LM:3 Guidance For Standards I-VII

Question 1

What are the 2 rules for knowledge of the law?

Answer 1

1. Follow more strict law
2. Dissociate from any violation of such laws, rules, or regulations.

Question 2

What are the 2 rules for independence & objectivity?

Answer 2

1. Use reasonable care & good judgement to achieve and maintain independence & objective
2. Must not offer or accept gifts, compensation, etc; anything that could compromise own or another’s independence & objectivity

Question 3

What does omissions mean?

Answer 3

Being left out

Eg. When some transactions are completely omitted from the books of accounts or entered but not posted.

Question 4

What are 6 areas that may involve misrepresentation? IPSOPW

Answer 4

1. Investment practice (qualifications, performance record.etc)
2. Performance reporting
3. Social media
4. Omissions
5. Plagiarism
6. Work completed for employer (when hired by employer can put your name out employer name)

Question 5

Are employers allowed to issue reports without providing credit to the previous analyst? Additionally, are analyst allowed to publish reports if they no longer work for the firm?

Answer 5

• yes employers are allowed to issue reports without providing credit to the previous analyst
• no analysts cannot publish reports if they no longer work for the firm

Question 6

What are 2 things you should do to avoid plagiarism on a research report?

Answer 6

• maintain copies: keep copies of sources and everything used in report
• attribute quotations: give credit to the source

Question 7

What is misconduct?

Answer 7

Unacceptable or improper behavior

Question 8

What is material information?

Answer 8

Disclosure of information would have impact on price of a security

Question 9

What are the 2 ways to manipulate markets?

Answer 9

1. Information based manipulation
2. Transaction based manipulation

Question 10

What is information based manipulation?

Answer 10

Spread false rumors about company to change the price of security (pump & dump)

Question 11

What is transaction based manipulation?

Answer 11

Transactions that affect price or volume

Question 12

What are the 4 rules to loyalty, prudence, & care for duties to client?

Answer 12

-must act with reasonable care and exercise good judgement
-place client interest before employer or own interest
-soft dollar commissions are asset of client and may only be used for benefit of client (eg. research), does not include general education
-must provide performance statements at least quarterly

Question 13

What is soft commissions?

Answer 13

When investment manager uses client brokerage to purchase research services

Question 14

What is directed brokerage?

Answer 14

When client directs a manager to use the clients brokerage to execute transactions for the client

Question 15

How should you vote for proxy statements for clients?

Answer 15

Vote in a way that benefits the client the most

Question 16

What are the 3 keys to the trade allocation procedure?

Answer 16

1. Fairness
2. Timeliness
3. Accuracy

Question 17

How often must IPS be reviewed?

Answer 17

At least annually

Question 18

What is responsibility of supervisor code of standards?

Answer 18

Members and candidates who supervise people, must make sure they comply with applicable laws, rules, regulations, and codes & standards.

Question 19

What is secondary research?

Answer 19

Research conducted by someone else in the firm

Question 20

What is third-party research?

Answer 20

Research conducted by entities outside of the firm

Question 21

What is front running trades?

Answer 21

Entering a trade in advance to an non public block transaction about to incur from client.

(trading stocks or any asset based on insider knowledge of a future transaction that will affect its price)

Question 22

Knowledge of the law requires members and candidates to dissociate from any violation of laws, rules, regulations; however, do they have to report these suspicions to legal or regulatory authorities?

Answer 22

No they do not unless such action is required by law.

Question 23

When keeping independence and objectivity you can accept flat fees but can you accept options or equity positions?

Answer 23

No only flat fees, any fee based on how well the stock performs or firm performs is a violation

Question 24

Record retention requires you to keep records for at least 7 years, however, if statements are falsely sent out then later updated statements with accurate information is sent out, can you delete or destroy the false files?

Answer 24

No if there’s a mistake you must just label the statements with mistakes and update the new ones with accurate information

Question 25

Is testing out equipment from a company enough to justify diligence and reasonable basis?

Answer 25

No, you just do your research diligence

Question 26

What are the three requirements for Performance Presentation?

Answer 26

1. Must be fair 2. Must be accurate 3. Must be complete

Question 27

What are the 2 musts for responsibilities of supervisors?

Answer 27

1. System for supervision (must be established, communicated, and documented; and detect violations) 2. Must not accept role unless adequate compliance system (unless firm compliance is substandard and you can use your influence to improve system)

Question 28

What are 3 recommendation for recommended procedures for priority of transactions?

Answer 28

- Participation in equity IPO’s should be limited because it could appear to take away opportunities from clients. - Members & candidates must not obtain any shares in an oversubscribed IPO. - Get approval from firm in advance of IPO.

Question 29

For record retention if there are no regulatory guidance, how many years does CFA institute recommend you record records?

Answer 29

7 years.

Question 30

For reference to the CFA institute, designation, what are 2 rules for individuals to be considered to be candidates?

Answer 30

1. Are awaiting results for current exam 2. Are registered for an exam

Question 31

What is the 1 rule to diligence and basis if doing a group project?

Answer 31

Members and candidates who lack confidence in process used to arrive at a group consensus should disassociate from group’s work and remove name from any work based process.

Question 32

Members and candidates who receive compensation for referring clients, how often should they update employer about nature and amount of compensation received?

Answer 32

At least quarterly

Question 33

What is the 1 rule for material non-public information?

Answer 33

Members and candidates who possess material nonpublic information that could impact value of an investment must not act or cause others to act on information.

Question 34

To maintain CFA institute membership, a member must fulfill what 2 requirements?

Answer 34

1. Annually complete the Professional Conduct Statement 2. Pay applicable membership dues on an annual basis

Question 35

What is pro rata basis for oversubscribed IPO’s?

Answer 35

each investor receives a proportionate amount of shares relative to their initial request.

Question 36

What are the 2 rule to fair dealing?

Answer 36

-all clients participating in a block trade should be assigned the same price and charged same commission (pro rata basis allowed), however, deviations are allowed to account for minimum lot sizes. -treat all clients in a fair and impartial manner

Question 37

What is the 1 rule to loyalty for duties to employer?

Answer 37

-you can make arrangements to start a new business while still employed at old firm, as long as it doesn’t take an unreasonable amount of time away from job duties.

Question 38

Who are a fund managers primary duty of loyalty owed too?

Answer 38

the funds mandate

Question 39

What is the 1 rule for referral fees?

Answer 39

-members and candidates must disclose benefits for referring products or services and provide an estimate for its monetary value

Question 40

What is capsule form and what must you notify the client if information is in capsule from?

Answer 40

capsule form: information is generic (eg.recommended stock list) members and candidates should notify clients that additional information and analyses are available from the producer of the report.

Question 41

Who are a fund managers mandate owed to for pension funds?

Answer 41

the beneficiary of the pension fund