Ethics
. According to the Fundamentals of Compliance section of the Global Investment Performance Standards, issues that a firm must consider when claiming compliance include all of the following except: A. replicating performance. B. properly defining the firm. C. documenting firm policies and procedures used in establishing and maintaining compliance with the Standards
A
Q. According to the Fundamentals of Compliance—Requirements section of the GIPS standards, a firm must: A. include in total firm assets those assigned to a sub-advisor selected by the firm. B. alter historical composite performance after a significant change in the firm's organization occurs. C. represent that the calculation methodology used by the firm is "in accordance with the Global Investment Performance Standards" when presenting performance.
A
Q. Benefits of compliance with the CFA Institute Global Investment Performance Standards (GIPS) least likely include: A. strengthening of internal controls. B. participation in competitive bidding. C. elimination of in-depth due diligence for investors.
C
Q. Stewart has been hired by Goodner Industries, Inc., to manage its pension fund. Stewart's duty of loyalty, prudence, and care is owed to: A. The management of Goodner. B. The participants and beneficiaries of Goodner's pension plan. C. The shareholders of Goodner
B
Q. To comply with the GIPS standards, firms most likely must: A. apply standards on a firm-wide basis. B. be verified before they can claim compliance. C. be defined as separate legal entities.
A
Q. Can an asset management firm who follows the GIPS standards for select performance composites claim that it is GIPS compliant? A. No. B. Yes, but only if those composites meet GIPS performance reporting requirements. C. Yes, but only if it uses the GIPS required return calculation requirements for all composites.
A
Q. Albert and Tye, who recently started their own investment advisory business, have registered to take the Level III CFA examination. Albert's business card reads, "Judy Albert, CFA Level II." Tye has not put anything about the CFA designation on his business card, but promotional material that he designed for the business describes the CFA requirements and indicates that Tye participates in the CFA Program and has completed Levels I and II. According to the Standards: A. Albert has violated the Standards, but Tye has not. B. Tye has violated the Standards, but Albert has not. C. Both Albert and Tye have violated the Standards.
A
Q. Anderb, a portfolio manager for XYZ Investment Management Company—a registered investment organization that advises investment firms and private accounts—was promoted to that position three years ago. Bates, her supervisor, is responsible for reviewing Anderb's portfolio account transactions and her required monthly reports of personal stock transactions. Anderb has been using Jonelli, a broker, almost exclusively for brokerage transactions for the portfolio account. For securities in which Jonelli's firm makes a market, Jonelli has been giving Anderb lower prices for personal purchases and higher prices for personal sales than Jonelli gives to Anderb's portfolio accounts and other investors. Anderb has been filing monthly reports with Bates only for those months in which she has no personal transactions, which is about every fourth month. Which of the following is most likely to be a violation of the Code and Standards? A. Anderb failed to disclose to her employer her personal transactions. B. Anderb owned the same securities as those of her clients. C. Bates allowed Anderb to use Jonelli as her broker for personal trades.
A
Q. Brown works for an investment counseling firm. Green, a new client of the firm, is meeting with Brown for the first time. Green used another counseling firm for financial advice for years, but she has switched her account to Brown's firm. After spending a few minutes getting acquainted, Brown explains to Green that she has discovered a highly undervalued stock that offers large potential gains. She recommends that Green purchase the stock. Brown has committed a violation of the Standards. What should she have done differently? A. Brown should have determined Green's needs, objectives, and tolerance for risk before making a recommendation of any type of security. B. Brown should have thoroughly explained the characteristics of the company to Green, including the characteristics of the industry in which the company operates. C. Brown should have explained her qualifications, including her education, training, and experience and the meaning of the CFA designation.
A
Q. CFA Institute support of a local country sponsor to drive the adoption of the GIPS standards seeks to: A. provide a link between the governing body and the local markets. B. promote the standards as mandatory. C. translate the standards into the local language for use as the official governing version.
A
Q. Cannan has been working from home on weekends and occasionally saves correspondence with clients and completed work on her home computer. Because of worsening market conditions, Cannan is one of several employees released by her firm. While Cannan is looking for a new job, she uses the files she saved at home to request letters of recommendation from former clients. She also provides to prospective clients some of the reports as examples of her abilities. A. Cannan violated the Code and Standards because she did not receive permission from her former employer to keep or use the files after her employment ended. B. Cannan did not violate the Code and Standards because the files were created and saved on her own time and computer. C. Cannan violated the Code and Standards because she is prohibited from saving files on her home computer.
A
Q. Carter works for Invest Today, a local asset management firm. A broker that provides Carter with proprietary research through client brokerage arrangements is offering a new trading service. The broker is offering low-fee, execution-only trades to complement its traditional full-service, execution-and-research trades. To entice Carter and other asset managers to send additional business its way, the broker will apply the commissions paid on the new service toward satisfying the brokerage commitment of the prior full-service arrangements. Carter has always been satisfied with the execution provided on the full-service trades, and the new low-fee trades are comparable to the fees of other brokers currently used for the accounts that prohibit soft dollar arrangements. A. Carter can trade for his accounts that prohibit soft dollar arrangements under the new low-fee trading scheme. B. Carter cannot use the new trading scheme because the commissions are prohibited by the soft dollar restrictions of the accounts. C. Carter should trade only through the new low-fee scheme and should increase his trading volume to meet his required commission commitment.
A
Q. During a round of golf, Rodriguez, chief financial officer of Mega Retail, mentions to Hart, a local investment adviser and long-time personal friend, that Mega is having an exceptional sales quarter. Rodriguez expects the results to be almost 10% above the current estimates. The next day, Hart initiates the purchase of a large stake in the local exchange-traded retail fund for her personal account. A. Hart violated the Code and Standards by investing in the exchange-traded fund that included Mega Retail. B. Hart did not violate the Code and Standards because she did not invest directly in securities of Mega Retail. C. Rodriguez did not violate the Code and Standards because the comments made to Hart were not intended to solicit an investment in Mega Retail.
A
Q. Ensuring that a country's interests are taken into account when effectively implementing the GIPS standards on a country-wide basis most likely relies on which of the following entities?\ A. A local sponsoring organization B. The local regulator(s) C.Local independent valuation firms
A
Q. Firms claiming compliance with GIPS standards are most likely required to: A. comply with all updates, interpretations, and clarifications. B.make negative assurance disclosures when presenting the firm's performance. C.meet at least 85% of the requirements before claiming compliance.
A
Q. Long has been asked to be the keynote speaker at an upcoming investment conference. The event is being hosted by one of the third-party investment managers currently used by his pension fund. The manager offers to cover all conference and travel costs for Long and make the conference registrations free for three additional members of his investment management team. To ensure that the conference obtains the best speakers, the host firm has arranged for an exclusive golf outing for the day following the conference on a local championship-caliber course. Which of the following is least likely to violate Standard I(B)? A. Long may accept only the offer to have his conference-related expenses paid by the host firm. B. Long may accept the offer to have his conference-related expenses paid and may attend the exclusive golf outing at the expense of the hosting firm. C. Long may accept the entire package of incentives offered to speak at this conference.
A
Q. The Fundamentals of Compliance section of the GIPS standards recommends that firms: A. conduct a verification. B. adopt a limited definition of the firm, regardless of the actual name of the individual investment management company. C. annually provide existing clients with compliant presentations for each composite on the firm's list of composite descriptions.
A
Q. The Global Investment Performance Standards (GIPS) least likely require: A. non-discretionary portfolios to be included in composites. B. non-fee-paying portfolios to be excluded in the returns of appropriate composites. C. composites to be defined according to similar investment objectives and/or strategies.
A
Q. To claim compliance with the GIPS standards, a firm is required to: A. adhere to certain calculation methodologies. B. conduct an independent third-party verification of its claim of compliance. C. perform periodic internal compliance checks of its investment performance process.
A
Q. 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. A. Townsend did not violate the Code and Standards. B. Townsend violated the Code and Standards by soliciting donations from her clients through the newsletter. C. Townsend violated the Code and Standards by not getting approval of the organization before soliciting her clients.
A
Q. When claiming GIPS compliance, a firm will least likely have to apply all of the required provisions in the first five major sections of the GIPS standards when investing in: A. separately managed accounts. B. equity mutual funds or unit trusts. C. commodity related portfolios.
A
Q. Which of the following categories completely represents an ethical principle of CFA Institute as outlined in the Standards of Practice Handbook? A. Individual professionalism B. Responsibilities to clients and employers C. Ethics involved in investment analysis and recommendations
A
Q. Which of the following is a correct statement of a member's or candidate's duty under the Code and Standards? A. In the absence of specific applicable law or other regulatory requirements, the Code and Standards govern the member's or candidate's actions. B. A member or candidate is required to comply only with applicable local laws, rules, regulations, or customs, even though the Code and Standards may impose a higher degree of responsibility or a higher duty on the member or candidate. C. A member or candidate who trades securities in a securities market where no applicable local laws or stock exchange rules regulate the use of material nonpublic information may take investment action based on material nonpublic information.
A
Q. Which of the following is least likely a requirement of the GIPS standards? Firms are required to: A. have their performance records verified by an independent third party. B. include all discretionary, fee-paying portfolios in at least one composite. C. present a minimum of five years of annual investment performance compliant with GIPS standards.
A
Q. Which of the following situations most likely helps to explain why the GIPS standards were created? A. Firms only including top performing funds to represent their performance history. B. Asset managers including the performance of all portfolios including those no longer managed in their performance history. C. Consistency amongst fund managers when making investment performance presentations.
A
Q. Which of the following statements does not accurately represent the GIPS standards concerning the fundamentals of compliance? GIPS standards: A. promote fair competition amongst investment management firms in all markets requiring a common fee structure. B. ensure consistent, accurate investment performance data in areas of reporting, records, marketing, and presentations. C. obtaining global acceptance of calculation and presentation standards in a fair, comparable format with full disclosure.
A
Q. Which of the following statements regarding GIPS compliance is correct? A. Plan sponsors and consultants that manage assets can claim compliance with GIPS. B. Software that calculates performance in a manner consistent with the GIPS standards can claim compliance with GIPS. C. Investment management firms can comply with GIPS requirements by limiting their compliance claims to the standards they have chosen to follow.
A
Q. With respect to the Global Investment Performance Standards, which of the following is one of the nine sections containing investment performance provisions? A. Real Estate. B. Derivatives. C. Legal and Ethical Considerations
A
Jimmy Lan, CFA, is a technology analyst at Pacific Securities, Inc., and is a leading authority on Japanese technology companies. Lan's clients include many leading Japanese equity managers. While still employed at Pacific, Lan makes plans during weekends to start a new company, JL Consulting. His plans consist of contracting office space, interviewing potential employees, and purchasing office equipment. Once he feels ready to launch his new firm, Lan provides Pacific with his resignation notice. After leaving, Lan constructs earnings models of the technology companies he previously covered, using the knowledge and experience gained while at Pacific. He then contacts former clients by using public sources and encourages them to become clients of his new firm. Are Lan's actions in compliance with the Code and Standards? A. Yes, assuming he is not in breach of any non-compete agreement signed while at Pacific Securities. B. No, because he is prohibited from engaging in activities related to starting his new business while still employed by Pacific Securities. C. No, because the names of former clients, modeling skills and experience gained by Lan are confidential information of Pacific Securities.
A Lan's actions do not violate Standard IV(A)-Duties to Employers. Lan does not use company time to make arrangements for his new venture, nor does he misappropriate any information (financial models or client contacts) from his former employer. All of the actions performed by Lan are permissible under Standard IV(A). B in incorrect because members and candidates are not prohibited from making arrangements for a new venture while still employed providing they do so on their own time and do not inappropriately use company property. C is incorrect because general skills and experience gained while employed are not considered confidential or privileged information. Likewise, simple knowledge of the names and existence of former clients is generally not considered confidential information under Standard IV(A).
The belief that one's ethical standards are above average is most likely a reflection of which of the following behavioral biases? A. Overconfidence B. Short-term focus C. Situational influence
A The belief that one's ethical standards are above average illustrates an overconfidence bias. An overconfidence bias will most likely lead individuals to overestimate the morality of their own behavior and can lead to a failure to consider important inputs and variables needed to make the best ethical decisions.
. 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.
B
Q. Rose, a portfolio manager for a local investment advisory firm, is planning to sell a portion of his personal investment portfolio to cover the costs of his child's academic tuition. Rose wants to sell a portion of his holdings in Household Products, but his firm recently upgraded the stock to "strong buy." Which of the following describes Rose's options under the Code and Standards? A. Based on his firm's "buy" recommendation, Rose cannot sell the shares because he would be improperly prospering from the inflated recommendation. B. Rose is free to sell his personal holdings once his firm is properly informed of his intentions. C. Rose can sell his personal holdings but only when a client of the firm places an order to buy shares of Household.
B
Pietro, president of Local Bank, has hired the bank's market maker, Vogt, to seek a merger partner. Local is currently not listed on a stock exchange and has not reported that it is seeking strategic alternatives. Vogt has discussed the possibility of a merger with several firms, but they have all decided to wait until after the next period's financial data are available. The potential buyers believe the results will be worse than the results of prior periods and will allow them to pay less for Local Bank. Q. Pietro wants to increase the likelihood of structuring a merger deal quickly. Which of the following actions would most likely be a violation of the Code and Standards? A. Pietro could instruct Local Bank to issue a press release announcing that it has retained Vogt to find a merger partner. B. Pietro could place a buy order for 2,000 shares (or four times the average weekly volume) through Vogt for his personal account. C. After confirming with Local's chief financial officer, Pietro could instruct Local to issue a press release reaffirming the firm's prior announced earnings guidance for the full fiscal year.
B
Q. A CFA Institute member would violate the standard for material nonpublic information by: A. conducting price distortion practices. B. inappropriately causing others to act. C. inadequately maintaining investment records.
B
Q. A key feature of the GIPS standards is that: A. they strive to cover the unique characteristics of each asset class. B. firms must adhere to all requirements of the standards to claim compliance. C.actual, discretionary, fee-paying portfolios may be excluded from a composite under limited conditions.
B
Q. According to the Code of Ethics, members of CFA Institute and candidates for the CFA designation must: A. maintain their professional competence to exercise independent professional judgment. B. place the integrity of the investment profession and the interests of clients above their own personal interests. C. practice in a professional and ethical manner with the public, clients, and others in the global capital markets.
B
Q. According to the Duties to Clients standard, suitability requires members and candidates in an advisory relationship with a client to: A. place their clients' interests before their own interests. B. consider investments in the context of the client's total portfolio. C. not knowingly make misrepresentations relating to recommendations.
B
Q. An investment banking department of a brokerage firm often receives material nonpublic information that could have considerable value if used in advising the firm's brokerage clients. In order to conform to the Code and Standards, which one of the following is the best policy for the brokerage firm? A. Permanently prohibit both "buy" and "sell" recommendations of the stocks of clients of the investment banking department. B. Establish physical and informational barriers within the firm to prevent the exchange of information between the investment banking and brokerage operations. C. Monitor the exchange of information between the investment banking department and the brokerage operation.
B
Q. An investment management firm has been hired by ETV Corporation to work on an additional public offering for the company. The firm's brokerage unit now has a "sell" recommendation on ETV, but the head of the investment banking department has asked the head of the brokerage unit to change the recommendation from "sell" to "buy." According to the Standards, the head of the brokerage unit would be permitted to: A. Increase the recommendation by no more than one increment (in this case, to a "hold" recommendation). B. Place the company on a restricted list and give only factual information about the company. C. Assign a new analyst to decide if the stock deserves a higher rating.
B
Q. An investment management firm that does not adopt the GIPS standards could mischaracterize its overall performance by presenting a performance history: A. that includes terminated portfolios. B. composed of a single top-performing portfolio. C.for an investment mandate over all periods since the firm's inception.
B
Q. Based on the Conflicts of Interest standard, members and candidates must: A. disclose, as required by law, those conflicts interfering with their professional duties. B. disclose, as appropriate, any benefit paid to others for the recommendation of products. C. seek employer approval before prioritizing their investment transactions over those clients.
B
Q. Bronson provides investment advice to the board of trustees of a private university endowment fund. The trustees have provided Bronson with the fund's financial information, including planned expenditures. Bronson receives a phone call on Friday afternoon from Murdock, a prominent alumnus, requesting that Bronson fax him comprehensive financial information about the fund. According to Murdock, he has a potential contributor but needs the information that day to close the deal and cannot contact any of the trustees. Based on the CFA Institute Standards, Bronson should: A. Send Murdock the information because disclosure would benefit the client. B. Not send Murdock the information to preserve confidentiality. C. Send Murdock the information, provided Bronson promptly notifies the trustees.
B
Q. Fiduciary duty is a standard most likely to be upheld by members of a(n): A. employer. B. profession. C. not-for-profit body.
B
Q. 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. A. Paper did not violate the Code and Standards. B. Paper violated the Code and Standards by claiming the performance of the entire fund as his own. C. Paper violated the Code and Standards by including the historical results of his prior employer.
B
Q. Quinn sat for the Level III CFA exam this past weekend. He updates his resume with the following statement: "In finishing the CFA Program, I improved my skills related to researching investments and managing portfolios. I will be eligible for the CFA charter upon completion of the required work experience." A. Quinn violated the Code and Standards by claiming he improved his skills through the CFA Program. B. Quinn violated the Code and Standards by incorrectly stating that he is eligible for the CFA charter. C. Quinn did not violate the Code and Standards with his resume update.
B
Q. Rule has worked as a portfolio manager for a large investment management firm for the past 10 years. Rule earned his CFA charter last year and has decided to open his own investment management firm. After leaving his current employer, Rule creates some marketing material for his new firm. He states in the material, "In earning the CFA charter, a highly regarded credential in the investment management industry, I further enhanced the portfolio management skills learned during my professional career. While completing the examination process in three consecutive years, I consistently received the highest possible scores on the topics of Ethics, Alternative Investments, and Portfolio Management." Has Rule violated Standard VII(B)-Reference to CFA Institute, the CFA Designation, and the CFA Program in his marketing material? A. Rule violated Standard VII(B) in stating that he completed the exams in three consecutive years. B. Rule violated Standard VII(B) in stating that he received the highest scores in the topics of Ethics, Alternative Investments, and Portfolio Management. C. Rule did not violate Standard VII(B).
B
Q. Smith is a financial analyst with XYZ Brokerage Firm. She is preparing a purchase recommendation on JNI Corporation. Which of the following situations is most likely to represent a conflict of interest for Smith that would have to be disclosed? A. Smith frequently purchases items produced by JNI. B. XYZ holds for its own account a substantial common stock position in JNI. C. Smith's brother-in-law is a supplier to JNI.
B
Q. Smith, a research analyst with a brokerage firm, decides to change his recommendation for the common stock of Green Company, Inc., from a "buy" to a "sell." He mails this change in investment advice to all the firm's clients on Wednesday. The day after the mailing, a client calls with a buy order for 500 shares of Green Company. In this circumstance, Smith should: A. Accept the order. B. Advise the customer of the change in recommendation before accepting the order. C. Not accept the order because it is contrary to the firm's recommendation.
B
Q. The Duties to Employers standard states that members and candidates must not: A. accept any gifts that might compromise their independence and objectivity. B. deprive their employer of their skills and abilities as related to their employment. C. accept compensation competing with their employer's interest and with the written consent of all parties involved.
B
Q. The GIPS standards are instrumental in: A. enabling regulatory enforcement of investment performance reporting. B. establishing best practices for calculating and presenting investment performance. C. eliminating barriers to entry in markets with no investment performance standards.
B
Q. The Standards of Practice Handbook provides guidance: A. regarding the penalties incurred as a result of ethical violations. B. to which all CFA Institute members and candidates must adhere. C. through explanatory material and examples intended to be all inclusive.
B
Q. The mosaic theory holds that an analyst: A. Violates the Code and Standards if the analyst fails to have knowledge of and comply with applicable laws. B. Can use material public information and nonmaterial nonpublic information in the analyst's analysis. C. Should use all available and relevant information in support of an investment recommendation.
B
Q. Verification of a firm's claim of compliance with the GIPS standards is performed: A. by firm personnel. B. on a firm-wide basis. C.to ensure the accuracy of a specific composite presentation.
B
Q. Ward is scheduled to visit the corporate headquarters of Evans Industries. Ward expects to use the information he obtains there to complete his research report on Evans stock. Ward learns that Evans plans to pay all of Ward's expenses for the trip, including costs of meals, hotel room, and air transportation. Which of the following actions would be the best course for Ward to take under the Code and Standards? A. Accept the expense-paid trip and write an objective report. B. Pay for all travel expenses, including costs of meals and incidental items. C. Accept the expense-paid trip but disclose the value of the services accepted in the report.
B
Q. Which of the following statements best describes an aspect of the Standards of Professional Conduct? Members and candidates are required to: A. ensure any portfolio mandate followed is fair, accurate, and complete. B. promptly disclose changes that might materially affect investment processes. C. have a reasonable and adequate basis for decisions about client confidentiality.
B
Q. Which of the following statements is a stated purpose of disclosure in Standard VI(C)-Referral Fees? A. Disclosure will allow the client to request discounted service fees. B. Disclosure will help the client evaluate any possible partiality shown in the recommendation of services. C. Disclosure means advising a prospective client about the referral arrangement once a formal client relationship has been established.
B
Q. Which of the following statements is correct under the Code and Standards? A. CFA Institute members and candidates are prohibited from undertaking independent practice in competition with their employer. B. Written consent from the employer is necessary to permit independent practice that could result in compensation or other benefits in competition with a member's or candidate's employer. C. Members and candidates are prohibited from making arrangements or preparations to go into a competitive business before terminating their relationship with their employer.
B
Q. Willier is the research analyst responsible for following Company X. All the information he has accumulated and documented suggests that the outlook for the company's new products is poor, so the stock should be rated a weak "hold." During lunch, however, Willier overhears a financial analyst from another firm whom he respects offer opinions that conflict with Willier's forecasts and expectations. Upon returning to his office, Willier releases a strong "buy" recommendation to the public. Willier: A. Violated the Standards by failing to distinguish between facts and opinions in his recommendation. B. Violated the Standards because he did not have a reasonable and adequate basis for his recommendation. C. Was in full compliance with the Standards.
B
Which is an example of an activity that may be legal but that CFA Institute considers unethical? A. Making legally required disclosures in marketing materials B. Trading while in possession of material nonpublic information C. Disclosure by an employee of his or her own company's dishonest activity
B
A research analyst is facing a moral dilemma and decides to use an ethical decision-making framework. After looking at the facts at hand and identifying the situational influences, he still cannot make a decision on the best course of action. His least appropriate next step is to: A. determine what additional information is needed. B. decide, act, monitor, and reflect. C. ask someone else to give guidance.
B The least appropriate action would be for the decision maker to go ahead and make a decision based on insufficient information. By doing so, the decision maker could cause harm and make the situation worse. The ethical decision-making framework is iterative, and users can move between phases rather than undertaking them in any one order. If a decision maker is not yet ready to make a decision, the most appropriate course of action would be to ask someone else to give guidance and determine what additional information is needed to clarify the situation.
Q. Which one of the following actions will help to ensure the fair treatment of brokerage firm clients when a new investment recommendation is made? A. Informing all people in the firm in advance that a recommendation is to be disseminated. B. Distributing recommendations to institutional clients prior to individual accounts. C. Minimizing the time between the decision and the dissemination of a recommendation.
C
Q. What is the minimum period of compliant performance that a 12-year-old firm must present to comply with the GIPS standards? A. Five years B. Ten years C. Twelve years
B. After a firm presents a minimum of 5 years of GIPS-compliant performance, the firm must present an additional year of performance for each year since its inception, building up to a minimum of 10 years of GIPS-compliant performance. Accordingly, a firm in existence for 12 years must present, at a minimum, 10 years of compliant performance to comply with the GIPS standards.
Grey recommends the purchase of a mutual fund that invests solely in long-term US Treasury bonds. He makes the following statements to his clients: I. "The payment of the bonds is guaranteed by the US government; therefore, the default risk of the bonds is virtually zero." II. "If you invest in the mutual fund, you will earn a 10% rate of return each year for the next several years based on historical performance of the market." Q. Did Grey's statements violate the CFA Institute Code and Standards? A. Neither statement violated the Code and Standards. B. Only statement I violated the Code and Standards. C. Only statement II violated the Code and Standards.
C
Q. A current Code of Ethics principle reads in full, "Promote the integrity: A. and viability of the global capital markets." B. of and uphold the rules governing capital markets." C. and viability of the global capital markets for the ultimate benefit of society."
C
Q. 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? A. A member or candidate is eligible for the new position and incentive if he or she can arrange for enough current clients to switch to the new firm and if the member or candidate discloses the incentive fee. B. A member or candidate may not accept employment with the new firm because Jackman's incentive offer violates the Code and Standards. C. A member or candidate is not eligible for the new position unless he or she is currently unemployed because soliciting the clients of the member's or candidate's current employer is prohibited.
C
Q. ABC Investment Management acquires a new, very large account with two concentrated positions. The firm's current policy is to add new accounts for the purpose of performance calculation after the first full month of management. Cupp is responsible for calculating the firm's performance returns. Before the end of the initial month, Cupp notices that one of the significant holdings of the new accounts is acquired by another company, causing the value of the investment to double. Because of this holding, Cupp decides to account for the new portfolio as of the date of transfer, thereby allowing ABC Investment to reap the positive impact of that month's portfolio return. A. Cupp did not violate the Code and Standards because the GIPS standards allow composites to be updated on the date of large external cash flows. B. Cupp did not violate the Code and Standards because companies are allowed to determine when to incorporate new accounts into their composite calculation. C. Cupp violated the Code and Standards because the inclusion of the new account produces an inaccurate calculation of the monthly results according to the firm's stated policies.
C
Q. According the GIPS standards, for periods beginning on or after 1 January 2011, the aggregate fair value of total firm assets most likely includes all: A. fee-paying discretionary accounts. B. fee- and non-fee-paying discretionary accounts. C. fee- and non-fee-paying discretionary and non-discretionary accounts.
C
Q. According to the GIPS standards, in cases where country-specific regulations conflict with GIPS, firms must follow: A. GIPS standards only. B. local laws only. C.local laws and disclose the nature of the conflict with GIPS.
C
Q. Adherence to the GIPS standards is reinforced by: A. the sanctioning authority of sponsoring organizations. B. the higher priority placed on compliance with GIPS over conflicting regulations. C. a strong commitment to ethical integrity in fair representation and full disclosure.
C
Q. An ethical decision-making framework will mostlikely: A. include a pre-determined, uniform sequence. B. focus exclusively on confirmable facts and relationships. C. help avoid a decision that has unanticipated ethical consequences.
C
Q. Andrews, a private wealth manager, is conducting interviews for a new research analyst for his firm. One of the candidates is Wright, an analyst with a local investment bank. During the interview, while Wright is describing his analytical skills, he mentions a current merger in which his firm is acting as the adviser. Andrews has heard rumors of a possible merger between the two companies, but no releases have been made by the companies concerned. Which of the following actions by Andrews is least likely a violation of the Code and Standards? A. Waiting until the next day before trading on the information to allow time for it to become public. B. Notifying all investment managers in his firm of the new information so none of their clients are disadvantaged. C. Placing the securities mentioned as part of the merger on the firm's restricted trading list.
C
Q. As part of the Duties to Clients standard, members and candidates must: A. document client financial constraints after an initial investment action. B. maintain an equal balance of interests owed to their clients and employers. C. deal fairly and objectively with all clients when engaging in professional activities.
C
Q. As stated in the revised 11th edition, the Standards of Professional Conduct: A. require supervisors to focus on the detection and prevention of violations. B. adopt separate ethical considerations for programs such as CIPM and Investment Foundations. C. address the risks and limitations of recommendations being made to clients.
C
Q. Each composite of a GIPS-compliant firm must consist of: A. multiple portfolios. B. portfolios selected on an ex post basis. C. portfolios managed according to a similar investment strategy.
C
Q. G&F Advisors claims compliance with the Global Investment Performance Standards (GIPS) in its marketing materials. The compliant presentation includes a footnote which indicates that the firm has been verified by an independent third party. An additional note states that G&F is in compliance with the GIPS standards except for its private equity investments. Is it likely that G&F violated the GIPS standards? A. No, because the footnotes meet the requirements of the Standards. B. No, because the provisions do not apply to the private equity investments. C. Yes, because they cannot claim compliance unless all requirements of the Standard are met.
C
Q. Jamison is a junior research analyst with Howard & Howard, a brokerage and investment banking firm. Howard & Howard's mergers and acquisitions department has represented the Britland Company in all of its acquisitions for the past 20 years. Two of Howard & Howard's senior officers are directors of various Britland subsidiaries. Jamison has been asked to write a research report on Britland. What is the best course of action for her to follow? A. Jamison may write the report but must refrain from expressing any opinions because of the special relationships between the two companies. B. Jamison should not write the report because the two Howard & Howard officers serve as directors for subsidiaries of Britland. C. Jamison may write the report if she discloses the special relationships with the company in the report.
C
Q. Which statement about a manager's use of client brokerage commissions violates the Code and Standards? A. A client may direct a manager to use that client's brokerage commissions to purchase goods and services for that client. B. Client brokerage commissions should be used to benefit the client and should be commensurate with the value of the brokerage and research services received. C. Client brokerage commissions may be directed to pay for the investment manager's operating expenses.
C
Q. Jurgen is a portfolio manager. One of her firm's clients has told Jurgen that he will compensate her beyond the compensation provided by her firm on the basis of the capital appreciation of his portfolio each year. Jurgen should: A. Turn down the additional compensation because it will result in conflicts with the interests of other clients' accounts. B. Turn down the additional compensation because it will create undue pressure on her to achieve strong short-term performance. C. Obtain permission from her employer prior to accepting the compensation arrangement.
C
Q. Michelieu tells a prospective client, "I may not have a long-term track record yet, but I'm sure that you'll be very pleased with my recommendations and service. In the three years that I've been in the business, my equity-oriented clients have averaged a total return of more than 26% a year." The statement is true, but Michelieu only has a few clients, and one of his clients took a large position in a penny stock (against Michelieu's advice) and realized a huge gain. This large return caused the average of all of Michelieu's clients to exceed 26% a year. Without this one investment, the average gain would have been 8% a year. Has Michelieu violated the Standards? A. No, because Michelieu is not promising that he can earn a 26% return in the future. B. No, because the statement is a true and accurate description of Michelieu's track record. C. Yes, because the statement misrepresents Michelieu's track record.
C
Q. Park is very frustrated after taking her Level II exam. While she was studying for the exam, to supplement the curriculum provided, she ordered and used study material from a third-party provider. Park believes the additional material focused her attention on specific topic areas that were not tested while ignoring other areas. She posts the following statement on the provider's discussion board: "I am very dissatisfied with your firm's CFA Program Level II material. I found the exam extremely difficult and myself unprepared for specific questions after using your product. How could your service provide such limited instructional resources on the analysis of inventories and taxes when the exam had multiple questions about them? I will not recommend your products to other candidates." A. Park violated the Code and Standards by purchasing third-party review material. B. Park violated the Code and Standards by providing her opinion on the difficulty of the exam. C. Park violated the Code and Standards by providing specific information on topics tested on the exam.
C
Q. Stafford is a portfolio manager for a specialized real estate mutual fund. Her firm clearly describes in the fund's prospectus its soft dollar policies. Stafford decides that entering the CFA Program will enhance her investment decision-making skill and decides to use the fund's soft dollar account to pay the registration and exam fees for the CFA Program. Which of the following statements is most likely correct? A. Stafford did not violate the Code and Standards because the prospectus informed investors of the fund's soft dollar policies. B. Stafford violated the Code and Standards because improving her investment skills is not a reasonable use of the soft dollar account. C. Stafford violated the Code and Standards because the CFA Program does not meet the definition of research allowed to be purchased with brokerage commissions.
C
Q. The Investment Analysis, Recommendations, and Actions standard states that members and candidates must: A. find an investment suitable for their client before making a recommendation. B. make reasonable efforts to ensure that performance presentation is fair, accurate, and complete. C. distinguish between fact and opinion in the presentation of investment analysis and recommendations.
C
Q. The Responsibilities as a CFA Institute Member or CFA Candidate Standard explicitly states a requirement regarding: A. loyalty. B. responsibility of supervisors. C. reference to the CFA Program.
C
Q. To maintain trust, the investment management profession must be interdependent with: A. regulators. B. employers. C. investment firms.
C
Q. When an ethical dilemma occurs, an investment professional should most likely first raise the issue with a: A. mentor outside the firm. B. professional body's hotline. C. senior individual in the firm.
C
Q. Which of the following statements best describes an aspect of the Professional Conduct Program process? A. Inquiries are not initiated in response to information provided by the media. B. Investigations result in Disciplinary Review Committee panels for each case. C. Investigations may include requesting a written explanation from the member or candidate.
C
Q. Which of the following statements clearly conflictswith the recommended procedures for compliance presented in the CFA Institute Standards of Practice Handbook? A. Firms should disclose to clients the personal investing policies and procedures established for their employees. B. Prior approval must be obtained for the personal investment transactions of all employees. C. For confidentiality reasons, personal transactions and holdings should not be reported to employers unless mandated by regulatory organizations.
C
Q. Which of the following statements concerning the Global Investment Performance Standards (GIPS) is most likely correct? A. Clients or prospective clients benefit from the Standards because the historical track record of compliant firms is accurate and precise. B. The Standards eliminate the need for in-depth due diligence by investors. C. Compliance with the Standards enhances the credibility of investment management firms.
C
Q. Which of the following statements concerning the requirements of GIPS Fundamentals of Compliance is correct? A. Firms claiming compliance have full discretion over the dissemination of their compliant presentation. B. Firms may claim partial compliance with the standards provided the performance presented is not false or misleading. C. The definition of the firm creates defined boundaries whereby total firm assets and the basis for firm-wide compliance are determined.
C
Q. Which of the following statements does not accurately represent the objectives of Global Investment Performance Standards (GIPS)? The GIPS standards: A. ensure consistent, accurate investment performance data in areas of reporting, records, marketing, and presentations. B. obtain global acceptance of calculation and presentation standards in a fair, comparable format with full disclosure. C. promote fair competition amongst investment management firms in all markets requiring common fee structures.
C
Which of the following is not included in the nine major provisions of the Global Investment Performance Standards (GIPS)? A.Input Data, Calculation Methodology, and Real Estate B. Fundamentals of Compliance, Composite Construction, and Disclosure C. Calculation Methodology, Composite Construction, and Alternative Assets
C Alternative Assets is not among the nine major provisions or sections of the Global Investment Performance Standards, which include: Fundamentals of Compliance, Input Data, Calculation Methodology, Composite Construction, Disclosure, Presentation and Reporting, Real Estate, Private Equity, and Wrap Fee/Separately Managed Account (SMA) Portfolios.
Q. High ethical standards are distinguishing features of which of the following bodies? A. Craft guilds B. Trade bodies C. Professional bodies
c
