Client
B. Employer
C. Teammates

Answer 9

C. Teammates, as they share in earning the bonus for the employer.

Question 10

An ethical decision making framework:
A. Is only beneficial when a firm lacks a code of ethics.
B. Is used to improve compliance with laws and regulations.
C. Is a tool, for analysing the potential alternative actions and consequences of a decision.

Answer 10

C. Is a tool, for analysing the potential alternative actions and consequences of a decision.

Question 11

Ethical decision-making frameworks:

A. Raise awareness of difference perspectives.
B. Focus attention on short-term consequences.
C. Allocate more weight to those who will directly benefit from the decision.

Answer 11

A. Raise awareness of difference perspectives.

Question 12

Ethical decision-making frameworks:
A. Are not needed if behaviour is legal.
B. Identify who gains the most from a decision.
C. Can help reduce unanticipated ethical lapses and unexpected consequences.

Answer 12

C. Can help reduce unanticipated ethical lapses and unexpected consequences.

Question 13

Using an ethical decision-making framework, which of the following duties would most likely take precedence?
A. Client
B. Employer
C. Colleagues

Answer 13

A. Client. The expecting to client interests taking precedence occurs when market integrity effects take precedence.

Question 14

Using an ethical decision-making framework, a financial adviser would most likely:
A. Recommend an elderly client invest at least some of his assets in the highly rated fund.
B. Research other investments that can provide steady income before making a recommendation to his elderly client.
C. Disclose commission he would earn before recommending that the elderly client invest at least some of his assets in the highly rated fund.

Answer 14

B. Research other investments that can provide steady income before making a recommendation to his elderly client.

Question 15

Benchmarks for minimally acceptable behaviours of community members are:
A. A code of ethics.
B. Laws and regulations.
C. Standards of conduct.

Answer 15

C. Standards of conduct.

Question 16

Specialised knowledge and skills, a commitment to serve others, and a shared code of ethics best characterise a(n):
A. Vocation
B. Profession
C. Occupation

Answer 16

B. Profession

Question 17

When unethical behaviour erodes trust in an investment firm, that firm is more likely to experience:
A. Lower revenues only.
B. Higher expenses only.
C. Lower revenues and higher expenses.

Answer 17

C. Lower revenues and higher expenses.

Question 18

High ethical standards are distinguishing features of which of the following bodies?
A. Craft guilds
B. Trade bodies
C. Professional bodies

Answer 18

C. Professional bodies

Question 19

Fiduciary duty is a standard most likely to be upheld by members of a(n):
A. Employer
B. Profession
C. Not-for-profit body

Answer 19

B. Profession

Question 20

Which of the following best identifies an internal trait that may lead to poor ethical decision making?
A. Overconfidence.
B. Loyalty to employer.
C. Promise of money of prestige.

Answer 20

A. Overconfidence.

Question 21

Situational influences in decision making will most likely be minimised if:
A. Strong compliance programs are in place.
B. Longer-term consequences are considered.
C. Individuals believe they are truthful and honest.

Answer 21

B. Longer-term consequences are considered.

Question 22

Decision makers who use a compliance approach are most likely to:
A. Avoid situational influences.
B. Oversimplify decision making.
C. Consider more factors than when using ethical decision making approach.

Answer 22

B. Oversimplify decision making.

Question 23

To maintain trust, the investment management profession must be interdependent with:
A. Regulators
B. Employers
C. Investment firms.

Answer 23

C. Investment firms.

Question 24

Which is an example of an activity that may be legal but that the CFA Institute considers unethical?
A. Making legally required disclosures in marketing materials.
B. Trading while in possession of material nonpublic information.
C. Disclosure by an employee of his or her own company’s dishonest activity.

Answer 24

B. Trading while in possession of material nonpublic information.

Question 25

An ethical decision making framework will most likely:
A. Include a pre-determined, uniform sequence.
B. Focus exclusively on confirmable facts and relationships.
C. Help avoid making a decision that has unanticipated ethical consequences.

Answer 25

C. Help avoid making a decision that has unanticipated ethical consequences.

Question 26

When an ethical dilemma occurs, an investment professional should most likely first raise the issue with a:
A. Mentor outside the firm
B. Professional body’s hotline
C. Senior individual in the firm

Answer 26

C. Senior individual in the firm

Question 27

Which of the following statements best describes an aspect of the Professional Conduct Program process?
A) Inquiries are not initiated in response to information provided by the media.
B) Investigations result in Disciplinary Review Committee panels for each case.
C) Investigations may include requesting a written explanation from the member or candidate.

Answer 27

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

Question 28

A current Code of Ethics principle reads in full, “Promote the integrity:
A) and viability of the global capital markets.”
B) of and uphold the rules governing capital markets.”
C) and viability of the global capital markets for the ultimate benefit of society.”

Answer 28

C) and viability of the global capital markets for the ultimate benefit of society.”

Question 29

Which of the following is correct with regard to the Standards of Professional Conduct?
A) They require supervisors to focus only on the detection and prevention of violations.
B) They set ethical conduct requirements for members and candidates that have remained unchanged since their creation.
C) They address the risks and limitations of recommendations being made to clients.

Answer 29

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

Question 30

Which of the following statements best describes an aspect of the Standards of Professional Conduct? Members and candidates are required to:
A) Ensure a portfolio mandate is suitable for all investors.
B) Promptly disclose changes that might materially affect investment processes.
C) Have a reasonable and adequate basis for decisions about client confidentiality.

Answer 30

B) Promptly disclose changes that might materially affect investment processes.

Question 31

A CFA Institute member or candidate violates Standard II(A) Material Nonpublic Information by:
A) Conducting price distortion practices.
B) Inappropriately causing otherst to act.
C) Inadequately maintaining investment records.

Answer 31

B) Inappropriately causing otherst to act.

Question 32

Standard III(C) Suitability requires members and candidates in an advisory relationship with a client to:
A) Place their client’s interests before their own interests.
B) Consider investments in the context of the client’s total portfolio.
C) Not knowingly make misrepresentations relating to recommendations.

Answer 32

B) Consider investments in the context of the client’s total portfolio.

Question 33

Standard III: Duties to Clients states that members and candidates must:
A) Document client financial constraints after an initial investment action.
B) Maintain an equal balance of interests owed to their clients and employers.
C) Deal fairly and objectively with all clients when engaging in professional activities.

Answer 33

C) Deal fairly and objectively with all clients when engaging in professional activities.

Question 34

Standard IV: Duties to Employers states that members and candidates must not:
A) Accept any gifts that might compromise their independence and objectivity.
B) Deprive their employer of their skills and abilities as related to their employment.
C) Accept compensation competing with their employer’s interest without the written consent of their employer only.

Answer 34

B) Deprive their employer of their skills and abilities as related to their employment.

Question 35

Standard V: Investment Analysis, Recommendations, and Actions states that members and candidates must:
A) Find an investment suitable for their client before making a recommendation.
B) Make reasonable efforts to ensure that performance presentation is fair, accurate, and complete.
C) Distinguish between fact and opinion in the presentation of investment analysis and recommendations.

Answer 35

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

Question 36

Standard VII: Responsibilities as a CFA Institute Member or CFA Candidate explicitly states a requirement regarding:
A) Loyalty.
B) Responsibility of supervisors.
C) Reference to the CFA Program.

Answer 36

C) Reference to the CFA Program.

Question 37

Standard VII: Responsibilities as a CFA Institute Member or CFA Candidate explicitly states a requirement regarding:
A) Loyalty.
B) Responsibility of supervisors.
C) Reference to the CFA Program.

Answer 37

C) Reference to the CFA Program.

Question 38

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

A. accept the order.
B. advise the customer of the change in recommendation before accepting the order.
C. not accept the order because it is contrary to the firm’s recommendation.

Answer 38

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

Question 39

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

A. A client may direct a manager to use that client’s brokerage commissions to purchase goods and services for that client.
B. Client brokerage commissions should be used to benefit the client and should be commensurate with the value of the brokerage and research services received.
C. Client brokerage commissions may be directed to pay for the investment manager’s operating expenses.

Answer 39

C. Client brokerage commissions may be directed to pay for the investment manager’s operating expenses.

Question 40

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

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

Answer 40

B. Jamison should not write the report because the two Howard & Howard officers serve as directors for subsidiaries of Britland.

Question 41

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

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

Answer 41

C. For confidentiality reasons, personal transactions and holdings should not be reported to employers unless mandated by regulatory organizations.

Question 42

Bronson provides investment advice to the board of trustees of a private university’s endowment fund. The trustees have provided Bronson with the financial and operating information, including planned expenditures. Bronson receives a phone call on Friday afternoon from Murdock, a prominent alumnus, requesting advice. Bronson faxed him comprehensive financial information about the endowment. Murdock, however, is not a contributor but has potential conflicts of interest. Based on the CFA Institute Code and Standards, Bronson should:

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

Answer 42

B. not send Murdock the information, to preserve confidentiality.

Question 43

Willier is the research analyst responsible for following Company X. All of the information he has accumulated about Company X suggests that the outlook for the company’s new products is poor, so the stock should be rated a “hold.” During lunch, however, Willier overhears a fellow analyst who has a different outlook. Upon returning to his office, Willier releases a strong “buy” recommendation. Willier:

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

Answer 43

B. violated the Standards because he did not have a reasonable and adequate basis for his recommendation.

Question 44

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

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

Answer 44

B. place the company on a restricted list and give only factual information about the company.

Question 45

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

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

Answer 45

A. Albert has violated the Standards, but Tye has not.

Question 46

Scott works for a regional brokerage firm. He estimates that Walkton Industries will increase its dividend by US$1.50 a share during the next year. He realizes that this increase is contingent on pending legislation that would, if enacted, give Walkton a substantial tax break. The U.S. representative for Walkton’s home district has told Scott that, although she is lobbying hard for the bill and hopes for its passage, it may be difficult. Walkton Industries has not made any statements about a tax change in its dividend policy. Scott writes in his research report, “We expect Walkton’s stock price to rise by at least 15% during the next year because the dividend will increase by US$1.50 a share, provided the stock at the current time should expect at least that bump in value.” Scott:

A. violated the Standards because he used material inside information.
B. violated the Standards by basing his research on uncertain predictions of future government action.
C. was in full compliance with the Standards.

Answer 46

B. violated the Standards by basing his research on uncertain predictions of future government action.

Question 47

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

A. Informing all people in the firm in advance that a recommendation is to be disseminated.
B. Distributing recommendations to institutional clients prior to individual accounts.
C. Minimizing the time between the decision and the dissemination of a recommendation.

Answer 47

C. Minimizing the time between the decision and the dissemination of a recommendation.

Question 48

The mosaic theory holds that an analyst:

A. violates the Code and Standards if the analyst fails to have knowledge of and comply with applicable laws.
B. can use material public information and nonmaterial nonpublic information in the analyst’s analysis.
C. should use all available and relevant information in support of an investment recommendation.

Answer 48

B. can use material public information and nonmaterial nonpublic information in the analyst’s analysis.

Question 49

Jurgen is a portfolio manager. One of her firm’s clients has told Jurgen that he will compensate her beyond the compensation provided by her firm on the basis of the capital appreciation of his portfolio each year. Jurgen should:
A. turn down the additional compensation because it will result in conflicts with the interests of other clients’ accounts.
B. turn down the additional compensation because it will create undue pressure on her to achieve strong short-term performance.
C. obtain permission from her employer prior to accepting the compensation arrangement.

Answer 49

C. obtain permission from her employer prior to accepting the compensation arrangement.

Question 50

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

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

Answer 50

B. did not violate the Standards in voting the shares in the manner requested by Jones or in directing trades to the brokerage firm.

Question 51

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

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

Answer 51

A. Brown should have determined Green’s needs, objectives, and tolerance for risk before making a recommendation of any type of security.

Question 52

15. Grey recommends the purchase of a mutual fund that invests solely in long-term
    US Treasury bonds. He makes the following statements to his clients:
    I. “The payment of the bonds is guaranteed by the US government; therefore, the default risk of the bonds is virtually zero.”
    II. “If you invest in the mutual fund, you will earn a 10% rate of return each year for the next several years based on historical performance of the market” Did Grey’s statements violate the CFA Institute Code and Standards?

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

Answer 52

C. Only statement II violated the Code and Standards.

Question 53

Anderb, a portfolio manager for XYZ Investment Management Company- a registered investment organization that advises investment firms and private accounts was promoted to that position three years ago. Bates, her supervisor, is responsible for reviewing Anderb’s portfolio account transactions and her is quired monthly reports of personal stock transactions. Ander has been using
Torelli, a broker, almost exclusively for brokerage transactions for the portfoio
account. For securities in which Jonellis firm makes a market, Jonelli has been giving Anderb lower prices for personal purchases and higher prices for personal sales than Jonelli gives to Anderb’s portfolio accounts and other investors. An-derb has been filing monthly reports with Bates only for those months in which she has no personal transactions, which is about every fourth month. Which of the following is most likely to be a violation of the Code and Standards?
A. Anderb failed to disclose to her employer her personal transactions.
B. Anderb owned the same securities as those of her clients.
C. Bates allowed Anderb to use Jonelli as her broker for personal trades.

Answer 53

A. Anderb failed to disclose to her employer her personal transactions.

Question 54

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

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

Answer 54

A. In the absence of specific applicable law or other regulatory requirements, the Code and Standards govern the member’s or candidate’s actions.

Question 55

Ward is scheduled to visit the corporate headquarters of Evans Industries. Ward expects to use the information he obtains there to complete his research report on Evans stock. Ward learns that Evans plans to pay all of Ward’s expenses for the trip, including the costs of meals, his hotel room, and air transportation. Which of the following actions would be the best course for Ward to take under the Code and Standards?
A. Accept the expense-paid trip, and write an objective report.
B. Pay for all travel expenses, including the costs of meals and incidental items.
C. Accept the expense-paid trip, but disclose the value of the services accepted
in the report.

Answer 55

B. Pay for all travel expenses, including the costs of meals and incidental items.

Question 56

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

A. CFA institute members and candidates are prohibited from undertaking independent practice in competition with their employer.
B. Written consent from the employer is necessary to permit independent practice that could result in compensation or other benefits in competition with a member’s or candidate’s employer.
C. Members and candidates are prohibited from making arrangements or preparations to go into a competitive business before terminating their relationship with their employer.

Answer 56

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

Question 57

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

A. Smith frequently purchases items produced by JNI.
B.XYZ holds for its own account a substantial common stock position in INT.
C. Smith’s brother-in-law is a supplier to JNI.

Answer 57

B.XYZ holds for its own account a substantial common stock position in INT.

Question 58

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

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

Answer 58

C. Yes, because the statement misrepresents Michelieu’s track record.

Question 59

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

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

Answer 59

B. Establish physical and informational barriers within the firm to prevent the exchange of information between the investment banking and brokerage operations.

Question 60

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

A. the management of Goodner:
B. the participants and beneficiaries of Goodner’s pension plan.
C. the shareholders of Goodner.

Answer 60

B. the participants and beneficiaries of Goodner’s pension plan.

Question 61

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

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

Answer 61

B. Disclosure will help the client evaluate any possible partiality shown in the
recommendation of services.

Question 62

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

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

Answer 62

B. Rose is free to sell his personal holdings once his firm is properly informed
of his intentions.

Question 63

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

A. A member or candidate is eligible for the new position and incentive if he or she can arrange for enough current clients to switch to the new firm and if the member or candidate discloses the incentive fee.
B. A member or candidate may not accept employment with the new firm, because Jackman’s incentive offer violates the Code and Standards.
C. A member or candidate is not eligible for the new position unless he or she is currently unemployed, because soliciting the clients of the member’s or candidate’s current employer is prohibited.

Answer 63

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

Question 64

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

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

Answer 64

A. Carter can trade for his accounts that prohibit soft dollar arrangements under the new low-fee trading scheme.

Question 65

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

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

Answer 65

B. Rule violated Standard VIIB) in stating that he received the highest scores in the topics of Ethics, Alternative Investments, and Portfolio Management.

Question 66

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

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

Answer 66

A. Stafford did not violate the Code and Standards because the prospectus informed investors of the fund’s soft dollar policies.

Question 67

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

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

Answer 67

C. Placing the securities mentioned as part of the merger on the firm’s restricted trading list

Question 68

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

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

Answer 68

B. Pietro could place a buy order for 2,000 shares (or four times the average weekly volume) through Vogt for his personal account.

Question 69

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

Which of the following statement is true?

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

Answer 69

C. Cupp violated the Code and Standards because the inclusion of the new account produces an inaccurate calculation of the monthly results according to the firm’s stated policies.

Question 70

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

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

Answer 70

A. Cannan violated the Code and Standards because she did not receive permission from her former employer to keep or use the files after her employment ended.

Question 71

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

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

Answer 71

B. Quinn violated the Code and Standards by incorrectly stating that he is eligible for the CFA charter.

Question 72

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

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

Answer 72

A. Hart violated the Code and Standards by investing in the exchange-traded fund that included Mega Retail.

Question 73

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

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

Answer 73

C. Park violated the Code and Standards by providing specific information on topics tested on the exam.

Question 74

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

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

Answer 74

B. Paper violated the Code and Standards by claiming the performance of the entire fund as his own.

Question 75

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

A. Townsend did not violate the Code and Standards.
B. Townsend violated the Code and Standards by soliciting donations from her clients through the newsletter.
C. Townsend violated the Code and Standards by not getting approval of the organization before soliciting her clients.

Answer 75

A. Townsend did not violate the Code and Standards.

Question 76

A firm that does not adopt the GIPS standards could mischaracterize its overall performance by presenting a performance history:

A. that includes terminated portfolios.
B. composed of a single top-performing portfolio.
C. for an investment mandate over all periods since the firm’s inception.

Answer 76

B. composed of a single top-performing portfolio.

Question 77

Which of the following statements regarding GIPS compliance is correct?

A. Asset owners that manage assets can claim compliance with the GIPS standards.
B. Software that calculates performance in a manner consistent with the GIPS standards can claim compliance with the GIPS standards.
C. Firms can comply with the GIPS standards by limiting their compliance claims to the provisions they have chosen to follow.

Answer 77

A. Asset owners that manage assets can claim compliance with the GIPS standards.

Question 78

Each composite of a GIPS-compliant firm must consist of:

A. multiple portfolios.
B. portfolios selected on an ex post basis.
C. portfolios managed according to a similar investment mandate, objective, or strategy.

Answer 78

C. portfolios managed according to a similar investment mandate, objective, or strategy.

Question 79

Verification:
A. must be performed on a firm-wide basis.
B. may be provided by the firm’s compliance department.
C. ensures the accuracy of a specific composite presentation.

Answer 79

A. must be performed on a firm-wide basis.

Question 80

Which of the following cannot claim compliance with the GIPS standards?
A. Investment management firms
B. Software vendors
C. Private pension funds

Answer 80

B. Software vendors

Question 81

Which of the following is an abusive practice that the GIPS standards were designed to avoid?

A. Presenting performance results that include terminated portfolios
B. Comparing performance results with an appropriate benchmark
C. Presenting performance results for select time periods

Answer 81

C. Presenting performance results for select time periods

Question 82

Which of the following is an abusive practice that the GIPS standards were designed to avoid?

A. Presenting performance results that include terminated portfolios
B. Comparing performance results with an appropriate benchmark
C. Presenting performance results for select time periods

Answer 82

C. Presenting performance results for select time periods

Question 83

The process of testing a firm or asset owner that claims compliance with the GIPS standards is referred to as a:

A. verification
B. validation.
C. certification.

Answer 83

A. verification

Question 84

Firms that claim compliance with the GIPS standards are required to receive a
verification:

A. before the firm can initially claim compliance.
B. after the firm has claimed compliance for 12 months.
C. never; verification is not required.

Answer 84

C. never; verification is not required.

Question 85

Which of the following is not a commonly perceived benefit of the GIPS standards?

A. Comparability of results across managers that claim compliance
B. Adherence to regulatory requirements
C. Increased confidence by investors and beneficiaries

Answer 85

B. Adherence to regulatory requirements

Question 86

When defining the firm, the GIPS standards recommend that firms should:

A. adopt the narrowest, most relevant definition of the firm.
B. adopt the broadest, most meaningful definition of the firm.
C. exclude offices operating under different brand names.

Answer 86

B. adopt the broadest, most meaningful definition of the firm.

Question 87

A composite return reflects the performance of:

A. all portfolios managed by the firm, regardless of investment strategy.
B. all discretionary portfolios that meet the composite definition.
C. all discretionary and non-discretionary portfolios that meet the composite definition.

Answer 87

B. all discretionary portfolios that meet the composite definition.