Ethicks

June Carter passed Level III of the CFA examination in June but will not complete her work experience requirement until August of next year. Carter can state on her resume that she: A)passed Levels I, II, and III of the CFA examination. B)is a CFA in waiting. C)will be a CFA charterholder in August of next year as long as she is on track to complete her work experience.

A A candidate cannot use any form of the CFA designation until receiving her charter.

Which of the following statements about a code of ethics is most accurate? A code of ethics: A)does not need to include standards of conduct. B)must include rules-based standards of conduct. C)must include principles-based standards of conduct.

A A code of ethics may include standards of conduct, but does not require them.

A member or candidate who rejects a disciplinary sanction proposed by the Professional Conduct Program: A)may request an appeal to a hearing panel. B)will typically not be subject to further disciplinary procedure unless a new investigation is initiated. C)will be suspended from membership or participation in the CFA Program.

A A member or candidate may accept a proposed disciplinary sanction or request an appeal to a hearing panel.

A professional code of conduct: A) can increase public trust in the profession. B) guarantees that members will adhere to a minimum level of ethical conduct. C) includes standards that provide guidance for specific behaviors.

A A professional code of conduct communicates to the public that members have promised to uphold a minimum level of ethical conduct when acting for clients. This is no guarantee that all members will follow the code at all times. A code of conduct may include specific standards of behavior or only state principles of conduct without specific standards or guidance.

John Farr, CFA, has accumulated several pieces of nonmaterial nonpublic information about CattleCorp from his contacts with the company. From analysis based on this information, together with public information, Farr concludes that CattleCorp will have unexpectedly low earnings this year. Farr has contacted the company, but they will not confirm his conclusion. According to CFA Institute Standards of Professional Conduct, Farr: A) may trade or make recommendations based on his analysis. B) may not trade or make recommendations based on his analysis. C) may trade or make recommendations based on his analysis only if his company's compliance officer determines that the nonpublic information he used was not material.

A According to Standard II(A) Material Nonpublic Information, Farr is free to act under the mosaic theory because nonmaterial nonpublic information does not fall within the prohibition on trading based on material nonpublic information. He should keep detailed documentation of his analysis to document that he did not advise or act based on material nonpublic information.

An analyst at Romer changes her rating on TelSky from "buy" to "hold" and sends an email explaining the change to all clients and firm brokers. Subsequently, Paul Stevens, CFA, a broker at Romer, receives a call from a client who wants to buy 15,000 shares of TelSky. Stevens must: A) advise his client of the change in recommendation before accepting the order. B) not accept the order until the customer has had time to receive and read the new report. C) accept the order without mentioning the ratings change because the order is unsolicited.

A According to Standard III(B) Fair Dealing, if a client places an order that goes against the firm's recommendation for that security, members and candidates should inform the client of the discrepancy between the order and the firm's recommendation before accepting the order.

The Standard regarding suitability most likely requires that: A) an advisor must analyze an investment's suitability for the client prior to recommending or acting on the investment. B) a member or candidate must decline to carry out an unsolicited transaction that she believes is unsuitable for the client. C) when managing a fund to an index, a manager who is evaluating potential investments must consider their suitability for the fund's shareholders.

A According to Standard III(C) Suitability, a member or candidate who is in an advisory relationship with a client is responsible for analyzing the suitability of an investment for the client before taking investment action or making a recommendation. If a member or candidate believes an unsolicited trade is unsuitable for a client, the appropriate action is to discuss the trade with the client. The advisor may follow her firm's policies for obtaining client approval if the requested trade would not affect the risk and return of the client's portfolio materially. If the trade would have a material effect, the advisor should discuss with the client whether the IPS needs to be updated. When managing a fund to an index or stated mandate, the manager is responsible for ensuring that potential investments are consistent with the fund's mandate. Suitability for individuals would be a concern for an advisor who recommends the fund to clients, but not for the manager of the fund.

According to Standard III(A) Loyalty, Prudence and Care, brokerage is an asset of the: A)client. B)brokerage firm conducting the trades. C)managing firm.

A Brokerage is an asset of the client.

Michael Malone, CFA, is an investment analyst for a large brokerage firm in New York who covers the airlines industry. After hours in his personal time, Malone maintains an online blog on which he expresses his personal opinions about various investment opportunities, including, but not limited to, the airlines industry. On his blog, he posts a very negative investment opinion about WestAir stock. Malone knows that WestAir's stock will be downgraded to a "sell" by his firm next week. Malone has most likely violated: A)violated Standard IV(A) Loyalty. B)Standard VI(B) Priority of Transactions. C)violated Standard II(A) Material Nonpublic Information.

A By expressing his investment analysis on his personal blog ahead of his employer, Malone deprived his employer of the benefits of his skills and abilities and therefore violated Standard IV(A) Loyalty. Malone did not possess material nonpublic information about WestAir and no transactions have taken place.

A manager has pointed out that his firm has experienced significant expansion over the past few years. Until recently, its Legal Department was responsible for the firm's compliance activities. Now, however, the legal and compliance functions have been separated. A compliance officer has been formally designated and a comprehensive compliance program has been put in place. In order to function effectively, the compliance officer must have the authority: A)to affect, control, and guide employee behavior and to respond to employee misconduct. B)which is consistent with the most senior partner or executive officer in the firm. C)to hire and fire personnel.

A Compliance officers must be able to guide employee behavior and respond to employee misconduct, otherwise there will be no effective compliance procedures in place. Unless the compliance officer can effectuate compliance procedures, the compliance program has no chance of responding to or preventing violations of the Standards.

Which of the following is NOT part of the CFA Institute Code of Ethics? A)Contractual provisions. B)Competence. C)Independent judgment.

A Contractual provisions are not part of the Code of Ethics.

Bob Douglas, CFA, is considering leaving his current employer to compete in the same field. He did not sign a non-compete clause when he was hired. He may: A)plan and prepare to compete with his current employer, but not begin competing until his resignation is effective. B)may not prepare to compete, begin competing, or anything related to competing with his current employer. C)begin competing with his current employer as long as the employer has been informed of Douglas' future intentions.

A Douglas may plan and prepare to compete with his current employer, but may not begin competing until his resignation is effective or he gets permission from his employer. Members must provide notification to their employer describing the types of services to be rendered, the expected duration, and compensation for the services.

During a conference call with 30 analysts, a company's management discloses that its quarterly earnings, which will be announced at the end of the week, are equal to the consensus forecast. The analysts participating in the conference call should consider this information: A)material and nonpublic. B)material, but public. C)nonpublic, but not material.

A Earnings releases are material because reasonable investors would want to know the information before making an investment decision. The information is nonpublic until it has been disseminated to the marketplace. Disclosure to analysts is not public dissemination.

Reliable Wealth Managers wants to present a GIPS-compliant performance presentation and reference its GIPS compliance in marketing materials. Reliable is least likely required to: A) claim compliance with GIPS only if it has a compliant performance history of at least five years. B) apply GIPS compliance firmwide and not only to the specific asset classes mentioned in the marketing materials. C) include each discretionary fee-paying account in a composite based on its investment objectives and/or strategies.

A GIPS require a firm to show a GIPS-compliant history for a minimum of five years, or since inception of the firm or the composite if in existence for less than five years. If Reliable has been in business for less than five years, it may still claim compliance with GIPS on a since-inception basis, provided the firm follows all other aspects of compliance. The other choices are requirements for a firm to claim compliance with GIPS.

According to the Standard on independence and objectivity, members and candidates: A) may accept gifts or bonuses from clients. B) may not accept compensation from an issuer of securities in return for producing research on those securities. C) should consider credit ratings issued by recognized agencies to be objective measures of credit quality.

A Gifts from clients are acceptable under Standard I(B) Independence and Objectivity, but the Standard requires members and candidates to disclose such gifts to their employers. Standard I(B) allows issuer-paid research as long as the analysis is thorough, independent, unbiased, and has a reasonable and adequate basis for its conclusions, and the compensation from the issuer is disclosed. Members and candidates should consider the potential for conflicts of interest inherent in credit ratings and may need to do independent research to evaluate the soundness of these ratings.

Greg Hoffman, CFA, has been hired by Hill Manufacturing, Inc. (HMI) to write a research report on their company. Hoffman writes a report on HMI with a "buy" recommendation and posts the report for purchase on his website but does not include the information that HMI paid for the research. According to the Standards that govern independence and objectivity and disclosure of conflicts, Hoffman has violated: A) both of these Standards. B) neither of these Standards. C) only one of these Standards.

A Hoffman has violated both Standard I(B) Independence and Objectivity, which specifically addresses the requirement of disclosure of the nature of any compensation from the subject company, and Standard VI(A) Disclosure of Conflicts, which, more generally, requires disclosure of any potential conflict of interest in research reports and investment recommendations.

Wes Smith, CFA, has been working toward the completion of a Master of Science in Finance. He has passed all the necessary courses and written the necessary thesis. He still must defend the thesis in one month. Smith's thesis advisor assures him that he will pass the thesis defense. Smith has new business cards printed with "M.S. in Finance" after his name. This is a violation of: A)none of the Standards if Smith does not make the cards public until after he defends his thesis and receives his degree. B)Standard I(C), Misrepresentation. C)Standard VII(B), Reference to CFA Institute, the CFA Designation, and the CFA Program.

A If the cards were distributed today he would be in violation of Standard I(C), Misrepresentation. However, if Smith does not make the cards public until after he receives the degree, there is no violation.

Robert Miguel, CFA, is a portfolio manager. On Saturday, one of his clients invited Miguel and his wife to be his guests at his luxury suite for a major league baseball playoff game, which they did. Miguel told his supervisor on Monday that they had attended the game with the client and that the suite was luxurious. Miguel has: A) not violated the Standards. B) violated the Standards because disclosure must be in writing. C) violated the Standards because he must disclose the gift prior to accepting.

A In this case, Miguel has not violated the standards. For a gift from a client in appreciation of past service or performance, informing his supervisor verbally is sufficient. Standard I(B) Independence and Objectivity requires disclosure prior to accepting the gift "when possible," but in cases such as this when there is short notice, notification afterward is permitted.

The O'Douls (husband and wife) have decided to work with Jane Mack, CFA, to have her recommend an investment portfolio for them. The O'Douls are novice investors and Mack has determined their asset allocation model falls into the conservative category. After researching various investment options for the O'Douls, Mack has made a recommendation that they divide their account on a 25%/75% basis between shares of a computer peripherals manufacturing company her brokerage firm is underwriting and investment grade corporate bonds. The O'Douls are not aware that Mack's firm is underwriting an offering of the company in question. Which CFA Institute Standard(s) has Mack violated given her actions? A)Standard VI(A), Disclosure of Conflicts, and III(C), Suitability. B)Standard III(B), Fair Dealing, and III(A), Loyalty, Prudence, and Care. C)Standard V(A), Diligence and Reasonable Basis, and I(D), Misconduct.

A Mack is obliged to disclose the conflict of interest regarding her company's IPO and to consider both the appropriateness and the suitability of the investment for her client. She has apparently failed in both respects.

Yvette Michaels, CFA, an analyst for Torborg Investments, inadvertently overhears a conversation between two executives of Collective Healthcare in which they mention an upcoming tender offer for Network, a stock she covers. Michaels has followed both companies extensively and feels their consolidation would be very beneficial for both companies. She tells her supervisor, a senior analyst, about the proposed tender offer. Michaels' actions are: A) in violation of the Standards. B) not in violation of the Standards because she told only her supervisor. C) not in violation of the Standards because she has not traded shares of Network or changed her report on the company.

A Michaels has violated Standard II(A) Material Nonpublic Information. Members who possess material nonpublic information are prohibited from acting or causing others to act on that information. She may not share the information with anyone except designated supervisory or compliance employees within her firm. Disclosing to her supervisor, who is not identified as a designated supervisor of compliance issues, is not permitted.

Which of the following is NOT expressly prohibited by Standard I(C), Misrepresentation? A)providing information on guaranteed investment products. B)misrepresenting a member's academic or professional credentials. C)misrepresenting the services a member is capable of performing.

A Misrepresentation of qualifications, academic and professional credentials and services that can be performed by the firm are all expressly prohibited by Standard I(C).

Which of the following requirements for members and candidates is one of the six components of the Code of Ethics? A) Maintain and improve their professional competence. B) Do not act or cause others to act on material nonpublic information. C) Distinguish between fact and opinion when presenting investment analysis.

A One of the six components of the Code of Ethics requires members and candidates to "maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals." The other two answer choices are required by the Standards of Professional Conduct but are not components of the Code of Ethics.

Denise Weaver is a portfolio manager who manages a mutual fund and has pension clients. When Weaver receives a proxy for stock in the mutual fund, she gives it to Susan Griffith, her administrative assistant, to complete. When the proxy is for a stock owned in a pension plan, she asks Griffith to send the proxy on to the sponsor of the pension fund. Weaver has: A)violated the Standards by her policy on mutual fund and pension fund proxies. B)not violated the Standards. C)violated the Standards by her policy on mutual fund proxies, but not her policy on pension fund proxies.

A Proxies should be taken seriously, and although it is likely that Griffith can understand some of the issues, it is likely that she is not capable of making responsible decisions on all potential proxy issues. Proxies for a pension plan should be voted in the best interests of the beneficiaries, not the plan sponsor. The sponsor's interests will not always be the same as the beneficiary's interest.

Ken Toma, CFA, has just completed an extensive analysis and concluded that the demand for vacation rentals in Hawaii will far exceed the supply for the foreseeable future. Toma writes a research report stating, "Based on the fact that the demand for Hawaiian beach vacations will exceed the supply of rooms for the foreseeable future, I recommend the purchase of shares of The Hawaiian REIT, a diversified portfolio of Hawaiian beachfront resorts." If Toma presents this report to his clients, he will most likely violate the CFA Institute Standards by: A) not distinguishing between fact and opinion. B) not considering the suitability of the investment for his clients. C) failing to have a reasonable and adequate basis for his recommendation.

A Standard V(B) Communication with Clients and Prospective Clients requires that Toma separate opinion from fact. Toma's statement that excess demand will persist into the foreseeable future is an opinion, not a fact. Toma has established a reasonable basis for his recommendation through his analysis. Suitability does not become an issue until a client chooses to act on Toma's recommendation.

Claire Marlin, CFA, manages an investment fund specializing in foreign currency trading. Marlin writes a report to investors that describes the basic characteristics of her strategy, which is based on an expected appreciation of the euro relative to other major currencies. Marlin shows the projected returns from the strategy if the euro appreciates less than 5%, between 5% and 10%, or more than 10%, while clearly stating that these forecasts are her opinion. Has Marlin violated the Standard related to communication with clients? A) Yes. B) No, because she disclosed the basic characteristics of the investment. C) No, because she distinguished fact from opinion and discussed how the strategy may perform under a range of scenarios.

A Standard V(B) Communication with Clients and Prospective Clients requires that members and candidates communicate the risk associated with the investment strategy used and how the strategy is expected to perform in a range of scenarios. These scenarios should include those different from the current trend. Marlin should have discussed how her strategy would perform if the euro depreciates instead of appreciating as she expects.

A To comply with Standard IV(B) Additional Compensation Arrangements, Bryant must obtain written consent from her employer before undertaking the independent consulting project. Bryant must also provide a description of the types of services being provided, the length of time the arrangement will last, and the compensation she expects to receive for her services.

A Standard V(C) Record Retention requires members to maintain records of the data and analysis they use to develop their research recommendations. Recommendations may be brief, in capsule form, or simply a list of buy/sell recommendations. A list of recommendations may be sent without regard to suitability, including both safe income stocks and aggressive growth stocks, for example.

According to the Code and Standards, members and candidates who are involved in distributing an initial public offering (IPO) of equity shares and wish to participate in the IPO: A) may participate unless the IPO is oversubscribed. B) may not participate because this creates a conflict of interest. C) must obtain pre-clearance from a supervisor before participating.

A Standard VI(B) Priority of Transactions recommends, but does not require, that a member or candidate obtain pre-clearance from his or her supervisor before participating in an equity IPO. Guidance for Standard III(B) Fair Dealing states that members and candidates distributing IPO shares must distribute shares in an oversubscribed IPO to clients and may not withhold shares for themselves.

Peter Taylor, a CFA charterholder and a food industry analyst for a large investment firm, has been invited by Sweet Pineapple Co. to visit the firm's processing plants in Hawaii. The Standard concerning independence and objectivity recommends that Taylor: A) use and pay for commercial transportation, if available. B) obtain written permission from his employer before he accepts this invitation. C) decline this invitation if he issues recommendations on the firm's securities.

A The recommended procedures for compliance with Standard I(B) Independence and Objectivity include the recommendation that analysts on company visits pay their own travel expenses and use commercial transportation if it is available.

Brett violated both the Code of Ethics and Standard VII(A) Conduct as Participants in CFA Institute Programs. By writing down information from the Candidate Body of Knowledge and taking it into the exam room, she compromised the integrity of the exam, whether she used the notes or not. Her actions are also in violation of the Code of Ethics by not acting "with integrity, competence, diligence, respect, and in an ethical manner."

A The requirement that members and candidates place their clients' interests before their employer's or their own is in Standard III(A) Loyalty, Prudence, and Care. The other choices are included in the CFA Institute Code of Ethics.

Ed Ingus, CFA, visits the headquarters and main plant of Bullitt Company and observes that inventories of unsold goods appear unusually large. From the CFO, he learns that a recent increase in returned items may result in earnings for the current quarter that are below analysts' estimates. Based on his visit, Ingus changes his recommendation on Bullitt to "Sell." Has Ingus violated the Standard concerning material nonpublic information? A) Yes. B) No, because the information he used is not material. C) No, because his actions are consistent with the mosaic theory.

A The statement from the CFO about the current quarter's earnings is material nonpublic information. Ingus violated Standard II(A) Material Nonpublic Information by acting or causing others to act on it.

Edie Pschorr, CFA, notices that a bond is priced at 98.0 in one market and 98.4 in another market. Pschorr places an order to buy a large number of these bonds in the first market and simultaneously places an order to sell the same number of bonds in the second market. The bond's price increases to 98.2 in the first market and decreases to 98.2 in the second market. Are Pschorr's trades a violation of the Code and Standards? A) No. B) Yes, because they violate the Standard concerning fair dealing. C) Yes, because they violate the Standard concerning market manipulation.

A The trader has carried out an arbitrage transaction. Because she did not exhibit any intent to distort prices or trading volume, the member did not violate Standard II(B) Market Manipulation. Standard III(B) Fair Dealing is concerned with fair treatment of clients and is not relevant to this transaction.

Sue Johnson, CFA, has an elderly client with a very large asset base. The client intends to start divesting her fortune to various charities. Johnson is on the Board of a local charitable foundation. Johnson most appropriately: A) must not discuss anything regarding her client and her client's intentions with the charitable foundation without permission. B) can discuss her client's situation with the charitable foundation as long as she informs other local charities of her client's intentions. C) can make this known to the charitable foundation so that they can solicit the client, since it is the client's wish to divest assets to charities in the future.

A To comply with Standard III(E) Preservation of Confidentiality, Johnson must not discuss with her charitable foundation anything regarding her client and her client's intentions. It does not matter that her client intends to give money to charities in the near future.

Linda Bryant, CFA, is an employee of Roomkin Investment House, which underwrites equity and debt offerings. She has been approached by SimthCo to consult on a private debt placement. According to CFA Institute Standards of Professional Conduct, before Bryant agrees to accept this job, she is required to: A) obtain written consent from Roomkin after submitting details of the arrangement. B) talk to her immediate supervisor and get her approval to take this consulting job. C) inform SimthCo in writing that she will accept the job and provide details of the arrangement to Roomkin in writing.

A To comply with Standard IV(B) Additional Compensation Arrangements, Bryant must obtain written consent from her employer before undertaking the independent consulting project. Bryant must also provide a description of the types of services being provided, the length of time the arrangement will last, and the compensation she expects to receive for her services.

Compared to complying with laws and regulations, complying with a code of ethics: A) is considered a lower standard. B) often involves more judgment. C) includes compliance with all laws and regulations.

B A code of ethics is considered a higher standard of behavior as it goes beyond simply legality of behavior. Compliance with the ethical principles of a code of ethics often requires judgment in balancing the interests of various stakeholders and consideration of short-term effects with longer-term effects of decisions. Some behavior that is illegal, such as civil disobedience or "whistle-blowing," is considered to be ethical behavior by many.

A framework for ethical decision making is most appropriately applied to: A)determine whether actions are legal. B)aid decision makers in considering alternatives and their potential impacts. C)reduce the need to maintain a large compliance department.

B A framework for ethical decision making is a way to help decision makers consider alternatives and their impact on stakeholders.

Alvin Gold, CFA, resides in Country T and does business as an investment advisor primarily in Country U. Country T allows trading on non-public information and does not require disclosure of referral fees. Country U prohibits trading on non-public information only if it is gained by illegal means and requires disclosure of referral fees of over $100 (U.S. equivalent). Gold accepts a referral fee of $75, and in the course of a meeting with two other analysts and the firm's CFO, Gold receives material non-public information. To comply with the Code and Standards, Gold: A) need not disclose the referral fee but cannot trade on the non-public information. B) must disclose the referral fee and cannot trade on the non-public information. C) must disclose the referral fee but may trade on the non-public information.

B According to Standard I(A) Knowledge of the Law, Gold must comply with the most strict of the laws of Country T, laws of Country U, and the CFA Standards of Practice. In this case, the most strict rules are those in the Standards of Practice. Standard VI(C) Referral Fees requires the disclosure of all referral fees and Standard II(A) Material Nonpublic Information prohibits acting or causing others to act on the basis of material non-public information.

Which of the following statements made in a marketing brochure is a violation of the Standards? A) "Roger Langley, Chartered Financial Analyst, has been a portfolio manager for ten years and passed all three levels of the CFA examinations on his first attempts." B) "Jennifer York has passed the Level II exam and will earn the right to use the CFA designation after completing the Level III exam this June." C) "Paul Yeng, CFA, has retired from the firm after 25 years of service. Much of the firm's past success can be attributed to Yeng's efforts as an analyst and portfolio manager."

B According to Standard VII(B) Reference to the CFA Institute, the CFA Designation, and CFA Program, citing an expected date for completing a level of the CFA Program is a misuse of the CFA designation.

Jack Salyers, CFA, is considering starting his own firm to compete with his current employer. He takes several actions before turning in his resignation. Which of the following actions is NOT in violation of Standard IV(A), Loyalty to Employer? A)Jack copied the employer's computer models and other property. B)Jack told his employer that he was considering leaving and requested that the employer write him a letter of recommendation. C)Before leaving, Jack solicits his employer's current clients.

B Asking for a letter of recommendation is perfectly acceptable. Soliciting clients and taking the employer's property like client lists, computer programs, etc. are not permissible.

Which of the following statements about the responsibilities of CFA charterholders is CORRECT? CFA charterholders: A)need not comply with the laws and rules governing their profession or must not engage in any individual behavior that reflects adversely on the entire profession. B)must comply with the laws and rules governing their profession and must not engage in any individual behavior that reflects adversely on the entire profession. C)are only obligated to comply with securities laws in the U.S.

B CFA charterholders must comply with the laws and rules governing their profession and must not engage in any individual behavior that reflects adversely on the entire profession. While they should act honorably and follow U.S. securities laws, they are obligated to more than that, as set forth in the Code and Standards.

Which of the following statements about the Standard on misconduct is most accurate? A) Misconduct applies only to a member or candidate's professional activities. B) Neglecting to perform due diligence when required is an example of misconduct. C) A member or candidate commits misconduct by engaging in any illegal activity.

B Failing to act when required by one's professional obligations, such as neglecting to perform due diligence related to an investment recommendation, violates Standard I(D) Misconduct. Acts a member commits outside his professional capacity are misconduct if they reflect poorly on the member or candidate's honesty, integrity, or competence (e.g., theft or fraud).Violations of the law that do not reflect on the member or candidate's honesty, integrity, or competence (e.g., an act related to civil disobedience) are not necessarily regarded as misconduct.

According to the GIPS standards, which of the following statements is most accurate? A) Firms are required to obtain independent third-party verification for a claim of GIPS compliance. B) GIPS compliant firms are required to maintain written documentation of policies and procedures used to establish and maintain compliance with GIPS. C) To initially claim compliance with GIPS, a company must present a minimum of ten years (or since the firm's inception if less than ten years) of GIPS-compliant performance data.

B GIPS require firms that claim compliance to maintain written documentation of their policies and procedures for complying with GIPS. Verification of GIPS compliance is optional. In order to initially claim compliance with GIPS, a firm must have a minimum of five years (or since firm inception) of GIPS-compliant data. After the first compliant presentation, another year of compliant performance must be added each year until the compliant performance history reaches at least ten years.

Sarah Johnson, a portfolio manager, is offered a bonus directly by a client if Johnson meets certain performance goals. To comply with the Standard that governs additional compensation arrangements, Johnson should: A) decline to accept a bonus outside of her compensation from her employer. B) disclose this arrangement to her employer in writing and obtain her employer's permission. C) disclose this arrangement to her employer only if she actually meets the performance goals and receives the bonus.

B Johnson should disclose her additional compensation arrangement in writing to her employer and obtain her employer's written consent before accepting this offer, in accordance with Standard IV(B) Additional Compensation Arrangements

In formulating her report on GammaCorp's common stock, Barb Kramer, CFA, did a complex series of statistical tests on the company's past sales and earnings. Based on this statistical study, Kramer stated in her report that, "GammaCorp's earnings growth for the next five years will average 15% per year." Her conclusion was based in part on a regression analysis with a high level of statistical significance. Has Kramer violated the Standard on communication with clients and prospective clients? A) Yes, because she didn't give complete details of the statistical model used. B) Yes, because she failed to indicate that 15% growth is an estimate. C) No, because her projections are within the generally accepted bounds of statistical accuracy.

B Kramer violated Standard V(B) Communication with Clients and Prospective Clients. The problem is with the word "will." Kramer should have used "is estimated to be" to separate fact from opinion. Statistical estimates of future events are subject to change and should not be presented as certainties. She need not give complete details of the statistical model but should indicate its general characteristics and the important factors involved in her projections.

The CFA Institute Professional Conduct Program (PCP) has begun an investigation into Chris Jones, a Level II CFA candidate, and a number of his CFA charterholder colleagues. Jones has access to confidential client records that could be useful in clearing his name and wishes to share this information with the PCP. Which of the following most accurately describes Jones's duties with regard to preservation of confidentiality? A) Sharing the confidential information with the PCP would violate the Standards. B) The Standards encourage, but do not require, that Jones support the PCP investigation into his colleagues. C) Jones may share confidential information about former clients with the PCP but may not share confidential information about current clients.

B Members and candidates are required to cooperate with PCP investigations into their own conduct and encouraged to cooperate with PCP investigations into the conduct of others. Sharing confidential information with the PCP is not a violation of Standard III(E) Preservation of Confidentiality. Any client information shared with the PCP will be kept in strict confidence. Standard III(E) states that members and candidates are required to maintain confidentiality of client records even after the end of the client relationship.

Ray Stone, CFA, follows the Amity Paving Company for his employer, Rubbell Securities. Which of the following scenarios is Stone least likely to have to disclose? A)Rubbell's broker-dealer relationship with Amity. B)The fact that Stone's son worked at Amity as a laborer during the summer while in school. C)Stone's ownership of Amity securities.

B Members are required to disclose all matters that reasonably could interfere with their objectivity. Personal ownership of securities or a broker-dealer relationship with a covered firm could reasonably interfere with objectivity, but it is unlikely that a child's past employment would reasonably interfere with Stone's objectivity.

Which of the following statements about the CFA Institute's Professional Conduct Program (PCP) is least accurate? A) Possible sanctions include condemnation by a member's peers or suspension of a candidate's participation in the CFA Program. B) If the PCP staff determine that a sanction against a member is warranted, the member must either accept the sanction or lose the right to use the CFA designation. C) Members who cooperate with a PCP inquiry by providing confidential client information to PCP staff are not in violation of Standard III(E) Preservation of Confidentiality.

B Members can accept or reject a disciplinary sanction proposed by the Professional Conduct Program staff. If the member rejects the sanction, the matter is referred to a hearing before a disciplinary review panel of CFA Institute members. The other statements are accurate.

A member or candidate who has supervisory responsibility: A) should place particular emphasis on enforcing investment-related compliance policies. B) is responsible for instructing those to whom he has delegated authority about methods to detect and prevent violations of the law and the Code and Standards. C) has complied with the Standards if she reports employee violations to upper management and provides a written warning to the employee to cease such activities.

B Members or candidates may delegate supervisory duties to subordinates but remain responsible for instructing them about how to detect and prevent violations. Reporting the violation and warning the employee are not sufficient to comply with Standard IV(C) Responsibilities of Supervisors. The supervisor must also take steps to prevent further violations while she conducts an investigation, such as limiting the employee's activity or increasing her monitoring of the employee. Supervisors should enforce investment-related and non-investment-related policies equally.

Andrea Waters is an investment analyst who has accumulated and analyzed several pieces of nonpublic information through her contacts with drug firms. Although no one piece of the information she collected is "material," Waters correctly concluded that the earnings of one of the drug companies would be unexpectedly high in the coming year. According to CFA Institute Standards of Professional Conduct, Waters: A)may use the information, but only after approval from a compliance officer or supervisor. B)can use the information to make investment recommendations and decisions. C)cannot legally invest or make recommendations based on this information.

B Members who can piece together items of nonmaterial nonpublic information with public information can, based upon the mosaic theory, use such information for trading purposes.

Antonio Mendoza, CFA, an investment manager operating as AM Investments, solicits new business by making brief presentations at which he makes available a single-page information sheet that summarizes his performance history for the past 10 years. On the sheet, Mendoza has his phone number for those who would like more information along with the statement, "AM Investments has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS®)." Mendoza's brief presentation and information sheet most likely: A) violate the Standard regarding performance presentation. B) comply with both GIPS and the Standard regarding performance presentation. C) do not comply with GIPS but comply with the Standard regarding performance presentation.

B Mendoza has not violated the Standards of Practice or GIPS. Because the presentation was introductory and brief, Mendoza was not required to give any supporting documentation, but he made it available to clients and prospective clients upon request. His claim of GIPS compliance on the information sheet is appropriate.

Nick O'Donnell, CFA, unsuspectingly joins the research team at Wickett & Co., an investment banking firm controlled by organized crime. None of the managers at Wickett are CFA Institute members. Because of his tenuous situation at Wickett, O'Donnell begins making preparations for independent practice. He knows he will be terminated if he informs management at Wickett that he is preparing to leave. Consequently, he determines that "if he can just hang on for one year, he will likely have a client base sufficient for him to strike out on his own." This action is: A)a violation of his fiduciary duties. B)not a violation of his duty to employer. C)a violation of his duty to disclose conflicts to his employer.

B O'Donnell is required to obtain consent from his employer if he is attempting to practice in competition with his employer. Merely undertaking preparations to leave, which do not violate a duty, is not a violation of the Code and Standards.

Which of the following characteristics distinguishes a profession from an occupation? Members of a profession: A)view their work as a calling. B)abide by a code of ethics. C)are better compensated for their services.

B One of the defining characteristics of a profession according to the Level I CFA curriculum is that its members agree to abide by a common code of ethics.

All of the following are required for a CFA Institute member to maintain his or her active status EXCEPT: A)remit a completed Professional Conduct Statement on an annual basis. B)Passing each exam in no more than two tries. C)paying membership dues to CFA Institute on an annual basis.

B Passing each exam in two or fewer tries is not required to maintain active status as a member of the CFA Institute. CFA Institute imposes both of the other choices.

Which of the following is one of the nine major sections of the GIPS standards? A) Verification. B) Private equity. C) Sub-advisers.

B Private equity is one of the nine major sections of the GIPS standards; the others are not.

Ethics is least likely: A) the study of acceptable and unacceptable behavior. B) the careful following of all laws and regulations. C) a set of moral principles to guide behavior.

B Simply following all laws and regulations is not as high a standard as ethical behavior. Ethical principles typically involve more judgment than laws or regulations.

Which of the following statements about legal and ethical standards is most accurate? A)Illegal acts are always unethical. B)Some illegal acts are considered ethical. C)Unethical acts are always illegal.

B Some illegal acts, such as acts of civil disobedience, are considered ethical by many people. All unethical behavior is not necessarily illegal.

A stockbroker who is a member of CFA Institute has a part-time housekeeper who also works for the CEO of Festival, Inc. One day the housekeeper mentions to the broker that she saw the CEO of Festival having a conversation at his home with John Tater, who is a nationally known corporate lawyer and consultant. The stockbroker is restricted from trading on this information: A)for both of the reasons listed here. B)if the housekeeper says the meeting concerned a tender offer and the broker knows that it is non-public information. C)only if the broker knows that the meeting is non-public information.

B Standard II(A), Material Nonpublic Information, states "a member cannot trade or cause others to trade in a security while the member possesses material nonpublic information" A tender offer would certainly be material nonpublic information. Knowing that the meeting took place, and nothing else, does not restrict the broker. A reasonable investor would need to know more to determine if the information was material.

According to the Standard related to loyalty, prudence, and care, which of the following statements regarding the voting of proxies on client holdings is least accurate? A) Proxies have economic value to a client. B) An investment management firm should vote all proxies on client holdings unless the client reserves that right. C) Members and candidates should explicitly disclose the firm's proxy voting policies to clients.

B Standard III(A) Loyalty, Prudence, and Care does not require the voting of all proxies. A cost-benefit analysis may support the conclusion that the voting of all proxies is not beneficial to the client in light of the time and effort required. Voting on nonroutine issues that have a material impact is required.

In securing the shares for all accounts under her management, Linda Kammel of Northwest Futures purchased three blocks of shares at three different prices. She then allocated these shares by placing shares from the first block in accounts with surnames beginning with A-G. The second was allocated over accounts H-P, and the third over Q-Z. This action is: A)permissible only if the clients are informed of the allocation procedure. B)not permissible under the Code and Standards. C)consistent with her responsibilities under the Code and Standards.

B Standard III(B) requires a member to deal fairly with all clients when taking investment actions. Since she knew at the outset that she was going to place shares in all accounts, regardless of the first letter of the surname, all accounts must participate on a pro-rata basis in each block in order to conform to the Standard. Her actions constitute a violation of the Standard concerning fair dealing.

Martin Tripp, CFA, is vice-president of the equity department at Walker Financial, a large money management firm. Of the twenty analysts in his department for whom he has supervisory responsibility, eight are subject to CFA Institute Standards of Professional Conduct. Tripp believes that he cannot personally evaluate the conduct of the twenty analysts on a continuing basis. Therefore, he plans to delegate some of his supervisory duties to Sarah Green, who is subject to the Standards, and some to Bob Brown, who is not subject to the Standards. According to CFA Institute Standards of Professional Conduct, which of the following statements about Tripp's ability to delegate supervisory duties is most accurate? A)Tripp may delegate some or all of his supervisory duties only to Green because she is subject to the Standards. B)Tripp may delegate some or all of his supervisory duties to Brown, even though Brown is not subject to the Standards. C)Tripp may not delegate any of his supervisory duties to either Green or Brown.

B Standard IV(C) Responsibilities of Supervisors permits Tripp to delegate supervisory duties to Green, Brown, or both, but such delegation does not relieve Tripp of his supervisory responsibility.

A CFA Institute member puts the following statement on her resume: "I passed each level of the CFA exam on the first try." Is this a violation of Standard VII(B)? A)Yes, because saying she passed exams on the first try is not appropriate. B)No, because it is a statement of fact. C)Yes, because she incorrectly refers to the CFA exam.

B The statement is not a violation because it is a fact. However, the member must not go on to claim superior performance.

Shan Ang, CFA, is a portfolio manager at Huang Investments. Lian Jan, an old friend of Ang's, is an executive recruiter in the same city. Jan refers any high-level executives that she places locally to Ang. In return, Ang gives Jan one round of golf at her country club for each new client referred to her by Jan. According to the Standard concerning referral fees, Ang is required to disclose the referral arrangement: A) only to all prospective clients referred by Jan. B) to his employer and all prospective clients referred by Jan. C) to all prospective clients, current clients, and his employer.

B Standard VI(C) Referral Fees states that members and candidates must disclose to employers and to affected prospects and clients, before entering into any formal agreement for services, any benefits received for the recommendation of services provided by the member.

After writing the Level I CFA exam, Cynthia White goes to internet discussion site CFA Haven to express her frustration. White writes, "CFA Institute is not doing a competent job of evaluating candidates because none of the questions in the June exam touched on Alternative Investments." White most likely violated the Standard related to conduct as a candidate in the CFA program by: A) publicly disputing CFA Institute policies and procedures. B) disclosing subject matter covered or not covered on a CFA exam. C) participating in an internet forum that is directed toward CFA Program participants.

B Standard VII(A) Conduct as Participants in CFA Institute Programs prohibits candidates from revealing which portions of the Candidate Body of Knowledge were or were not covered on an exam. Members and candidates are free to disagree with the policies, procedures, or positions taken by the CFA Institute. The Standard does not prohibit participating in CFA Program-related internet blogs, forums, or social networks.

Calvin Moore, CFA, has been transferred from the brokerage house of the Browning Company to the portfolio management department. In portfolio management, Moore learns that clients are grouped into three divisions according to portfolio value, divided as follows: Group 1 up to $10,000 Group 2 from $10,001 to $100,000 Group 3 more than $100,000 When recommendations are announced or trades are initiated, a particular sequence is followed in communicating to these groups. At the next monthly meeting, Moore suggests that the sequencing practice is a breach of CFA Institute Standards. One of Moore's co-workers replies that the grouping approach helps the company in applying the Standard regarding portfolio recommendations. He further suggests that because Browning's overall performance is more strongly affected by actions taken on the high value portfolios, that these portfolios should take priority over the small value portfolios. What should Moore do? Moore should: A)do nothing since there is no breach with the Standards. B)disassociate himself from the problem and seek legal advice. C)prepare a written report to the CEO describing the problem.

B Taking a special approach in disseminating information in relation to initiating trades is a breach of Standard III(B), Fair Dealing. Given the fact that Moore works in the department and has already unsuccessfully tried to prevent the practice from continuing, he needs to disassociate himself and seek legal advice.

Anne Franklin, CFA, who covers technology stocks, joins a conference call for analysts presented by Cynthia Lucas, chief technology officer for LevelTech. Lucas tells the analysts that overseas shipments of the company's important new product are going to be delayed due to manufacturing defects, which is new information to the analysts. After the meeting Franklin changes her rating on LevelTech from "buy" to "hold" and sends a note to accounts recommending the sale of LevelTech. Franklin: A) did not violate the Standards. B) violated the Standard on nonpublic information by revising her rating on LevelTech. C) violated the Standard on fair dealing by rating the stock a "hold" but recommending sale of the shares to her accounts.

B Telling a selected group of analysts new information does not constitute public disclosure, and therefore acting or causing others to act on this information is a violation of Standard II(A) Material Nonpublic Information. Recommending the sale of a stock rated as a "hold" is not a violation of Standard III(B) Fair Dealing.

The CFA Institute Professional Conduct Program may impose sanctions on: A)CFA charterholders, member firms, and candidates for the CFA designation. B)CFA charterholders and candidates for the CFA designation. C)CFA charterholders only.

B The CFA Institute Professional Conduct Program may impose sanctions on CFA charterholders and candidates for the CFA designation. Firms are not members of CFA Institute.

Which of the following actions is most likely a violation of the Standard on fair dealing? A) A portfolio manager allocates IPO shares to all client accounts, including her brother's fee-based retirement account. B) An investment firm routinely begins trading for its own account immediately after announcing recommendation changes to clients. C) After releasing a general recommendation to all clients, an analyst calls the firm's largest institutional clients to discuss the recommendation in more detail.

B The firm must give its clients an opportunity to act on recommendation changes. Firms can offer different levels of service to clients as long as this is disclosed to all clients. The largest institutional clients would likely be paying higher fees for a greater level of service. The portfolio manager's brother's account should be treated the same as any other client account.

Green Brothers, an emerging market fund manager, has two of its subsidiaries simultaneously buy and sell emerging market stocks. In its marketing literature, Green Brothers cites the overall emerging market volume as evidence of the market's liquidity. As a result of its actions, more investors participate in the emerging markets fund. Green Brothers most likely: A) did not violate the Code and Standards. B) violated the Standard regarding market manipulation. C) violated the Standard regarding performance presentation.

B The intent of Green Brothers' actions is to manipulate the appearance of market liquidity in order to attract investment to its own funds. The increased trading activity was not based on market fundamentals or an actual trading strategy to benefit investors. It was merely an attempt to mislead market participants in order to increase assets under Green Brothers' management. The action violates Standard II(B) Market Manipulation.

If a member does business in a country with stricter securities laws and regulations than the Code and Standards, but the member's home country has less strict securities laws or regulations than the Code and Standards, the member must abide by the: A)home country's securities laws and regulations only. B)laws and regulations of the country with stricter securities laws. C)Code and Standards only.

B The member must abide by the laws and regulations of the country in which he is doing business if these laws are stricter than his home country's laws or the Code and Standards. A member must adhere to the strictest applicable law or regulation.

Dudley Thompson is a bond salesman for a small broker/dealer in London. His firm is the lead underwriter on a new junk bond issue for Ibex Corporation, and Thompson has sent details of the offering to clients. Thompson calls only his accounts over £1,000,000 for whom he thinks the issue is suitable. Thompson also posts his firm's optimistic projections for Ibex's performance in several Internet chat rooms. According to the Standards concerning market manipulation and fair dealing, Thompson is in violation of: A) both of these Standards. B) neither of these Standards. C) only one of these Standards.

B Thompson has not violated Standard II(B) Market Manipulation by posting his firm's projections for Ibex. A firm's recommendation of a security may increase its price without any intent to mislead the market. The firm has disseminated the details of the offering to its clients fairly, so Thompson may call individual clients without violating the Standard III(B) Fair Dealing.

Derek Stevens, CFA, manages the pension plan assets of Colors, Inc. When voting proxies for plan equities, Stevens owes a fiduciary duty to: A) the plan trustees who hired him. B) the plan participants and beneficiaries. C) the managers, stockholders, and bondholders of Colors, Inc., equally.

B Under Standard III(A) Loyalty, Prudence, and Care, the fiduciary duty in this case is to plan participants and beneficiaries, not shareholders or plan trustees.

Doug Watson, CFA, serves in a sales position at Sommerset Brokerage, a registered investment adviser. As part of his employment, he is expected to entertain clients. Frequently at these client outings, Watson drinks excessively. On one occasion, after dropping off a client, Watson was cited by local police for misdemeanor public intoxication. According to the Standard on knowledge of the law and the Standard on misconduct, Watson is in violation of: A) both of these Standards. B) neither of these Standards. C) only one of these Standards.

B Watson's excessive drinking is unfortunate, but we have no evidence that it has affected his work, professional integrity, judgment, or reputation. His arrest for public intoxication occurred while he was away from work. If he commits an act involving fraud or dishonesty, he would violate the Standard on misconduct

If regulations do not specify how long to retain the documents that support an analyst's conclusions, the Code and Standards recommend a period of at least: A) 5 years. B) 7 years. C) 10 years.

B When no other regulatory guidance applies, Standard V(C) Record Retention recommends that records be maintained for a minimum of seven years.

In the case of a complaint about a member's professional conduct, CFA Institute Professional Conduct Program staff are least likely to: A) review documents and records related to the complaint. B) request an interview with the member or with the party making the complaint. C) suspend the member's right to use the CFA designation while an investigation is in progress.

C

A code of ethics: A) is a personal view of acceptable behavior. B) encompasses current "best practices." C) specifies a minimum level of acceptable conduct.

C A code of ethics specifies a minimum level of acceptable conduct for a group or organization, whereas "best practices" are suggested behavior, not a minimum acceptable level.

Employing a framework for decision making that includes the ethical aspects of the decision is most likely to: A) lead to higher profits. B) avoid any unintended ethical consequences of decisions. C) balance the interests of various stakeholders.

C A decision-making framework that includes the ethical aspects of the decision should consider the conflicts among the interests of various stakeholders so that decision makers can use the company's stated ethical principles and their judgment to balance these interests in an ethical manner. Profit maximization, at least in the short term, does not necessarily follow from sound ethical judgment. While integrating ethics into the decision-making process can consider and reduce unintended ethical consequences of a decision, avoiding them altogether can never be assured.

Bill Cooper finds a table of historical bond yields on the website of the U.S. Treasury that supports the work he has done in his analysis and includes the table as part of his report without citing the source. Has Cooper violated the Code and Standards? A) Yes, because he did not cite the source of the table. B) Yes, because he did not verify the accuracy of the information. C) No, because the table is from a recognized source of financial or statistical data.

C According to Standard I(C) Misrepresentation, members and candidates must cite the sources of the information they use in their analysis, unless the information is factual data (as opposed to analysis or opinion) from a recognized financial or statistical reporting service. The U.S. Treasury is one example of a recognized source of factual data.

Connie Fletcher, CFA, works for a small money management firm that specializes in pension accounts. Recently, a friend asked her to act as an unpaid volunteer manager for the city's street sweep pension fund. As part of the position, the city would grant Fletcher a free parking space in front of her downtown office. Before Fletcher accepts, she should most appropriately: A) do nothing because this is a volunteer position. B) inform her current clients in writing and discuss the offer with her employer. C) disclose the details of the volunteer position to her employer and obtain written permission from her employer.

C According to Standard IV(A) Loyalty, members and candidates are expected to act for the benefit of their employer and not deprive the employer of their skills. Fletcher is performing work similar to the services that her employer provides. Although the position is a volunteer position, Fletcher will receive compensation in the form of a free parking space. In light of the circumstances, Fletcher must disclose the details of the position to her employer and get written permission before accepting the volunteer position.

Rob Elliott, CFA, is an analyst with a large asset management firm. His personal portfolio includes a large amount of common stock of Tech Inc., a semiconductor company, which his firm does not currently follow. The director of the research department has asked Elliott to analyze Tech and write a report about its investment potential. Based on the CFA Institute Standards of Professional Conduct, the most appropriate course of action for Elliot is to: A) decline to write the report. B) sell his shares of Tech before completing the report. C) disclose the ownership of the stock to his employer and in the report, if he writes it.

C According to Standard VI(A) Disclosure of Conflicts, Elliott should disclose his beneficial ownership of Tech to his employer and to clients and prospects because such ownership could interfere with his ability to make unbiased and objective recommendations. Selling his shares or declining to write the report are not required and are more extreme than simply disclosing the potential conflict.

Hern Investments provides monthly emerging market research to Baker Brokerage in exchange for prospective client referrals and European equity research from Baker. Clients and prospects of Hern are not made aware of the agreement, but clients unanimously rave about the high quality of the research provided by Baker. As a result of the research, many clients with nondiscretionary accounts have earned substantial returns on their portfolios. Managers at Hern have also used the research to earn outstanding returns for the firm's discretionary accounts. Hern has most likely: A) not violated the Code and Standards. B) violated the Code and Standards by using third-party research in discretionary accounts. C) violated the Code and Standards by failing to disclose the referral agreement with Baker.

C According to Standard VI(C) Referral Fees, Hern must disclose the referral arrangement between itself and Baker so that potential clients can judge the true cost of Hern's services and assess whether there is any partiality inherent in the recommendation of services.

Hedge Funds Unlimited, a global hedge fund, has publicly acknowledged in writing that it has adopted the CFA Institute Code and Standards as its policies. Which of the following is least likely a violation of the firm's policies? A) An analyst at the firm working overseas uses material nonpublic information as allowed by local law to make investment decisions for discretionary client accounts. B) A junior analyst at the firm uses a subscription to his local newspaper and the opinions of his friends and colleagues to make investment recommendations for discretionary client accounts. C) A CFA candidate at the firm, who is registered for the Level III exam, includes reference to participation in the CFA program and her status as a Level III candidate in her biographical background.

C All investment personnel in this example are subject to the CFA Institute Code and Standards as part of the firm's established policies. The candidate's reference to her Level III status and the inclusion of such information in her biographical information is not in violation of the CFA Institute Code and Standards. Candidates may clearly reference their participation in the CFA program, provided such reference does not imply the achievement of any type of partial designation. The analyst is considered a candidate since she is registered to take the next scheduled examination. The Code and Standards prohibit using material nonpublic information. Since the Code and Standards are stricter than the local law, they must be followed by the analyst. The junior analyst failed to exercise diligence and thoroughness in making investment recommendations and failed to have a reasonable and adequate basis for such recommendations.

Jacob Allen, CFA, decides he could make more money if he started his own company. Which of the following steps would most likely violate Standard IV(A) Loyalty? A)Soliciting, without written permission from his current employer, the business of former clients after he leaves his current employer. B)Renting space for his new company and interviewing several candidates for the position of manager at the new company. C)Using his notes from prior research of a firm in a creating a new research report on the firm, after leaving his current employer.

C Allen's notes from his research are employer records and even though he prepared them, it is a violation to take them from his employer without permission. Soliciting former clients' business is not, in itself, a violation as long has Allen has not misappropriated client information from his former employer. Preparations to start a new business are not necessarily a violation of the Standard, although soliciting current clients or recruiting other firm personnel for the new venture, before formally leaving his employer, would be violations of the Standards.

Ethics least likely refers to: A)moral principles to guide behavior. B)the study of good and bad behavior. C)a person's beliefs about right and wrong behavior.

C An individual's beliefs are not ethics as it is used in the Level I CFA curriculum. Ethics are described as commonly accepted principles of good and bad behavior and the study of good and bad behavior.

Ruth Brett, a Level I CFA candidate, feels nervous and unprepared the night before the exam. Brett writes a few key notes on the bottom of her shoe. At the exam, Brett sees the large number of proctors present and decides not to risk getting caught and does not look at her shoe. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, Brett is: A) not in violation of any Standard or the Code of Ethics because she did not use the notes. B) in violation of the Code of Ethics for bringing the notes into the examination room but is not in violation of any Standard because she did not use the notes. C) in violation of both the Code of Ethics and the Standard governing conduct as participants in CFA Institute programs for taking the notes into the examination room.

C Brett violated both the Code of Ethics and Standard VII(A) Conduct as Participants in CFA Institute Programs. By writing down information from the Candidate Body of Knowledge and taking it into the exam room, she compromised the integrity of the exam, whether she used the notes or not. Her actions are also in violation of the Code of Ethics by not acting "with integrity, competence, diligence, respect, and in an ethical manner."

CFA Institute believes: A)that a maximum level of professional responsibility and conduct dictates that members be aware of and comply with laws, rules, and regulations governing their conduct. B)that firms should comply with all domestic laws and regulations and that these laws also govern behavior in foreign markets, regardless of foreign laws and requirements. C)that a minimum level of professional responsibility and conduct dictates that members be aware of and comply with laws, rules, and regulations governing their conduct.

C CFA Institute's Code and Standards dictate a minimum level of conduct. Standards should not be based on ethics of upper management and the board of directors of a company. Firms must comply with the strictest applicable standards, whether they be foreign or domestic laws and regulations.

The first component of the Code of Ethics does NOT explicitly say that a CFA Institute member will act with which of the following? A)Competence. B)Integrity. C)Solemnity.

C Component one mentions all of these except solemnity.

Which of the following individuals may refer to himself or herself as a candidate in the CFA Program? A)Bob Krall passed the Level II exam and intends to register for the next Level III exam. B)Jane Baker received a passing score in January for the Level I exam but is waiting until the following year to register for the Level II exam. C)Ed Long has not yet attempted a Level I exam but has registered for the next one.

C To refer to oneself as a CFA candidate, an individual must be registered to sit for a CFA exam or waiting for results of a CFA exam taken.

Daniel Lyons, CFA, is an analyst who covers several stocks including Horizon Company. Lyons's aunt owns 30,000 shares of Horizon. She informs Lyons that she has created a trust in his name into which she has placed 2,000 shares of Horizon. The trust is structured so that Lyons will not be able to sell the shares until his aunt dies, but may vote the shares. Lyons is due to update his research coverage of Horizon next week. Lyons should most appropriately: A) update the report as usual because he is not a beneficial owner of the stock. B) advise his superiors that he is no longer able to issue research recommendations on Horizon. C) disclose the situation to his employer and, if then asked to prepare a report, also disclose his beneficial ownership of the shares in his report.

C Even though the shares are held in trust, Lyons is considered a beneficial owner under Standard VI(A) Disclosure of Conflicts because he has a pecuniary interest in the shares and because has the power to vote the shares. Lyons is obligated to inform his employer of the potential conflict. If Lyons's employer permits him to continue issuing investment recommendations on the company, Lyons must disclose the existence of a potential conflict in his reports.

Sharon West is a CFA charterholder and trust officer for REO Trust Company. Soon after beginning work for REO, West finds that REO has been conducting all its securities transactions through her brother who is a registered representative. West's brother charges REO commissions that are equal to the lowest available from another broker. West's brother tells her that if she continues doing business with him, he will give her a substantial discount on all personal transactions she conducts through him. West: A)does not need to inform her employer of the arrangement because the commissions her brother charges the firm are the lowest possible. B)must inform her employer of the arrangement because she is doing business with a member of her immediate family. C)must inform her employer of the arrangement because it provides her with additional compensation.

C Members are required to disclose to their employer in writing all monetary compensation or other benefit they receive in addition to the employer's compensation. The discounting of West's commissions is a benefit that must be disclosed.

Which of the following statements concerning Standard II(A), Material Nonpublic Information, is CORRECT? A member: A)can trade on material non-public information if the information has not been misappropriated. B)can trade on material non-public information if the information was not obtained through a breach of duty. C)cannot trade on material non-public information.

C Members cannot trade on material nonpublic information until that same information is made public. It does not matter if the information was not misappropriated or not obtained through a breach of duty

Kate Wilson, CFA, is an equity analyst. Wilson enters two transactions for her personal account. Wilson sells 500 shares of Tibon, Inc., a stock on which her firm currently has a "Buy" recommendation. Wilson buys 200 shares of Hayfield Co. and the following day issues a research report on Hayfield with a "Buy" recommendation. Has Wilson violated the Code and Standards? A) No. B) Yes, both of her actions violate the Code and Standards. C) Yes, but only one of her actions violates the Code and Standards.

C Only one of these transactions is a violation. Standard VI(B) Priority of Transactions requires members and candidates to give clients an adequate opportunity to act on a recommendation before trading for accounts in which the member or candidate has a beneficial ownership interest. Members and candidates may trade for their own accounts as long as they do not disadvantage clients, benefit personally from client trades, or violate any regulations that apply. The Standard does not prohibit members and candidates from entering personal transactions that are contrary to what their firms are recommending for clients, as long as the transaction does not violate any of these criteria.

Which of the following is most likely a recommended procedure for complying with the Standard on performance presentation? A) Exclude terminated accounts from past performance history. B) Present the performance of a representative account to show how a composite has performed. C) Consider the level of financial knowledge of the audience to whom the performance is presented.

C Recommendations stated in Standard III(D) Performance Presentation include considering the sophistication and knowledge of the audience when presenting performance data. Other recommendations are to include terminated accounts in past performance history; to present the performance of a composite as a weighted average of the performance of similar portfolios, rather than using a single representative account; and to maintain the records and data that were used to calculate performance.

At his golf club on Saturday morning, Paul Corwin, CFA, sees Frank Roberts, a friend and institutional client of his, who tells him that he is planning to sell his house on the 7th fairway. While golfing that day, Corwin tells Robert Lowe, a realtor, that Roberts is planning to sell his house and may need a realtor. He also tells Lowe that he manages an equities account for Roberts. If Corwin has not received permission from Roberts, he has violated the Standard on preservation of confidentiality: A) both by disclosing Roberts' plan to sell his home and that he is a client. B) by disclosing Roberts' plan to sell his home but not by mentioning that he was a client. C) by disclosing that Roberts is a client of his but not by mentioning Roberts' plan to sell his home.

C Roberts violated Standard III(E) Preservation of Confidentiality by revealing his business relationship with Roberts without permission. Because the information that Roberts' plans to sell his home is not received as part of his professional relationship with Roberts, it is not covered by the Standard.

Situational factors that influence ethical behavior are least likely to include: A) social pressure. B) large financial rewards. C) a lack of ethical principles.

C Situational factors are those external to the decision makers, such as financial rewards and desire to please coworkers or others. Researchers have found that external factors are often more likely than a lack of personal ethics to lead to poor ethical decisions.

Challenges to ethical behavior are most likely to arise from: A)internal motivations. B)inadequate training. C)situational influences.

C Situational influences, which are factors external to a decision maker, are the most likely source of challenges to ethical behavior.

Cobb, Inc., has hired Jude Kasten, CFA, to manage its pension fund. The client(s) to whom Kasten owes a duty of loyalty are: A) Cobb's management. B) the shareholders of Cobb, Inc. C) the beneficiaries of the pension fund.

C Standard III(A) Loyalty, Prudence, and Care specifies that for the manager of a pension or trust, the duty of loyalty is owed to the beneficiaries, not to the individuals who hired the manager.

Alpha Advisors, Inc., is an investment management firm with a client base that ranges from individuals to large foundations. Which of the following firm policies is least appropriate if Alpha adopts the Code and Standards? Alpha: A) monitors the personal trading activity of firm personnel and requires them to pre-clear personal trades. B) regularly calls larger accounts first after changes in investment recommendations have been faxed to all clients. C) excludes client accounts of family members of employees from participating in IPOs.

C Standard III(B) Fair Dealing requires that all clients be treated fairly. Members and candidates should not discriminate against any client. A family member who is a fee-paying client should not be treated differently from other clients when taking investment action. Following up changes in recommendations with phone calls to larger clients is not a violation of the Standard if the changes have been disseminated fairly.

Patricia Young is an individual investment advisor who uses a computer model to place each of her clients into an appropriate portfolio. The model analyzes a range of simulated portfolios and computes for each the probabilities of achieving various levels of return. Young then selects the portfolio that provides the highest probability of achieving the clients' minimum required return. By using this process, Young is: A)violating Standard I(C) - Misrepresentation. B)not violating the Standards. C)violating Standard III(C) - Suitability.

C Standard III(C) Suitability requires that Young select investments that are consistent with clients' risk and return objectives. However risk tolerance is not adequately addressed by Young's process.

Amy Brooks, a Level III CFA candidate, has been given supervisory responsibilities. In carrying out her responsibilities, Brooks has discovered that the firm's compliance system is inadequate. She informed her supervisor, who is not supportive of Brooks's efforts to correct the situation. According to CFA Institute Standards of Professional Conduct, Brooks: A) has satisfied her obligation under the Code and Standards by informing her manager of the situation. B) must dissociate herself from the firm if the firm is not in compliance with the CFA Institute Standards. C) should decline in writing to accept supervisory responsibilities until an adequate compliance system is adopted.

C Standard IV(C) Responsibilities of Supervisors indicates that a member should decline supervisory responsibility in writing until the firm adopts reasonable compliance procedures. Otherwise, Brooks cannot adequately exercise her responsibility.

After passing all three levels of the CFA exams on her first attempts and being awarded her CFA charter, Paula Osgood is promoting her new money management firm by issuing an advertisement. Which of these statements would most likely violate the Standard related to use of the CFA designation? A) "To earn the right to use the CFA designation, Paula passed three exams covering ethics, financial statement analysis, asset valuation, and portfolio management." B) "Paula passed three 6-hour exams on her first attempts and is a member of her local investment analyst society." C) "Because of her extensive training, Paula will be able to achieve better investment results than managers who have not been awarded the CFA designation."

C Standard VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program prohibits members and candidates from implying superior performance as a result of being a CFA charterholder. Concise factual descriptions of the requirements to obtain the CFA charter are acceptable. Osgood's statement that she passed the exams on her first attempts is acceptable because it states a fact.

Standards of conduct are most accurately described as: A)providing the public with the values and general expectations for a group of professionals. B)a necessary part of any ethical code. C)giving members of a group a minimum level of acceptable behavior.

C Standards of conduct address specific minimum levels or expected behavior in various circumstances, while a code of ethics communicates provides the values and general expectations for professional behavior. A code of ethics does not necessarily include standards of conduct.

A money management firm has the following policy concerning new recommendations: When a new recommendation is made, each portfolio manager estimates the likely transaction size for each of their clients. Clients are notified of the new recommendation in the order of their estimated transaction size—largest first. All clients have signed a form where they acknowledge and consent to this allocation procedure. With respect to Standard III(B), Fair Dealing, this is: A)not a violation because the clients are aware of the policy. B)not a violation because the clients have signed the consent form. C)a violation of the standard.

C Such a policy is a violation of the Standard and client acknowledgement and/or consent does not change that fact.

CFA Institute Standards of Professional Conduct are most accurately described as being based on: A)the best interests of members and candidates. B)accepted legal standards. C)a code of ethics.

C The Standards of Professional Conduct are based on principles stated in the CFA Institute Code of Ethics.

If a member or candidate is offered an additional compensation arrangement by a client, which of the seven Standards of Professional Conduct states the requirements the member or candidate must follow? A) Duties to Clients. B) Conflicts of Interest. C) Duties to Employers.

C The standard related to additional compensation arrangements is a subsection of Standard IV Duties to Employers.

In situations where the laws of a member or candidate's country of residence, the local laws of regions where the member or candidate does business, and the Code and Standards specify different requirements, the member or candidate must abide by: A) local law or the Code and Standards, whichever is stricter. B) the Code and Standards or his country's laws, whichever are stricter. C) the strictest of local law, his country's laws, or the Code and Standards.

C To comply with Standard I(A) Knowledge of the Law, a member must always abide by the strictest applicable law, regulation, or standard.

Rhonda Morrow, CFA, is an analyst for Waller & Madison, a brokerage and investment banking firm. Waller & Madison is a market maker for CorpEast, and Tim Waller, a principal in Morrow's firm, sits on CorpEast's board. Morrow has been asked to write a research report on CorpEast. According to the Standard regarding disclosure of conflicts, Morrow: A) must not write the report. B) must disclose that Waller & Madison is a market maker in CorpEast shares but not that Waller is a board member. C) may write the report if she discloses both that Waller & Madison is a market maker in CorpEast shares and that Waller sits on the CorpEast board.

C To comply with Standard VI(A) Disclosure of Conflicts, both the market-making activities by the firm and the directorship held by a principal in the firm must be disclosed.

Mary Kim, CFA, practices in the established country of Oldasia as well as in the emerging country of Newasia. By regulation, Oldasia prohibits licensed investment advisors from trading in securities ahead of their clients. Newasia has no laws or regulations in this area. Mary Kim may: A)trade ahead of her clients in Newasia only. B)trade ahead of her clients in Newasia only, as long as she has made full disclosure to her clients that she reserves the right to do this. C)not trade ahead of her clients in either country.

C Under Standard I(A), Mary Kim, as a CFA charterholder, must apply the CFA Institute Code and Standards or the controlling law, whichever is stricter. Because Standard VI(B) requires members to put client trades ahead of their own transactions, Mary Kim must follow the standard in the absence of governing law, or where the law is less strict than the standard.

Which of the following is a component of the Code of Ethics? A)Transactions for clients and employers have priority over transactions in which a member or candidate is the beneficial owner. B)Members and candidates must not engage in conduct that compromises the integrity of the CFA designation or the security of the CFA examinations. C)Practice and encourage others to practice in a professional and ethical manner that will reflect credit on members and their profession.

C Which of the following is a component of the Code of Ethics? A)Transactions for clients and employers have priority over transactions in which a member or candidate is the beneficial owner. B)Members and candidates must not engage in conduct that compromises the integrity of the CFA designation or the security of the CFA examinations. C)Practice and encourage others to practice in a professional and ethical manner that will reflect credit on members and their profession.