Reading 29 and 30

Question 1

CFA Institute conducts inquiries when

Answer 1

1. self disclosure
2. written complaints
3. evidence of misconduct
4. report by CFA exam proctor
5. Analysis of exam materials and monitoring of social media by CFA Institute

Question 2

List the code of ethics

Answer 2

1. Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets.
2. Place the integrity of the investment profession and the interests of clients above their own personal interests.
3. Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.
4. Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.
5. Promote the integrity and viability of the global capital markets for the ultimate benefit of society.
6. Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.

Question 3

Name the 7 standard of Professional Conduct

Answer 3

I. Professionalism
II. Integrity of Capital Markets
III. Duties to Clients
IV. Duties to Employers
V. Investment analysis, recommendations and actions
VI. Conflicts of Interest
VII. Responsibilities as a CFA Institute Member of CFA Candidate

Question 4

Professionalism

Answer 4

1. Knowledge of the law
2. Independence and Objectivity
3. Misrepresentation
4. Misconduct

Question 5

Integrity of Capital Markets

Answer 5

1. MNPI
2. Market Manipulation

Question 6

Duties to Clients

Answer 6

1. Loyalty, prudence and care
2. Fair Dealing
3. Suitability
4. Performance Presentation
5. Preservation of Confidentiality

Question 7

Duties to Employers

Answer 7

1. Loyalty
2. Additional Compensation Arrangements: must not accept gifts, benefits, compensation or consideration that competes with, or might reasonably be expected to create a conflict of interest with the employer’s interest unless they get written consent from all parties involved
3. Responsibilities of Supervisors

Question 8

Investment Analysis, Recommendations and Actions

Answer 8

1. Diligence and Reasonable Basis
2. Communication with Clients and Prospective Clients
3. Record Retention

Question 9

Conflicts of Interest

Answer 9

1. Disclosure of conflicts
2. priority of transactions
3. referral fees

Question 10

Responsibilities as CFA Institute Member/ Candidate

Answer 10

1. Conduct as Participants in CFA Institute Program
2. Reference to CFA Institute, the CFA Designation and the CFA Program

Question 11

Mosaic Theory

Answer 11

Reaching an investment conclusion through perceptive analysis of public information combined with non-material nonpublic information is not a violation of the standard

Question 12

What is the minimum frequency of statements to be sent to the clients?

Answer 12

quarterly

Question 13

Are different levels of service allowed?

Answer 13

They are acceptable, but they must not negatively affect or disadvantage any clients. Disclose the different service levels to all clients and prospects and make premium levels of service available to all those willing to pay for them.

Question 14

How frequently should IPS be reviewed?

Answer 14

annually

Question 15

Protocol for additional compensation arrangements and a gift from a client

Answer 15

• If a client offers a bonus that depends on the future performance of her account’s past performance, this is a gift that required disclosure to the member’s employer to comply with Standard of Independence and Objectivity

Question 16

Is it wrong to say about US Treasury bonds that “payment of bonds is guaranteed by the US government, therefore, the default risk of the bonds is virtually zero”

Answer 16

No

Question 17

Tie in Agreement

Answer 17

Tie in Agreement exists when an underwriter requires the investing client to purchase additional shares of the new issue in the secondary market in exchange for the ability to purchase the IPO shares. The effect is to artificially increase demand and increase the share price on day one of trading.

Question 18

can client brokerage commissions be directed to pay for the investment manager’s operating expenses?

Answer 18

No

Question 19

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.

Answer 19

Paper has violated Standard III(D)—Performance Presentation by not disclosing that he was part of a team of managers that achieved the results shown. If he had also included the return of the portion he directly managed, he would not have violated the standard

Question 20

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.

Answer 20

Townsend has not provided any information about her clients to the leaders or managers of the golf program; thus, she has not violated Standard III(E)—Preservation of Confidentiality. Providing contact information about her clients for a direct-mail solicitation would have been a violation.

Question 21

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

Answer 21

Standard IV(A)—Loyalty discusses activities permissible to members and candidates when they are leaving their current employer; soliciting clients is strictly prohibited. Thus, answer A is inconsistent with the Code and Standards even with the required disclosure

Question 22

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:

Answer 22

Obtain permission from her employer prior to accepting the compensation arrangement.

Question 23

Scott works for a regional brokerage firm. He estimates that Walkton Industries will increase its dividend by US$1.50 a share during the next year. He realizes that this increase is contingent on pending legislation that would, if enacted, give Walkton a substantial tax break. The US representative for Walkton’s home district has told Scott that, although she is lobbying hard for the bill and prospects for its passage are favorable, concern of the US Congress over the federal deficit could cause the tax bill to be voted down. Walkton Industries has not made any statements about a change in dividend policy. Scott writes in his research report, “We expect Walkton’s stock price to rise by at least US$8.00 a share by the end of the year because the dividend will increase by US$1.50 a share. Investors buying the stock at the current time should expect to realize a total return of at least 15% on the stock.” According to the Standards:
A.Scott violated the Standards because he used material inside information.
B.Scott violated the Standards because he failed to separate opinion from fact.
C.Scott violated the Standards by basing his research on uncertain predictions of future government action.

Answer 23

The correct answer is B. This question relates to Standard V(B)—Communication with Clients and Prospective Clients. Scott has issued a research report stating that he expects the price of Walkton Industries stock to rise by US$8 a share “because the dividend will increase” by US$1.50 per share. He has made this statement knowing that the dividend will increase only if Congress enacts certain legislation, an uncertain prospect. By stating that the dividend will increase, Scott failed to separate fact from opinion.

The information regarding passage of legislation is not material nonpublic information because it is conjecture, and the question does not state whether the US representative gave Scott her opinion on the passage of the legislation in confidence. She could have been offering this opinion to anyone who asked. Therefore, statement A is incorrect. It may be acceptable to base a recommendation, in part, on an expectation of future events, even though they may be uncertain. Therefore, answer C is incorrect.

Question 24

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?

Answer 24

This question involves Standard VI(A)—Disclosure of Conflicts. The question establishes a conflict of interest in which an analyst, Jamison, is asked to write a research report on a company that is a client of the analyst’s employer. In addition, two directors of the company are senior officers of Jamison’s employer. Both facts establish that there are conflicts of interest that must be disclosed by Jamison in her research report.

Question 25

In a surprising turn of events, Constantile Life, a publicly listed insurance firm that wishes to enter the asset management industry, approaches Foster. It is interested in buying Foster Asset Management to complement its product line and to significantly increase its profitability. Constantile presents an extensive list of documents the firm wants to examine as part of its due diligence process. Foster updates Ogalo about the potential buyer and asks her to help gather the due diligence documents, including the contact information of all the current board members and other shareholders, as well as copies of all the firm’s policies and procedures. Ogalo mentions to Foster that she has yet to complete her statutory annual review of the policies and procedures.

Answer 25

To avoid violating any Standards of Professional Conduct, Ogalo’s priority should most likely be adding the potential buyer to the firm’s restricted list. Standard II(A): Material Nonpublic Information requires members and candidates who are in possession of material nonpublic information that could affect the value of an investment not to act on this information or cause others to act on the information. Because Ogalo knows the potential buyer is a publicly listed company and the purchase of Foster Asset Management would likely be considered material, she needs to ensure that no one in the firm acts on the information that the publicly listed company is interested in acquiring the asset management firm. She can do this by putting the potential buyer on the firm’s restricted list to ensure no one trades in the public shares. Protecting the integrity of the capital markets is of higher importance than protecting the confidentiality of the board and the shareholders and updating the firm’s policies and procedures as legally required. Both of these things can be done, after the restricted list has been updated.

Question 26

Ogalo walks into Foster’s office to update him on the gathering of due diligence documents requested by Constantile and finds Foster on the phone. He motions for her to take a seat and hands her a note indicating he is talking with the potential buyer. She overhears Foster tell the buyer, “We haven’t lost a client in over five years. We’ve been able to outperform the market on a consistent basis, so our clients love us!” Ogalo knows the comment about the firm outperforming the market is likely to be true, but the firm lost two clients just in the last month owing to increasing management fees.

Answer 26

Ogalo should most likely determine the context in which Foster made his comment. She may initially believe Foster violated Standard I(D): Misconduct by mis-stating that the firm had not lost any clients in five years, when she knows for a fact the firm had lost clients. However, as the firm’s compliance officer and a CFA charterholder, she has a responsibility—according to Standard IV(C): Responsibilities of Supervisors—to discover the context in which Foster made the statement. He may have been answering any one of a variety of questions, such as a question related to having lost any clients as a result of poor investment performance. If that is how the question was framed to Foster, his answer would not have violated Standard I(D): Misconduct.

Question 27

Should terminated accounts be included in performance representation or no?

Answer 27

yes, they should be, including date of termination

Question 28

In the first Foster Asset Management board meeting after the sale, Calvin Lim, CFA, the firm’s chief investment officer (CIO), stated, “My investment team recently added real estate investment trust (REITs) to our model portfolio to see what the impact would be on investment returns for our clients if we added them to their portfolios. But this asset class has a much higher risk profile than our normal allowable assets.” Foster added, “After we analyzed the impact of adding this new asset class to our model portfolio, we made the decision to add the real estate exposure to all of our client accounts. We found it is having a positive impact on portfolio returns and still complies with the firm’s performance measurement policy.”

Answer 28

Both Lim, as CIO, and Foster, as the chair of the Investment Committee, most likely violated Standard III(C): Suitability. After realigning the model portfolio, they added REITs, a much riskier new asset class, to client portfolios. There is no indication they obtained client approval prior to adding the new riskier asset class to the clients’ portfolios or that the new asset class was even allowable according to the clients’ investment policy statements (some clients were invested only in money market instruments), nor did they confirm the suitability of a higher-risk asset class for all clients given that some of the clients had conservative risk profiles. Members and candidates have a responsibility to manage assets according to a predetermined specific mandate, including risk and liquidity constraints. Any change in the investment philosophy would require clients’ permission prior to implementation.

Question 29

when can you solicit clients to your new firm?

Answer 29

• after employment ceases. doing so before end of employment is a violation.
• and after, u can do it only if there is no non-compete

Question 30

What does priority of transactions mean

Answer 30

investment transactions for clients and employers have priority over investment transactions in which a member or candidate is the beneficial owner.

Fair dealing means treating all clients fairly when taking investment action with regard to general purchases.

Question 31

Is donating for activist lobbying against the CFA standards?

Answer 31

no

Question 32

Are bonuses from clients permissable?

Answer 32

yes, if they are disclosed to the employer

Question 33

What should you do if the firm does not have any adequate compliance policies?

Answer 33

decline in writing to accept any supervisory responsibilities until the firm adopts reasonable procedures to allow you to adequately exercise such responsibility

Question 33

Difference between CFA Code and Standards and CFA Institute Asset Manager code

Answer 33

Code and standards apply to individual members and candidates as part of their firm code of ethics. CFA Institute Asset Manager Code has been drafted specifically for firms.

Question 34

ill Dean, CFA, a self-employed analyst, on www.Jill_Dean_the_Independent_Analyst.com. Prior to writing each report, Dean is paid a flat fee by the companies whose stocks she researches, but she does not reveal this fact to readers of her reports. She produces reports only for those companies whose stocks she can legitimately give “buy” recommendations after conducting a thorough analysis. Otherwise, she returns the flat fee. Investors have come to recognize all her “buy” ratings as having a sound and reasonable basis

Does Dean violate the CFA Institute Standards in preparing and disseminating her equity reports?

Answer 34

It is not a violation to accept compensation from an issuer in exchange for research, but such arrangements must be disclosed prominently and in plain language.

Question 35

Can you claim partial compliance with GIPS?

Answer 35

No

When claiming compliance with GIPS, firms must meet all the requirements. GIPS standards, while voluntary, only apply on a firmwide basis. Neither a firm nor a fund can claim partial compliance with GIPS standards.

Question 36

“The quarterly return of the Westlake Fund was 4.07%. The quarterly return exceeded the performance of its benchmark, the Russell 2000 Index, by 0.16%. Investors should not expect this type of performance to continue into the foreseeable future.*

• Additional detailed information available upon request.”

Q. Are Khadri’s newsletter comments regarding returns consistent with the CFA Institute Standards?

Answer 36

Khadri violates Standard III(D): Performance Presentation because he does not disclose whether the performance results are before or after fees. Standard III(D) requires that members and candidates make reasonable efforts to ensure that investment performance information is “fair, accurate, and complete.” According to the Guidance provided in the Standards of Practice Handbook (2014), members should include disclosures that fully explain the performance results (for example, whether the performance is gross of fees, net of fees, or after tax).

Question 37

PIA receives initial public offering (IPO) allocations from FTI. Danko allocates these IPOs to those discretionary accounts that normally participate in IPOs. If the IPO is oversubscribed, he excludes his wife’s discretionary non-fee-paying account so that he is not accused of bias when allocating the oversubscribed IPOs.

Does Danko violate the CFA Institute Standards when he allocates oversubscribed IPO issues?

Answer 37

No

When an issue is oversubscribed, allocations cannot be made to accounts where members and candidates have beneficial interest; client orders must be filled first

Question 38

He is careful not to trade in stocks mentioned explicitly on the squawk box. Rather, he sometimes researches competitors and other firms operating in the same industry. In one case, he immediately shorts the stock of Tefla Corporation after an Omega analyst downgrades a firm in the same industry.

When shorting Tefla stock, does Garcia violate any of the CFA Institute Standards?

Answer 38

Garcia is in possession of material nonpublic information and acted on it in violation of Standard II(A). After the analyst’s recommendation has been issued and/or distributed publicly, Garcia would be free to make the trade. Because this is a personal purchase, the standard relating to diligence and reasonable basis is not applicable.

Question 39

Whats the minimum requirement for performance reporting?

Answer 39

Quarterly (even if there is a lock-up period)

Question 40

Do marketing materials need to be reviewed by an independent third party?

Answer 40

yes, and it can be compliance too

Question 41

Can Chief compliance officer report to CIO?

Answer 41

No

CCO needs to be independent

Question 42

Is this right or wrong?

On occasion, we are able to acquire securities we expect will be particularly strong performers, such as oversubscribed initial public offerings. In order to ensure that all clients are treated fairly, each client portfolio is given the same number of shares.

Answer 42

Wrong

Investment Process and Actions, requires clients to be treated equitably, not equally. Clients have different investment objectives and risk tolerances, so treating clients equally would be inconsistent with the Asset Manager Code.

Question 43

how frequently should IPS and review be conducted?

Answer 43

at least annually

Question 44

Provide client performance within three days after month-end.

Is this compliant with asset management principles?

Answer 44

Although it is true that managers are recommended to provide performance data on a timely basis, they also have the responsibility to present performance information that is fair, accurate, relevant, and complete. Given this requirement, it may not always be possible to provide this information to clients within three days, particularly in complicated scenarios.

Question 45

What is the valuation hierarchy for market prices?

Answer 45

Item 1. Observable quoted market prices for similar investments in active markets

Item 2. Quoted prices for similar investments in markets that are not active

Item 3. Market-based inputs other than quoted prices that are not observable for the investment

Item 4. When no quotes or other market inputs are available, estimates based on quantitative models and assumptions

Question 46

Which fees can be included in calculating gross of fees returns?

Answer 46

Only direct trading fees. Custodial fees cannot be considered as a component of direct trading expenses.

Question 47

Is it ok to exclude non-discretionary accounts from performance measurement?

Answer 47

Yes - should include fee paying discretionary portfolios

Question 48

How often should returns be calculated?

Answer 48

Monthly basis for periods beginning or after 1 January 2001

Question 49

Can GIPS verification be on one fund?

Answer 49

no - must be issued on the whole firm. it cannot be carried out only on a composite and, accordingly, does not provide assurance about the investment performance of any specific composite.