CFA Ethics

Bertrand Greene, CFA, is preparing a report on Blanding, Inc. Blanding's earnings have increased in each of the last six years by an average of 11.8%. Based on his analysis, Greene projects that Blanding's earnings will increase by 12.5% in each of the next two years. When he refers to this projection in his report, Greene will violate the Code and Standards if he states:

"Blanding's earnings will grow at 12.5% annually in each of the next two years."

Which of the following is NOT an objective of the Global Investment Performance Standards (GIPS)?

To obtain worldwide recognition by securities regulators of a standard for the calculation and presentation of investment performance in a fair, comparable format that provides full disclosure.

When calculating the performance of a composite, which of the following actions complies with GIPS?

Defining a composite so as to include portfolios that have been discontinued.

Assume that on January 1, 2005, a firm with no Global Investment Performance Standards (GIPS) compliant history since its inception four years ago wishes to claim compliance with GIPS. Which of the following accurately reflects the appropriate action for the firm to take?

Comply with GIPS for all four periods since the firm's inception.

Which of the following actions is least likely to prevent the misuse of insider information?

Monitoring all the phone calls made by the brokers.

Heidi Krueger, CFA, an investment advisor, applies soft dollars generated from client accounts to purchase a report on the economic impact of world events, and to purchase a new conference table for the office she uses to meet with clients and prospects. Do these purchases violate Standard III(A) Loyalty, Prudence, and Care?

Only one of these purchases violates the Standard.

An investment advisor goes straight from a research seminar to a meeting with a prospective new client with whom she has never been in contact. The advisor is very excited about the information she just received in the seminar and begins showing the prospect the new ideas her firm is coming up with. This is most likely a violation of:

both of these.

Standard VI(B), Priority of Transactions, applies to transactions an analyst takes on behalf of:

both of these.

According to Standard III(A) Loyalty, Prudence and Care, brokerage is an asset of the:

client.

Steve Waters, a Level I CFA candidate, has decided to enter into a long position of Farmco stock. Since Farmco is thinly traded, Waters is concerned the order will overwhelm the liquidity of Farmco and the price will surge. Waters engages in a series of block trades in order to accomplish the purchase. According to Standard II(B), Market Manipulation, Waters has engaged in:

neither transaction-based manipulation nor information-based manipulation.

A client calls his money manager and asks the manager to liquidate a large portion of his assets under management for an emergency. The manager warns the client of the risk of selling many assets quickly but says that he will try to get the client the best possible price. This is a violation of:

none of the Standards listed here.

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:

violated the Standards by her policy on mutual fund and pension fund proxies.

Which of the following is a component of the Code of Ethics? CFA Institute members shall:

use reasonable care and exercise independent professional judgment.

In its initial GIPS-compliant performance presentation, a firm must show GIPS-compliant performance history for a minimum of:

5 years or since firm's inception, and the firm must add annual performance results each year going forward up to a minimum total of 10 years of performance history.

A firm that has been in existence for 12 years has decided to present performance data in compliance with the Global Investment Performance Standards (GIPS). To comply with GIPS, the firm must present GIPS compliant performance information for a minimum of:

5 years.

Which of the following individuals may refer to himself or herself as a candidate in the CFA Program?

Ed Long has not yet attempted a Level I exam but has registered for the next one.

Which of the following is least likely an act explicitly referred to in the Code of Ethics?

Educating the general public on investing.

When an analyst makes an investment recommendation, which of the following statements must be disclosed to clients?

Both of these statements must be disclosed to clients.

Which of the following most accurately states a limitation that the Fair Dealing standard imposes?

Clients should not be discriminated against when disseminating investment recommendations.

After working 20 years on Wall Street, Jim Gentry, CFA, decides to open his own investment firm on Turtle Island, located in the Caribbean. Turtle Island has securities laws that are much less stringent than U.S. laws or the CFA Institute Standards of Professional Conduct. Many of his U.S.-based clients have agreed to keep Gentry as their portfolio manager and move their assets to his new firm. After a few months of operations, Gentry has encountered several instances in which Turtle Island regulations relieve him of disclosing information to investors that he had been required to disclose while working in New York. According to the CFA Institute Code and Standards, Gentry must adhere to the:

Code and Standards or U.S. law, whichever is more strict

Which of the following statements is most correct concerning a member's obligation to his or her employer under the Code and Standards?

Consent from the employer is necessary to permit independent practice that could result in compensation or other benefits in competition with the member's employer.

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

Consent from the employer is necessary to permit independent practice that could result in compensation or other benefits in competition with the member's employer.

Which of the following activities will least likely constitute a violation of Standard IV(A), Loyalty?

Consulting on your own time and obtaining written permission from your employer.

Which of the following is least likely part of the CFA Institute Code of Ethics?

Contractual provisions.

Janet Green, CFA, provides investment advice and other services to clients in several countries. She resides in Country A whose securities laws and regulations are less strict than the Code and Standards. She also conducts business with clients in Country B, which has no securities laws or regulations, and in Country C, which has securities laws and regulations that are stricter than the Code and Standards. Which of the following statements is CORRECT? According to CFA Institute Standards of Professional Conduct, Green must adhere to the Code and Standards in:

Country A and Country B but the law in Country C.

Ethyl Redd recently joined Bloomington Investments as a research analyst. After spending an afternoon looking through the research team's archives, Redd is not sure Bloomington maintains the records that support the team's analysis and recommendations for the minimum 7-year period called for by Standard V(C), Record Retention. What is Redd's most appropriate course of action?

Review the firm's record retention procedures with her supervisor or compliance officer to ensure that they comply with the Standard, or suggest ways to bring them into compliance.

In preparing research reports, which of the following is least likely required or recommended by the Code and Standards?

Send all reports to the firm's legal counsel to ensure compliance with securities laws.

Which of the following statements about legal and ethical standards is most accurate?

Some illegal acts are considered ethical.

Rickard Advisors recently had a trading error in a customer account that was subsequently discovered by Rickard. The firm felt embarrassed by the disclosure of this error, and, in order to induce the client to continue its relationship, Rickard offers the client preferential access to a new issue that is expected to be "hot." Which Standard is violated, if any?

The Standard concerning Fair Dealing.

In the course of reviewing the Corn Co., an analyst has received comments from management that, while not meaningful by themselves, when pieced together with data he has accumulated from outside sources, lead him to recommend placing Corn Co. on his firm's sell list. What should the analyst do?

The comments are non material and the report can be issued as long as he maintains a file of the facts as supplied by management.

Which of the following is least likely required of fiduciaries who are responsible for pension plans?

Supporting the sponsor's management during proxy fights.

Which of the following statements regarding Standard II(A), Material, Nonpublic Information, is least accurate?

Information received from an insider who is not breaching his fiduciary responsibility may be traded on.

A member or candidate who rejects a disciplinary sanction proposed by the Professional Conduct Program:

may request an appeal to a hearing panel.

An analyst is allowed to trade on information that he has predicted, such as a corporate action or event, using perceptive assembly and analysis of public information and nonmaterial nonpublic information. This is called the:

mosaic theory.

A CFA Institute member is also a member and the portfolio manager of an environmentalist group. In its charter, the environmentalist group lists a group of companies its members should boycott. The CFA Institute member would violate Standard I(A) concerning obeying all rules and regulations if the member:

purchases stock of a boycotted firm for the group's portfolio.

According to Standard VI(A), Disclosures of Conflicts, members must disclose to their clients the member's (or their firm's) material ownership of all of the following EXCEPT:

real estate holdings

Which of the following is least likely part of the CFA Institute Code of Ethics. Members of CFA Institute will:

recommend investments that maximize returns for a given level of risk.

A member would most likely violate the Standard regarding duties to clients by:

recommending purchase of securities without a reasonable inquiry into the investment experience of the client.

The CFA Institute Code of Ethics specifies that CFA Institute Members and Candidates must do all of the following EXCEPT:

refrain from any conduct that compromises the reputation or integrity of the CFA designation.

Bill Fence, CFA, supervises a group of research analysts, none of whom have earned the CFA designation (nor are they CFA candidates). On several occasions he has attempted to get his firm to adopt a compliance system to ensure that applicable laws and regulations are followed. However, the firm's principals have never adopted his recommendations. Fence should most appropriately:

refuse supervisory responsibility.

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 least likely violates the Standard concerning loyalty? Salyers:

registers his new firm with the government's financial regulators

To comply with Standard IV(B), Additional Compensation Arrangements, members should do all of the following EXCEPT:

reject any outside compensation immediately because it is not appropriate to accept outside compensation in a business setting.

According to CFA Institute Standards of Professional Conduct, which of the following is least likely a form of misrepresentation?

Using factual information published by recognized financial and statistical reporting services or similar sources without acknowledgment.

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?

Using his notes from prior research of a firm in a creating a new research report on the firm, after leaving his current employer.

Timothy Hooper, CFA, is a security analyst at an investment firm. In his spare time, Hooper serves as a volunteer for City Pride, which collects clothes for the homeless. Hooper has occasionally given some of the clothes to his friends or sold the clothes instead of returning all of the clothing to City Pride. City Pride discovers what he has been doing and dismisses him. Later, City Pride learns that other volunteer organizations have dismissed Hooper for similar actions. Has Hooper violated Standard I(D) on professional misconduct in the CFA Institute Standards of Professional Conduct?

Yes.

Mary White, CFA, sits on the board of directors of XYZ Manufacturing, Inc. She discovers that management has knowingly participated in an activity she knows is illegal. According to the CFA Institute Standards of Professional Conduct, White is least likely to be required to:

report the violation to the CFA Institute Professional Conduct Program.

A member or candidate who produces issuer-paid research should most appropriately negotiate:

a flat fee prior to writing the report

While on a business trip, John Hayes, CFA, found a notebook that had apparently been left in the waiting area of an airport. Hayes opened the notebook and read the title: Confidential: Level II CFA Examination. Before returning the notebook to CFA Institute, he made a copy and gave it to Linda Sacket, one of his firm's analysts, who was a candidate for Level II of the CFA examination. Sacket read the questions and guideline answers before taking the Level II examination. According to the CFA Institute Standards of Professional Conduct:

both Hayes and Sacket violated the Standards.

Referral fees a member must disclose to a prospective client include:

both fees a member receives and fees a member pays.

For years John Berger, a CFA charterholder and CEO of a company, relied upon a set of reasonable procedures for preventing violations of the Code and Standards of Professional Conduct in the firm. To comply with the Standards, Berger must:

both periodically review the procedures and ensure the procedures are monitored and enforced.

Robe Advisory Services operates an office in San Francisco, where it manages portfolios for its clients based in the United States. The firm also maintains an office in Tokyo, where it employs Sam Lee, CFA who researches Japanese stocks. According to the CFA Institute Standards of Professional Conduct, Lee is required to maintain knowledge of and comply with all applicable laws, rules, and regulations in:

both the U.S. and Japan and the CFA Institute Standards of Professional Conduct.

Unethical behavior by a financial professional harms:

clients, other employees, and society.

Janine Walker is an individual investment advisor with 200 individual clients. When she first obtains a client, Walker solicits personal data that helps her formulate an investment recommendation, including tax status, income, expenditure needs, and risk tolerance. The Standards:

require Walker to update the data regularly.

CFA Institute members should encourage their employers to do all of the following EXCEPT:

require employees to write personal ethics statements.

Which of the following is NOT a key characteristic of the Global Investment Performance Standards (GIPS)? GIPS:

require managers to include all actual fee-paying and non-fee-paying discretionary portfolios in composites defined according to similar strategy and/or investment objective.

According to the CFA Institute Code of Ethics, CFA Institute members shall:

act with integrity, competence, diligence, respect, and in an ethical manner when dealing with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets.

According to the CFA Institute Standards of Professional Conduct, which of the following statements about members with supervisory responsibility is least accurate? Members with supervisory responsibility:

are relieved of their supervisory responsibility if they delegate their supervisory duties to other members of CFA Institute.

According to the Global Investment Performance Standards (GIPS), where existing laws or regulations conflict with GIPS, firms:

are required to comply with local laws and regulations in preparing a compliant presentation.

Andy Rock, CFA, is an analyst at Best Trade Co. The company is going to announce a sell recommendation on Biomed stock in one hour. Rock was a member of the team who reached the decision on Biomed. Rock's wife has an account at Best Trade Co. that contains Biomed stock. According to the Code and Standards, trading on Rock's wife's account can begin:

as soon as the information is disseminated to all clients.

An analyst has the opportunity to offer his clients shares in a "hot new issue." One of the analyst's clients is his brother. When the new issue comes out, for those clients he deems it would be appropriate, he offers them an equal share. He includes his brother in that group. With respect to Standard VI(B), Priority of Transactions, this is:

congruent with the Standard as long as he does not have a direct personal interest in his brother's account.

An ethical decision-making framework:

considers alternative actions and unintended consequences.

Marc Feldman, CFA, is manager of corporate investor relations for a high-tech startup, zippy.com, in Boise, Idaho. Feldman learns that Larry Smith, controller, is altering the accounting records. Feldman advises some of his personal friends to sell short zippy.com. This action:

constitutes the use of material nonpublic information and is a violation of the Code and Standards.

A member or candidate who suspects that a colleague is violating the law should most appropriately:

consult with the company counsel to determine if in fact a law is being violated.

May Frost, CFA, is concerned about the comments and activities of several of her coworkers and feels both ethical and legal violations are routinely overlooked. According to the Code and Standards, a recommended first step would least likely be to:

contact industry regulators.

Sean Jones places an order with his investment advisor Lisa Johnson, CFA, to buy 1,000 shares of Orkle Incorporated. Johnson's firm makes a market in Orkle and she executes the trade through her own firm. According to the Code and Standards, Johnson should:

disclose her firm's market making activities to Jones.

Dick Bowden, a CFA charterholder, receives a free country club membership in exchange for financial advice he can offer the firm. He should:

disclose the arrangement to his employer.

If a CFA charterholder receives a referral fee, he must:

disclose the nature of the fee arrangement to the client before entering into a formal agreement.

Standard VI(C), Referral Fees, requires the member to do all of the following EXCEPT:

disclose to the referred client the percentage of the member's business that comes from referrals.

Paul Clark, CFA, has just learned from a financial analyst at Corvac Industries that orders for their core products are running ahead of last year's orders by 15%, information that has not been publicly disclosed by the company. Clark currently has a hold rating on Corvac based on his expectation of a 5% increase in revenues for the current year. Based on Standard II(A) Material Non-public Information, Clark's most appropriate course of action is to:

encourage Corvac to publicly release the order information and not act on that information until it is publicly disclosed. Explanation

Challenges to ethical behavior are most likely to arise from:

situational influences.

A requirement that investment professionals recommend securities that match their clients' requirements and constraints is a:

suitability standard.

Mark Guenin, CFA, covers the textile industry for a brokerage firm. While at his golf club on Saturday, he notices several executives from two of his covered companies entering a private dining room and sees a pro forma balance sheet combining the two companies projected onto a screen. The executives greet Guenin and confirm that their companies intend to merge. Guenin's most appropriate course of action should be to:

encourage the companies to announce the merger.

Establishing standards of ethical behavior and monitoring professional conduct are best described as ways that professions:

establish trust.

To comply with GIPS, private equity investments must be valued according to specific guidelines contained in Appendix D, the "GIPS Private Equity Valuation Principles." Exceptions, in which private equity investments can be valued according to the main body of GIPS, include:

evergreen funds and open-end funds.

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:

excludes client accounts of family members of employees from participating in IPOs.

All of the following are violations of Standard II(B) Market Manipulation EXCEPT:

exploiting differences in market inefficiencies

Bob Sampson is the head portfolio manager for Global Equities, which has been in existence for eight years. Beginning this year, the firm has decided to present performance information in compliance with GIPS. To claim GIPS compliance, the firm must present at least:

five years of GIPS-compliant performance information with no additional disclosure required for prior years.

With respect to reporting investment results, Global Investment Performance Standards (GIPS) require a minimum of:

five years of historical performance.

Greg Stiles, CFA, may withhold from CFA Institute information about a client acquired in the regular performance of his duties:

for neither of the reasons listed.

The CFA Institute's Professional Conduct Program may learn about potential violations of the Code and Standards by members and candidates:

from sources other than written complaints or members and candidates selfreporting.

An analyst has found an investment with what appears to be a great return-to-risk ratio. The analyst double-checks the data for accuracy, keeps careful records, and is careful to not make any misrepresentations as he simultaneously sends an e-mail to all his clients with a "buy" recommendation. According to Standard V(A), Diligence and Reasonable Basis, the analyst has:

fulfilled all obligations.

Standards of conduct are most accurately described as:

giving members of a group a minimum level of acceptable behavior.

In dealing with the public and others, the CFA Institute Code of Ethics requires that CFA Institute members act with:

integrity, competence, and respect.

Alan Cramer, CFA, practices in a country that does not regulate the investment of company retirement plans. He was retained by Bingham Companies to manage their corporate pension plan. Bingham's management has approached Cramer and requested that Cramer invest the entire plan in Bingham stock. Cramer may:

invest a portion of the retirement plan in Bingham Company stock if the investment is prudent and if he keeps the overall portfolio properly diversified.

Under Standard IV(A) Loyalty (to employers):

it is recommended that members deliver a copy of the Code and Standards to their employer.

Allen Parsons, a CFA candidate, suspects a colleague at his firm of engaging in an illegal activity. Which of the following statements about procedures for compliance involving Standard I(A), Knowledge of the law is NOT correct? Parsons:

is required to report this legal violation to the appropriate governmental or regulatory organizations.

CFA Institute believes:

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.

To prepare a GIPS-compliant performance presentation, a firm must:

maintain a complete list of the firm's composites and their descriptions. Explanation

Standard V(B), Communication with Clients and Prospective Clients, least likely requires members to:

make clear buy or sell recommendations on the securities covered in research reports.

The mosaic theory is the idea that an analyst can:

make recommendations or trade based on several pieces of public or nonpublic information, each piece by itself being nonmaterial, but when compiled the information becomes material.

Chris Babcock, CFA, a portfolio manager for a large Texas investment firm, has been offered compensation in addition to what her firm pays her. The offer is from one of her clients and the additional compensation will be based on her yearly performance in excess of the market index. Babcock should:

make written disclosure to all parties involved before she accepts this offer.

Janet Thompson, CFA, is employed as an analyst by Nationwide Securities. According to CFA Institute Standards of Professional Conduct, which of the following statements about Thompson's duty to Nationwide is NOT correct? Thompson must refrain from:

making arrangements to go into a competitive business before terminating her relationship with Nationwide.

An analyst has several groups of clients who are categorized according to their specific needs. Compared to research reports distributed to all of the clients, reports for a specific group:

may generally exclude more basic facts.

An analyst notices that for most years that a given class of assets has an abnormally high rate of return, the asset class often has an abnormally low rate of return the next year. Based upon this information, according to Standard V(A), Diligence and Reasonable Basis, the analyst can recommend:

neither of these choices.

A CFA charterholder may disclose confidential information about a client when:

the CFA Institute Professional Conduct Program requests it. Explanation

A candidate or member is least likely violating the Standard regarding the confidentiality of client information if he shares confidential client information, when not required by law, with:

the CFA Institute Professional Conduct Program.

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:

violating Standard III(C) - Suitability.

Analysts who undertake an independent consulting practice while employed must get permission from their employer and should disclose all of the following EXCEPT:

the clients contact information.

Which of the following statements concerning material nonpublic information is most accurate? A member or candidate may not act or cause others to act on material nonpublic information:

until the information becomes available to the public.

Nicholas Brynne, CFA, is a fixed-income analyst who trades in mortgage-backed securities (MBS). The MBS industry has seen sweeping regulatory changes since Brynne took his current position, and he now feels his understanding of applicable laws and regulatory standards is dated. Brynne must:

update his understanding of applicable laws and regulatory standards relating to his position.

In order to comply with the CFA Institute Standards, an analyst should:

use outside research only after verifying its accuracy.

Member compliance on issues relating to corporate governance or to soft dollars is primarily addressed by the Standard concerning:

Loyalty, Prudence, and Care

Unethical behavior by financial professionals:

increases risk and the cost of capital

According to the Code of Ethics, the professional judgment of a member should be:

independent.

Which of the following actions most likely violates Standard I(D) Misconduct?

A Level I candidate submits a request to her employer for auto travel reimbursement using inflated mileage totals

Which of the following statements least accurately describes a key characteristic of the Global Investment Performance Standards (GIPS)?

A firm may not claim compliance with GIPS until it has recorded at least five years of GIPS-compliant performance data.

Regarding non-public information, which one of the following statements is NOT correct?

A member can be summarily suspended for having received material non-public information.

Nancy Korthauer, CFA, has launched a new hedge fund called the Korthauer Tautology Fund but has had trouble hiring analysts who are CFA charterholders as well as with finding clients. She offers a $15,000 incentive bonus to any charterholder who joins the firm with over $1 million in committed client investments. Which of the following interpretations of the Code and Standards is most accurate?

A member or candidate may not solicit current clients away from their current employer.

Which of the following examples of supervisory responsibility is consistent with the requirements of the Code and Standards?

A professional conduct evaluation is part of an employee's performance review.

An analyst preparing a report needs to cite which of the following?

A recent quote from the Federal Reserve Chairman

Todd Gregory has been recently hired as the head of compliance for Speed Capital. He decides the firm should precisely follow the recommendations of the CFA Institute Standards of Professional Conduct to ensure integrity within the firm. Which of the following is NOT a compliance procedure that Speed should put in place?

A requirement of disclosure of all investment holdings of friends and family members of employees on an annual basis.

Based on CFA Institute Standards of Professional Conduct, which of the following statements is a violation of Standard I(C), Misrepresentation?

A young trainee bond trader tells a prospective client that she can assist the client in all the client's investment needs: equity, fixed income, and derivatives and based on her years of experience as an analyst in the business that an investment looks like it has lots of potential.

Lucy Ackert and Chris Brown prepared the following information to be included in the promotional materials of their employer, Lofton Securities. Lucy Ackert is one of five CFAs at Lofton Securities. She satisfied all requirements for the CFA designation in 1998. Chris Brown holds a CFA Level I designation, which he passed in 2001. He is registered to take the next scheduled Level II examination. Are the promotional materials prepared by Ackert and Brown fully consistent with the Standards of Professional Conduct?

Ackert: No. Brown: No.

Wes Smith, CFA, works for Advisors, Inc. In order to remain in compliance with Standard V(A), Diligence and Reasonable Basis, Smith may recommend a security in which of the following situations?

Advisors' research department recommends a stock.

The Code of Ethics least likely states that a CFA Institute member shall do which of the following?

Advocate laws to protect the investing public.

Ann Dunbar, a portfolio manager, wishes to buy stock of Knight Enterprises for her personal account and for clients. Knight is a thinly traded stock. Dunbar believes her own purchase is too small to affect the price but the purchase for clients is likely to increase the price. According to the Code and Standards, when may Dunbar buy the stock for her personal account?

After the buy order for her clients is executed.

An analyst needs to inform his supervisor in writing of which of the following?

An annual bonus, sent to the analyst by a client, which varies with the performance of the client's portfolio that the analyst manages as an employee even though no verbal or written agreement exists about the bonus.

Which one of the following least accurately describes the CFA Institute Standard about using material nonpublic information?

An analyst using material nonpublic information may be fined by CFA Institute.

The Global Investment Performance Standards (GIPS) apply to which of the following parties?

An investment management firm located in Indonesia.

Which of the following statements is least accurate regarding being a part of Standard III(B), Fair Dealing?

At the same time notify clients for whom an investment is suitable of a new investment recommendation.

Which of the following activities would be following a component of the Code of Ethics explicitly?

Attending continuing education seminars on investing and inviting colleagues to come along.

According to Standard III(C) Suitability, which of the following is least likely to be considered a relevant factor in determining the appropriateness and suitability of investment recommendations or actions for each portfolio or client?

Best interests of the investment professional.

Ned Brenan manages two dozen pension accounts, one of which earned over 25% during the past two years. Brenan tells prospective clients that based on past experience they can expect a 25% return on their funds. Which of the following statements is CORRECT?

Brenan has violated both Standard of Professional Conduct III(D), Performance Presentation, and Standard I(C), Misrepresentation.

The first component of the Code of Ethics does NOT explicitly say that a CFA Institute member will act in a certain manner with respect to which of the following groups?

CFA Institute members and candidates in the CFA Program.

Anderson, Baker and Chang all received their CFA charters and ordered new business cards. Their business cards are as follows: G. J. Anderson, CFA B. K. Baker, Chartered Financial Analyst M. S. Chang, C.F.A Which of the business cards use the CFA marks improperly?

Chang.

Dick Charles is a security analyst with a large brokerage company. Sean Donaldson is a money manager. They both listen in on a conference call for security analysts with the president of Stoppard, Inc., who states that in two days the company will be holding a press conference announcing a new product. Both Charles and Donaldson feel the news will increase the value of Stoppard.

Charles must wait until after the press conference to disseminate the information to clients, and Donaldson must wait until after the press conference to purchase the stock for his clients.

Concerning Standard III(B), Fair Dealing, which of the following actions is NOT a valid procedure for compliance with the Standard?

Communicate investment recommendations to all customers including those accounts for which the securities are not eligible for purchase.

Which of the following statements about legal and ethical standards is most accurate?

Ethical and legal standards often intersect, but not always.

Which of the following best describes the underlying principles upon which the Global Investment Performance Standards (GIPS) are based?

Full disclosure and fair representation of performance results.

The section of the Global Investment Performance Standards (GIPS) that outlines defining the firm and documenting firm policies and procedures is:

Fundamentals of Compliance.

Hillary Jones, CFA, sometimes promises clients that she will allocate more shares from oversubscribed initial public offerings (IPOs) than she knows she will actually be able to deliver. Her employer has reprimanded her in the past for similar behavior. Which of the following statements is least accurate regarding Jones' behavior?

Her actions are a violation of the Standards only if prosecution results in a felony conviction.

Greg Stiles, CFA, keeps a list of his clients' birthdays and has personally sent them a birthday card each year at the appropriate time. With respect to this action, which of the following may be a violation of Standard III(E), Preservation of Confidentiality?

Hiring a company outside the firm to perform the task.

All of the following statements in promotion of your services are in violation of CFA Institute Standards of Practice handbook EXCEPT:

I passed Level II of the CFA Program in 2003.

Which of the following is an appropriate statement for a Level II CFA candidate to make?

I passed the Level I CFA exam.

The investment-banking department of the XYZ Brokerage House often has information that would be of significant use to the firm's brokerage clients. In order to conform to CFA Institute Standards of Professional Conduct, which of the following policies should XYZ adopt? According to Standard:

II(A), Material Nonpublic Information, XYZ should establish physical and informational barriers within the firm to prevent the exchange of information between the investment banking and the brokerage operations.

Which of the following statements about Standard IV(C) Responsibilities of Supervisors is least accurate?

If a subordinate violates a securities law, her supervisor is in violation of Standard IV(C).

All of the following are titles of one of the nine sections of the Global Investment Performance Standards (GIPS) EXCEPT:

Implementation.

Which of the following is most accurate concerning a member's duty under the Code and Standards?

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

Which of the following would be permissible under Standard I(C), Misrepresentation?

Including a graph showing the Fed's discount rates over the previous 12 months in a report that goes to clients.

Which of the following is least likely an appropriate use of the CFA designation?

Jeremy Salyers, as a CFA charterholder, expects to outperform the market because CFA charterholders have on average outperformed their peers.

Dixie Miller, a Level II CFA candidate, heads the research department of a large brokerage firm. The firm has many analysts, some of whom are subject to the CFA Institute Code of Ethics and Standards of Professional Conduct. If Miller delegates some of her supervisory duties, which statement best describes her responsibilities under the CFA Institute Code and Standards?

Miller retains supervisory responsibilities for those duties delegated to her subordinates.

Which of the following is least likely to be a reason for imposing a suspension on a member or candidate?

Misdemeanor charge for possession of narcotics.

Which of the following actions would be a violation of the Standard VII(A) Conduct as Participants in CFA Institute Programs?

Misrepresenting information on the Professional Conduct Statement.

Mary Hiller, CFA, is a senior analyst at a mutual fund. She is also a member of the Board of the Directors of her daughter's Skating Club. She is often asked for advice about the management of the club budget and about possible short-term investments, but she is not paid for this advice. She does not undertake any research to answer these questions, providing information based only on the general practices of the mutual fund at that moment. The only benefit she receives is a free monthly membership for her daughter that would usually cost $182. What should she do before making any recommendations, in order to comply with the CFA Institute requirements?

Obtain prior permission from her employer.

Nichole Zeller and Randy Toffler have both passed Level II of the CFA Exam Program and have registered for Level III. Zeller circulates a resume stating that she is a candidate for the CFA designation and has passed Level II of the CFA program. Toffler circulates a resume stating that he is a CFA II. Which of the following statements is CORRECT?

Only Toffler has violated the Code of Standards.

Which of the following is a violation of Standard II(B), Market Manipulation?

Overstating an earnings projection in order to increase the price of a stock.

Francisco Perez, CFA, is an equity research analyst for a long-term investment fund. The fund is seeking new clients, so Perez contacts old clients he knew through his former employer. Which of the following is most accurate?

Perez is not prevented from soliciting clients as long as he is working from memory and publically available information rathe

Sharon Pope has been asked by the Chief Investment Officer to develop a firm-wide policy for proxy voting. Which of the following would NOT be acceptable to include in the policy statement?

Portfolio managers of active funds must vote in all proxies; portfolio managers of index funds should vote only when they have a definitive opinion.

Within the Global Investment Performance Standards (GIPS) are supplemental provisions which must be applied to which of the following asset classes?

Private equity and real estate.

Which of the following is least likely to be a requirement for a firm claiming compliance with Global Investment Performance Standards (GIPS)?

Provide a compliant presentation only to prospects who request one.

Which of the following statements is most accurate about the Standard concerning referral fees?

Referral fees must be disclosed before proceeding with an agreement for service.

Which of the following is an example of information-based market manipulation?

Spreading false rumors about a stock on social media to influence its price.

Johnson Investment Managers is preparing its presentation and reporting in accordance with GIPS. The firm has been in business for three years. Which of the following is most accurate?

The firm can report composite performance of less than three years.

If the Chief Investment Officer of an investment advisory firm also is a CFA charterholder, which of the following statements is CORRECT?

The firm must comply with the CFA Institute Global Investment Performance Standards only if it states that it follows the Standards.

As countries adopt the Global Investment Performance Standards (GIPS), which of the following is least likely to occur?

The trend toward cross border investments will decline.

Which of the following statements regarding employee/employer relationships is NOT correct?

There must be monetary compensation for an employer/employee relationship to exist.

Which of the following statements regarding GIPS is least accurate?

To stay GIPS compliant, a firm must abide by GIPS guidelines even when conflicting with local or country-specific regulations.

In accordance with Standard III (A) Loyalty, Prudence and Care, which of the following statements is not a required or recommended action?

Vote all proxies on behalf of clients in a responsible manner.

The following information involves two research analysts at a brokerage firm. Erik Bagenot, CFA, is preparing a research report on Global Enterprises, Inc. In preparing the report, he uses materials from many sources. For example, he uses factual information published by Standard & Poor's Corporation without acknowledging the source. He also uses excerpts from a research report prepared by another analyst. Bagenot makes only a slight change in wording for these excerpts, but acknowledges the source. Sally Wain, who is currently enrolled in the CFA program, is preparing a research report on Manson Telecommunications. She attends a conference in which several investment experts provide their views about the future prospects of this company. Wain cites several quotations from these investment experts in her report without specific reference. According to CFA Institute Standards of Professional Conduct involving prohibition against plagiarism, which of the following statements is CORRECT?

Wain violated the Standards, but Bagenot did not. Explanation

In presenting the firm's investment results in compliance with GIPS, how should any firmspecific information be handled?

When appropriate, it is acceptable to include any additional firm-specific information within the GIPS presentation.

A money manager is meeting with a prospect. She gives the client a list of stocks and says, "These are the winners I picked this past year for my clients. Their double-digit returns indicate the type of returns I can earn for you." The list includes stocks the manager had picked for her clients, and each stock has listed with it an accurately measured return that exceeds 10%. Is this a violation of Standard III(D), Performance Presentation?

Yes, unless the positions listed constitute a complete presentation (i.e., there were no stocks omitted that did not perform in the double digits). Explanation

CFA Institute Standards of Professional Conduct are most accurately described as being based on:

a code of ethics.

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:

claim compliance with GIPS only if it has a compliant performance history of at least five years.

In 1995, the CFA Institute sponsored and funded the Global Investment Performance Standards (GIPS) in response to:

a need to address issues, such as portability of investment results.

Ethics least likely refers to:

a person's beliefs about right and wrong behavior.

When providing outside services, a member should provide all of the following information to her current employer EXCEPT:

a promise to remit an agreed-upon percentage of the proceeds to the current employer.

When Wes Smith first joined Advisors, Inc., he was excited that all the analysts at the firm had the CFA designation. In letters to prospective clients, he states that this ensures that Advisors can provide better service than their competitors. With respect to Standard VII(B), Reference to CFA Institute, the CFA Designation, and the CFA Program, this is:

a violation because he cannot guarantee better service.

A money management firm has created a new junk-bond fund. When the firm advertised the new fund at its issuance, they used care to accurately compute the returns from the past 10 years for all assets in the fund. The firm used the current portfolio weights to determine an average annual historical return equal to 18% and claim an 18% annual historical return in their advertising literature. With respect to Standard III(D), Performance Presentation, this is:

a violation because the advertisement implies the firm generated this return.

An analyst belongs to a nationally recognized charitable organization, which requires dues for membership. The analyst has worked out a deal under which he provides money management advice in lieu of paying dues. While performing services for the organization, the analyst discovers some useful computer programs that his predecessor developed and left as the property of the organization. The analyst decides to use the computer programs in his consulting business. This action is:

a violation of Standard I(D) concerning misconduct.

Klaus Gerber, CFA, is a regular contributor to the Internet site WizeGuy. This past week Gerber has been incorrectly quoted as recommending that investors buy shares in Bradford, Inc. He is unaware that this message has been placed on the site as the quote was placed as a prank by an unknown source. This is the third time this has happened over the past month and each time the stock being mentioned moved in price according to the buy or sell recommendation. Fritz Fox, CFA, maintains and updates the WizeGuy site and has learned how to determine if the quotes being attributed to Gerber are actually valid. Several days later, he observes an investment recommendation, posted on the site, to buy Gresham, Inc. The investment recommendation is purported to be from Gerber, but Fox actually knows it to be bogus. He immediately sells 1,000 Gresham short and e-mails Gerber to inform him of the bogus recommendation. Gerber immediately issues a rebuttal, and Gresham falls by 14%. Fox's action is:

a violation of the Standard concerning use of material nonpublic information.

The Standard concerning referral fees is applicable to:

any consideration received or paid for recommending products or services.

With respect to the professional conduct of a member or candidate, CFA Institute staff will consider a complaint from:

anyone.

Scott Andrews, CFA, is a stockbroker selling an oversubscribed stock issue. Which of the following best describes Andrews' actions regarding this sale? Andrews:

can offer this security on a prorated basis to all clients for which the security is appropriate.

A good way to describe the Global Investment Performance Standards (GIPS) is a:

common yardstick for means of comparison.

According to the Code of Ethics, which of the following statements is NOT correct? CFA Institute members are required to:

comply with the CFA Institute Global Investment Performance Standards.

Paul Drake is employed by a company to provide investment advice to participants in the firm's 401(k) plan. Company stock is one of the investment options in the plan. Drake feels that the stock is too risky for employees to own in their 401(k) plan and starts advising them to pull out of the stock. The Treasurer of the company calls Drake and tells him that he will be fired if he continues making such advice because he is violating his fiduciary duty to the company. Drake should:

continue to advise employees to sell their stock.

Which of the following is least likely a violation of Standard I(D), Misconduct? Being:

convicted of a misdemeanor traffic offense.

All of the following are violations of Standard I(D), Misconduct, EXCEPT:

conviction of a misdemeanor involving civil disobedience in support of one's personal beliefs.

The Standard concerning preservation of confidentiality states that members and candidates must keep information confidential about:

current clients, former clients, and prospective clients.

Standard III(E), Preservation of Confidentiality, applies to the information that an analyst learns from:

current clients, former clients, and prospects.

Unethical behavior by individuals in the investment industry is most likely to:

decrease the rate of economic growth.

All of the following are components of the Code of Ethics EXCEPT:

demonstrating diligence, independence, and thoroughness when preparing investment reports.

Fernando Abrea, CFA was an analyst for Pacific Investments. In October he left Pacific and joined Global Securities as manager of a local office. Abrea's change of employment came about in the following manner: In April, Abrea contacted Global about a possible position he saw advertised in a financial publication and had exploratory meetings with Global. In July, Abrea submitted a strategic plan to Global and signed an agreement to join Global. He then contracted for office space on behalf of Global. On October 15, Abrea's resignation from Pacific became effective. He did not take any client lists from Pacific. On October 16, Abrea mailed a letter that explained his new undertaking with Global to prospective clients, including his former clients at Pacific. With respect to Standard IV(A) Loyalty, Abrea:

did not violate the Standard.

Sue Parsons, CFA, works full-time as an investment advisor for the Malloy Group, an asset management firm. To help pay for her children's college expenses, Parsons wants to engage in independent practice in which she would advise individual clients on their portfolios. She would conduct these investment activities only on weekends. She is currently only in the preparation stage and has not started independent practice yet. Which of the following statements about Standard IV(A), Loyalty to Employer, is most accurate? Standard IV(A):

does not require Parsons to notify Malloy of preparing to undertake independent practice under the current conditions.

Art Dodd, CFA, is a registered representative with Owens Securities. He is currently in a dispute with one client, Madge Phillips, about a limit order for her account that she feels was entered incorrectly, resulting in a loss (in her opinion) of $500. Dodd has 1,000 shares of an oversubscribed new issue to allocate to clients. He suggests to Phillips that he will give her 250 shares of this allocation to make up for the supposed trade error. Further, he offers to buy her dinner at a nice restaurant. According to the Standards of Practice, Dodd has most likely violated the Standard concerning:

fair dealing.

A requirement that investment professionals act in the best interests of their clients is a:

fiduciary standard.

Don Benjamin, CFA, is the compliance officer for a large brokerage firm. He wants to prevent the communication of material nonpublic information and other sensitive information from his firm's investment banking and corporate finance departments to its sales and research departments. The most common and widespread approach that Benjamin can use to prevent insider trading by employees is the:

fire wall.

Joshua Rosenberg, CFA, is an equity analyst who covers Northwest Implements, a farm implement manufacturer. Northwest's main factory is located in a sparsely inhabited region six hours by automobile from the nearest airport. Northwest has its own corporate jet and a landing strip is located near the facility. When Rosenberg contacts Northwest's management to gather information for a report he is preparing on the company, Northwest's chief financial officer, Thomas Blake, invites Rosenberg to visit Northwest's headquarters and meet with management. Blake offers to send Northwest's corporate jet to pick up Rosenberg from an airport near Rosenberg's home and to return him home the same evening. Rosenberg estimates that it would require three days for him to make the visit using commercial travel. If Rosenberg accepts Blake's offer and makes the trip to Northwest's headquarters on the corporate jet, Rosenberg:

has not violated the Code and Standards.

Samuel Goldstein, CFA, is an analyst for Tamarack Securities. Goldstein's father, Reuben, has a client account at Tamarack. In ordering trades, Goldstein should place orders in:

his clients' and his father's accounts in the first group and his personal accounts in the second group.

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:

if the housekeeper says the meeting concerned a tender offer and the broker knows that it is non-public information.

Ken Howell, CFA, plans to issue a buy recommendation for Glazer Oil, Inc., based on his analysis and forecasts. Howell suspects that the company will soon announce merger plans with a Japanese oil company. To investigate, Howell attempts to call three executives at Glazer. Different secretaries inform Howell that the executives are "attending a conference overseas" or "traveling in Japan." Howell is able to confirm that all three are in the same city in Japan where the potential merger partner is headquartered. Howell feels confident that the merger will go forward. According to CFA Institute Standards of Professional Conduct, Howell may issue a buy recommendation on the oil company:

immediately.

Phoenix Investments has been in business for three years. Since its inception, the firm has presented its investment performance in compliance with GIPS, and Phoenix has just begun the verification process. Phoenix can claim GIPS compliance:

immediately.

Williams and Fudd is a major London-based brokerage and investment banking firm. Heritage Group, a money management firm, is the first, second, or third largest holder of each of the securities listed on Williams & Fudd's "PrimeShare #10" equity security list. On Tuesday morning, August 22, Williams & Fudd released a research report recommending the purchase of Skelmerdale Industries to the public and to its clients. On Wednesday afternoon, August 23, Heritage Group bought 1.5 million shares of Skelmerdale. This action is:

in accordance with the CFA Institute Code and Standards.

While it would be customary to report both five-year and ten-year performance data, Seminole Equity Partners has been in existence for only eight years. Because of this, Kurt Dambach does not report ten-year data but reports for both five years and since the inception of the fund. This he notes in a footnote at the bottom of the information sheet. This action is:

in accordance with the Code and Standards since he has indicated the basis in a footnote.

An analyst is told by his supervisor that when he feels he should write a buy recommendation he is free to do so, and when he feels he should write a sell recommendation he should check with the supervisor first. This practice is most likely:

in violation of Standard I(B) Independence and Objectivity.

Sandra Bulow, CFA, is responsible for updating her employing firm's website to include changes in analysis techniques and trading procedures. She is often very delinquent in making these changes, despite working extensive hours. She is aware clients are using the website to make investment decisions, and has received complaints from the sales department as the information on the website if often different from what is presented in sales meetings. Bulow is most likely:

in violation of Standard I(C) "Misrepresentation."

Nicholas Brynne, CFA, develops a trading model while working for CE Jones, an investment management firm. By working on the model at home from his personal computer, Brynne is able to devote additional work hours. Although the trading model is successful, Brynne loses his job in a company restructuring, and decides to start his own practice using the trading model. Nicholas is most likely:

in violation of the Standards because he did not receive permission from his employer to keep or use the files after employment ended

Which of the following least likely violates the Standard concerning misconduct? Roland Lawson, a financial analyst:

is arrested for participating in a nonviolent protest.

According to the CFA Institute Standards of Professional Conduct, Standard I(A), Knowledge of the Law, members shall not knowingly participate or assist in any violations of laws, rules, or regulations. An analyst:

is held responsible for participating in illegal acts when the law is evident to anyone knowing the law and can participate in a violation by having knowledge of the violation and taking no action to stop it or disassociate from it.

The term "material" in the phrase "material nonpublic information" refers to information that is likely to affect significantly the market price of the issuing company's securities or that:

is likely to be considered important by reasonable investors in determining whether to trade a particular security.

Which of the following statements regarding CFA Institute Global Investment Performance Standards (GIPS) is CORRECT? A firm that employs members of CFA Institute:

is not required to conform to the GIPS.

Kim Lee is a research analyst at Superior Investments and is researching a biotech firm specializing in the analysis of "mad cow" disease. While touring company facilities and meeting with management, she learns that they believe they may have found a way to reverse the disease. Moreover, one manager conjectured, "Suppose that we reversed the disease in someone who didn't even have it? We might then be able to boost that individual's IQ into the stratosphere!" After returning to her office, Lee issues a research report describing the compound as an "IQ booster with huge potential." This statement:

lacks a reasonable and adequate basis in fact.

Recommended procedures to comply with the Standard concerning priority of transactions are least likely to include:

limited front-running by employees.

When GIPS and local laws conflict, in order to be in compliance with GIPS, the investment firm must follow:

local law but disclose the conflict with GIPS.

Grant Starks, CFA, has been working for Advisors, Inc., for eight years. Starks is about to start his own money management business and has given his two-week notice of his resignation. A few days before his resignation takes effect, a current client of Advisors calls him at his office to inquire about some services for her account at Advisors. During the conversation, Starks tells the client that his new business will have lower commissions than Advisors. Starks has most likely violated the Standard concerning:

loyalty.

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:

material and nonpublic.

An analyst routinely has the opportunity to offer his clients the opportunity to purchase "hot new issues." He tells his clients that he will distribute each issue equally among those interested, with himself included in the distribution. The clients do not object to this. With respect to Standard VI(B), Priority of Transactions, this:

may be a violation despite the clients' approval.

Which of the following statements about a member's use of client brokerage commissions is NOT correct? Client brokerage commissions:

may be directed to pay for the investment manager's operating expenses.

A code of ethics:

may be rules-based or principles-based.

in violation of Standard VII(A) "the Code and Standards" for providing confidential information about the exam.

member or candidate provide (on request) additional detail information which supports the abbreviated presentation.

While trading on behalf of a pension account, an analyst receives special research reports from the brokerage firm with whom she is doing the trades. Such an activity is:

not in itself a violation of Standard III(A), Loyalty, Prudence, and Care, nor the Code of Ethics.

Calvin Doggett, CFA, has been contacted by the CFA Institute Professional Conduct Program (PCP) regarding allegations that he has taken investment actions that were unsuitable for his clients. Doggett is questioned by PCP concerning the identity of his clients he considered suitable for investing in a very risky start-up company that eventually went bankrupt.

not violate the Code and Standards by revealing the names, financial condition and investment objectives of his clients to PCP.

The CFA logo may be used as a certification mark:

on a personal business card.

Which of the following statements regarding allocating trades is CORRECT? It is permissible under the Standards to allocate trades:

on a pro-rata basis over all suitable accounts.

Viroqua DeSoto, CFA, is reading a discussion in an online forum about the construction and purpose of composites in performance reporting. She finds these statements from participants: Statement 1: The purpose of composites is to let investors know how well a firm has performed managing different types of securities or investment strategies. Statement 2: A managed portfolio should have a performance history of at least one year before the firm assigns it to a composite. With respect to both statements:

only one is correct.

Which of the following statements about a GIPS-compliant firm's verification of GIPS compliance is most accurate? Verification is:

optional, but if chosen it must be performed by an independent third party.

Tony Calaveccio, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto. Calaveccio places a trade with Quantco Brokerage. While Calaveccio's part of the transaction was conveyed correctly to Quantco, there was a trading error made in Calaveccio's account due to a slip up within Quantco. Calaveccio realizes that the error has taken place, and informs his contact at Quantco. Calaveccio allows Quantco to cover the error, with no cost to TrustCo. This is:

permissible under CFA Institute Standards.

Recommended procedures to comply with the Standard related to fair dealing are most likely to include:

publishing personnel guidelines for pre-dissemination that prohibit those who know about a pending recommendation from discussing or acting on it.

According to the Code of Ethics, a member reflects credit on the profession when a member:

practices in a professional and ethical manner.

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. According to the Code and Standards, he may:

prepare to compete with his current employer, but not begin competing until his resignation is effective.

All of the following violate Standard I(C), Misrepresentation, EXCEPT:

presenting factual information published by recognized statistical reporting services without acknowledgment.

The purpose of composites in a GIPS-compliant performance presentation is to:

provide information about a firm's performance in various asset classes.

When a CFA Institute member who is presently employed by a firm undertakes any independent practice, he must do all of the following EXCEPT:

remand a percentage (to be determined by the employee and employer) of the income earned back to the employer.

Caroline Turner, an analyst for Lansing Asset Management, just completed an investment report in which she recommends changing a "buy" to a "sell" for Gallup Company. Her supervisor at Lansing approves of the change in recommendation. Turner wonders about whether she needs to disseminate this investment recommendation to Lansing's clients and if so, how to distribute this information. According to CFA Institute Standards of Professional Conduct, Turner is:

required to design an equitable system to disseminate the change in a prior investment recommendation.

If a CFA Institute member knows that a fellow member has violated the Code and Standards, according to Standard I(A) the member is:

required to dissociate from the activity and strongly encouraged to report it.

The provisions for each section of the Global Investment Performance Standards (GIPS) are divided between:

requirements and recommendations.

Which of the following statements most accurately describes verification under the Global Investment Performance Standards (GIPS)? GIPS verification:

requires a verification report to be issued for the entire firm

Judy Gonzales is a portfolio manager with Brenly Capital and works on Johnson Company's account. Brenly has a policy against accepting gifts over $25 from clients. The Johnson portfolio has a fantastic year, and in appreciation, the pension fund manager sent Gonzales a rare bottle of wine. Gonzales should:

return the bottle to the client explaining Brenly's policy.

Wes Smith, CFA, refers many of his clients to Bill Towers, CPA, for accounting services. In return, Towers performs routine services for Smith, such as his tax returns, for no charge. Towers has just become a member of CFA Institute. With this development, Towers must:

reveal to the prospects referred by Smith that he performs services for Smith, along with the estimated value of those services.

Jill Marsh, CFA, works for Advisors where she manages a portfolio for a wealthy family. Marsh earns 1% of the portfolio's value each year in the form of a commission from Advisors. The family just told her that any year the portfolio she manages earns more than a 10% return, the family will give her the use of the family's vacation home for one week. Hirsh will comply with Standard IV(B), Additional Compensation Arrangements, if she:

sends an e-mail to her supervisor about the vacation home.

A brokerage firm has a trading department and an investment-banking department. Often the investment-banking department receives material non-public information that would be valuable in advising the firm's brokerage clients. In order to comply with the Standards, the firm:

should restrict employee trading in securities for which the firm is in possession of material non-public information.

Joni Black, CFA, works for a portfolio management firm. Black is a partner of the firm and is primarily responsible for managing several large pension plans. Black has just finished a research report in which she recommends Zeta Corporation as a "Strong Buy." Her rating is based on solid management in a growing and expanding industry. She just handed the report to the marketing department of the firm for immediate dissemination. Upon returning to her desk she notices a news flash by CNN reporting that management for Zeta Corporation is retiring. Black wishes she did not recommend Zeta Corporation as a "Strong Buy," but believes the corporation is still a good investment regardless of the management. What course of action for Black is best? Black:

should revise the recommendation based on this new information.

Compliance with the Standard concerning suitability least likely includes determining a client's:

social habits and interests.

The use of client brokerage by an investment manager to obtain certain products and services to aid the manager in the investment decision-making process is called:

soft dollar practices

The first component of the Code of Ethics least likely states that a CFA Institute member should act with:

solemnity and in an ethical manner.

Pamela Gee is a portfolio manager. She is planning to establish her own money management firm. She has already informed her employer, Branford, Inc., about her plans. In her remaining time at Branford, she can:

start the registration of her new company.

All of the following are required by fiduciaries under Standard III(A), Loyalty, Prudence, and Care, EXCEPT:

support the sponsor's management during proxy fights.

All of the following are violations of Standard III(B), Fair Dealing, EXCEPT a member:

telephones clients in distant cities the day after a buy recommendation is mailed to all clients because their mail service is later than the member's local clients.

Compliance with the CFA Institute Performance Presentation Standards (PPS) or the Global Investment Performance Standards (GIPS) is:

the best way to comply with Standard III(D), Performance Presentation.

Jane Talbot, CFA, is a portfolio manager at Cavalier Investments. Talbot manages the account of Wendall Wilcox. The performance of Wilcox's portfolio has been below that of the benchmark portfolio, the S&P 500, for the past several years. In an effort to enhance his portfolio's performance, Wilcox offers to pay Talbot $2,000 each year that his portfolio's return exceeds that of the S&P 500. Wilcox suggests this arrangement last for the next three years. The amount that Wilcox agrees to pay Talbot is in addition to the compensation that Talbot will receive from his employer and the standard fee that Wilcox will pay Cavalier for managing his portfolio over the three-year period. Talbot agrees to the arrangement proposed by Wilcox and informs Cavalier in writing of the terms of the agreement under which she will receive additional compensation. According to CFA Institute Standards of Professional Conduct Talbot must disclose:

the nature and amount of compensation plus the duration of the agreement.

An analyst finds a stock that has had a low beta given its historical return, but its total risk has been commensurate with its return. When writing a research report about the stock for clients with well-diversified portfolios, according to Standard V(B), Communication with Clients and Prospective Clients, the analyst needs to mention:

the relationship of the historical beta and return only.

Ethics are most accurately defined as:

the study of moral principles.

Vijay Gill, CFA, leases office space from Land Bank in exchange for an agreement that Gill will pay Land 20% of any fees paid by Land customers to Gill for investment management services. Gill also has an arrangement with Bloom Insurance Advisors whereby Gill receives a fee for each client referred. Gill only refers clients that request insurance products. Gill meets with Randolph Song, a Land Bank customer, who is interested in Gill's asset management services as well as insurance products. Gill is required to disclose to Song:

the terms of the arrangements with both Land Bank and Bloom.

The nine major sections of the Global Investment Performance Standards (GIPS) least likely include:

verification procedures.

Jamie Pyles, a portfolio management trainee for a money management firm, is trying to create a client base. He phones prospective clients, telling them that he is a portfolio manager. He informs prospective clients that based on the last five years of performance of his firm, he can guarantee the client at least a 75% return. He informs them that his firm can provide all of the services that they will ever need. What is the minimum number of misrepresentations Jamie has made to the prospective clients in violation of Standard I(C), Misrepresentation?

3

A firm produces regular proprietary research reports on various companies. According to Standard VI(B), Priority of Transactions, which of the following would be an "access person?"

A supervisory analyst who reviews all research reports prior to dissemination.

John Larsen, CFA, is creating his investment firm's initial GIPS-compliant performance results. He would like to supplement the historical performance numbers with older, non-GIPScompliant data. According to GIPS, is this allowed?

After the initial, GIPS-compliant performance results are presented, a firm may go back further and present non-compliant performance data, but no non-compliant results can be included for time periods after January 1, 2000.

Judy Albert and Bob Tye, who recently started their own investment advisory business, plan to take the Level III CFA examination next year. Albert's business card reads, "Judy Albert, CFA Candidate." Tye has not put anything about the CFA on his business card. However, the firm's promotional materials describe the CFA requirements and indicate that Tye participates in the CFA program and has completed Levels I and II. According to CFA Institute Standards of Professional Conduct:

Albert has violated the Standards but Tye has not.

For the past 5 years, Karen Beckworth, CFA, has served as a proctor for the CFA exam. Beckworth tells her assistant, a Level III CFA candidate, that she normally receives the examinations on the Thursday before the exam. Given the low pass rate at Level III, Beckworth asks her assistant if he would like an advance copy of the next exam. Beckworth's assistant declines the offer. Beckworth's assistant has been very vocal about expressing his opinions about the low pass rate. The assistant claims, "there are too many charterholders and CFA Institute is deliberately failing candidates because the prestige of the CFA charter is becoming diluted." With regard to Standard VII(A) Conduct as Participants in CFA Institute Programs, which of the following statements concerning Beckworth's and her assistant's behavior is most accurate?

Beckworth is in violation of Standard VII(A), but her assistant is not in violation.

Ernesto Vivaldo is a CFA candidate. He is working in the branch office of an American-based investment company in Belgium. Vivaldo is a citizen of Venezuela. In his country, a portfolio manager is not required to disclose referral fees. Belgian law does not allow referral fees for portfolio managers. Vivaldo has been offered a deal that involves a referral fee. Vivaldo should follow the requirements of:

Belgium.

The following scenarios involve two analysts at Dupree Asset Management, a small New Yorkbased company with about $150 million in assets under management. Dupree restricts personal trading of stocks analyzed, corporate directorships, trustee positions, and other special relationships that could reasonably be considered a conflict of interest with their responsibilities to their employer. Ray Bolt, CFA, is a senior investment analyst. Bolt was recently elected to the board of trustees of his alma mater, Midwest University, and was appointed as the chairman of the University's endowment committee. Midwest has more than $2 billion in its endowment. Bolt must travel from New York to Chicago eight times a year to attend meetings of the board of trustees and endowment committee. Bolt did not inform Dupree of his involvement with Midwest University. Wanda Delvecco, a candidate in the CFA Program, is a junior investment analyst. She recently wrote a research report on Aveco Communications and recommended the stock for Dupree's "buy" list. Delvecco bought 200 shares of Aveco stock for her personal account 12 months before she wrote her research report. Over the past 12 months, the stock's price has been in the $20-42 price range. Delvecco has not informed Dupree of her ownership of Aveco stock. According to CFA Institute Standards of Professional Conduct, which the following statements about Bolt and Delvecco's actions is CORRECT?

Both Bolt and Delvecco violated the Standards.

Lindsay Gordon is a Level II CFA candidate. Gordon's best friend, Steve Haney, is also a Level II candidate and has registered for the same exam window as Gordon. Because Haney's exam appointment is the day before Gordon's appointment, Gordon suggests that Haney try to remember some of the exam questions and let her know what they asked. After Haney takes his exam, he reminds Gordon that the Code and Standards prohibit candidates from disclosing specific exam questions, and only gives her a general idea of what topics were tested or not tested. Which of the following statements regarding Gordon and Haney is most accurate?

Both Gordon and Haney are in violation of the Code and Standards.

Several years ago, Hilton and Ross, a full service investment firm, managed the initial public offering of eCom, Inc. Now, eCom wants Hilton and Ross to underwrite its secondary public offering. A senior manager at Hilton and Ross asks Brent Whitman, CFA, one of its equity analysts, to write a favorable research report on eCom to help make the underwriting a success. Whitman conducts a thorough analysis of eCom and concludes that the company has serious problems that do not suggest a favorable financial outlook. Nevertheless, Whitman writes a favorable report because he is fearful of losing his job. Hilton and Ross publicly distribute a report that only contains a buy recommendation and a brief description of the basic characteristics of eCom. Whitman has violated:

Both Standard I(B) Independence and Objectivity and Standard V(A) Diligence and Reasonable Basis.

Lance Tuipulotu, CFA, manages investments for 400 individuals and families and often finds his resources stretched. When his largest investors petition him to include a 5% to 7% allocation of non-investment-grade bonds in their portfolios, he decides he needs additional help to meet the request. He considers various independent advisors to use as submanagers, but determines that the most qualified advisors would be too expensive. Reasoning that a lowercost provider would enable him to pass the savings along to his clients, he chooses that provider to invest the new bond allocation. Tuipulotu has violated:

Both Standard III(C) Suitability and Standard V(A) Diligence and Reasonable Basis.

Don Wilson and Nadine Chavis, both CFA charterholders, are investment advisors at Uptown Securities. Wilson recommends that one of his clients buy Alpha Company based on research conducted by Uptown. Chavis recommends that one of her clients sell Alpha Company based on research conducted by another brokerage firm for general distribution. Both recommendations are consistent with each client's investment objectives and within the context of their entire portfolios. Neither Wilson nor Chavis has reason to suspect that any information contained in the research reports from these two sources is inaccurate or inadequately supported. According to Standard V(A) Diligence and Reasonable Basis, do Wilson and Chavis have a reasonable basis for making their investment recommendations?

Both of these advisors have a reasonable basis for their recommendations.

Selma Brown, CFA, is a portfolio manager for Mainland Securities. Rick Wood, one of her clients and owner of Wood Fitness Centers, offers to permit Brown and her immediate family to use the facilities at his fitness centers at no cost during 2003. To get this benefit, Brown must achieve on Wood's portfolio at least a 2-percentage point return above the total return on the S&P's 500 index during 2002. Brown orally informs her immediate supervisor of the nature and duration of the proposed arrangement. Arnold Turley, a CFA Institute member, is a portfolio analyst at Mainland Securities. He was just elected to the Board of Directors for Omega Services, which pays him $1,000 plus expenses for attending each of its quarterly board meetings. Turley e-mails Mainland's compliance officer informing her of this arrangement with Omega and receives a reply informing him that the agreement is acceptable. Did Brown or Turley violate CFA Institute Standards of Professional Conduct?

Brown: Yes, Turley: No.

Janet Coleman, CFA, is preparing a research report on Union Power and Light. Due to deregulation, utility companies face increased competition. During the past year, three of the five utility companies in her region have cut their dividends by 50%, on average, to provide more internal funds for investment purposes. In a discussion with Union's chief executive officer, Coleman learned that Union expects to have a record amount of capital expenditures during the next year. Although Union subsequently issued a press release about its capital expenditure plans, it did not make any public statements about a change in dividend policy. Coleman reasons that the management of Union will be under pressure to cut its dividends within the next year to remain competitive. Coleman issues a research report in which she states: "Union Power and Light will decrease its dividend from $2 to $1 a share by the second quarter. We expect that Union will strengthen its competitive position by using more internally generated funds to finance its investment opportunities. If investors buy the stock now at around $50 a share, their total return could exceed 20% on the stock." Based on CFA Institute Standards of Professional Conduct, which of the following statements about Coleman's actions is most accurate?

Coleman violated the Standards because she failed to separate opinion from fact in her research report.

Assume that on January 1, 2005, a 15-year old firm with no Global Investment Performance Standards (GIPS) compliant performance history wishes to claim compliance with the GIPS standards. Which of the following accurately reflects the appropriate action for the firm to take?

Comply with the GIPS standards for the 5-year period January 1, 2000, through December 31, 2004, and report five additional years of non-GIPScompliant performance and disclosure of why the performance in the earlier years is not GIPS compliant. Explanation

Which of the following are recommended procedures of compliance according to Standard I(D), Misconduct?

Conduct background checks on potential employees to ensure that they are of good character.

Jim Crockett is a portfolio manager for Miami Advisors and reports to Vicki Tubbs, the Chief Investment Officer. Miami has developed a proprietary model that has been thoroughly researched and is known throughout the industry as the Miami model. The model is purely quantitative and takes a given set of client characteristics and universe of potential securities and forms a portfolio for the investor. Individual portfolio managers are responsible for selecting securities to fit into the model based on recommendations from the firm's research department and the managers' own judgment. Because of the specific nature of the inputs to the model, each manager is responsible for applying the model on his or her own computer. The basic philosophy of the process is thoroughly explained to clients. Crockett does not understand the basics of the model, but feels that since it provides pure quantitative output, he does not need to understand it. However, he misapplies the model for several of his clients. In reviewing some of Crockett's portfolios, Tubbs finds the errors and points them out to Crockett. Which of the following statements regarding Tubbs and Crockett is CORRECT?

Crockett has violated the Standards by not exercising diligence and thoroughness in making investment recommendations.

Dwight Dawson, a CFA charterholder and portfolio manager at Ascott Investments, was recently appointed to the investments committee at Brightwood College. He will receive no compensation from Brightwood for serving on this committee. Another person at Ascott manages part of Brightwood's endowment. Dawson does not inform Ascott's compliance office of his involvement with Brightwood, because he does not believe doing so is necessary. Brenda Hamilton, a CFA candidate, also works for Ascott as an investment analyst. Procedures established at Ascott prohibit personal trading in securities analyzed or recommended by Ascott. One of these securities is Horizon, a telecommunications firm. Hamilton buys 10 shares of Horizon for her infant son's trust account. She believes that reporting this purchase to Ascott's compliance officer is unnecessary because the amount of the transaction is small and is not for her own personal account.

Dawson: Yes, Hamilton: Yes.

Jennifer Stewart, CFA, a supervisor at an investment advisory firm, has tried unsuccessfully to convince top management of the firm's need for a formal, comprehensive compliance program. What is Stewart's most appropriate course of action?

Decline in writing to accept supervisory responsibility.

Which of the following is least likely a violation of Standard VII(A), Conduct as Participants in CFA Institute Programs?

Expressing opinions in disagreement with CFA Institute advocacy positions.

Which of the following statements is most accurate with regard to Global Investment Performance Standards (GIPS)?

GIPS are ethical principles that firms can follow voluntarily where local or country-specific law, regulation, or industry standards may not exist for investment performance presentation.

Which of the following statements relating to the Global Investment Performance Standards (GIPS®) is least accurate?

GIPS represent standards to which members of CFA Institute and CFA candidates must adhere.

Which of the following statements regarding Global Investment Performance Standards (GIPS) is most accurate?

GIPS requires that all fee-paying discretionary portfolios be included in composites defined according to investment objective or similar strategy and firms must show GIPS compliant history for a minimum of five years or since inception if a composite has existed less than five years.

Nancy Hall, a candidate in the CFA program, is an analyst for a mutual fund. As part of her job she makes company visits to interview executives. On a recent trip she stayed with her sister instead of at a hotel. In her expenses Hall included a hotel charge of $100, which was less than the amount allowed by her employer. After receiving a check for her expenses, Hall disclosed to her supervisor that she had stayed with her sister instead of at a hotel. She also returned the $100 to her employer. According to CFA Institute Standards of Professional Conduct, which of the following statements best describes Hall's professional conduct?

Hall engaged in professional misconduct.

Roger Halpert, CFA, prepares a company research report in which he recommends a strong "buy." He has been careful to ensure that his report complies with the CFA Institute Standard on research reports. According to CFA Institute Standards of Professional Conduct, which of the following statements about how Halpert can communicate the report is most correct?

Halpert can make his report in person, by telephone, or by computer on the Internet.

Jack Harris, a CFA candidate, is a telecommunications analyst at Hasten Securities. Based upon his analysis of Midwest Telecom, he changes his recommendation of the company's common stock from "hold" to "sell." Before disseminating his recommendation and the reason for the change to Hasten's clients, Harris informs several portfolio managers at Hasten, whom he knows personally own Midwest stock, of the changed recommendation. Several days later, Hasten communicates the change in investment recommendation on Midwest to clients known to have bought Midwest and those who currently hold the stock.

Harris violated Standard III(B), but White did not violate Standard III(B).

Arthur Harrow, CFA, is a pharmaceuticals analyst at Dominion Asset Management. His supervisor directs him to prepare separate research reports on Miracle Drug Company and Wonder Drug Company. Harrow serves on the board of Miracle and owns shares of Wonder. According to the Standards of Professional Conduct, which of the following actions is Harrow required to take when he writes the research reports?

Harrow must disclose both his relationship with Miracle and his ownership of shares in Wonder.

Theresa Hatcher, CFA, is making arrangements to establish her own investment advisory business before terminating her relationship with her current employer, Elite Brokers, Inc. Elite is a small company consisting of only six investment professionals and a small support staff. According to CFA Institute Standards of Professional Conduct, which of the following activities is least likely a violation of Hatcher's duty to Elite?

Hatcher leases office space, furniture, and other equipment for her new business.

Will Lambert, CFA, is a financial analyst for Offshore Investments. He is preparing a purchase recommendation on Burch Corporation. According to the Standards of Professional Conduct, which of the following relationships with Burch is Lambert least likely required to disclose?

His son-in-law was formerly employed by Burch.

Which of the following is least likely a recommended procedure for supervisors and compliance officers to comply with Standard IV(C) Responsibilities of Supervisors?

Hold hearings when violations have occurred to determine the severity of the violations.

Patricia Cuff is the chief financial officer and compliance officer at Super Selection Investment Advisors, an organization that has incorporated the CFA Institute Code of Standards into the firm's compliance manual. Karen Trader is a portfolio manager for Super Selection. Trader is friendly with Josey James, president of AMD, a rapidly growing biotech company. Trader has served on AMD's board of directors for the last three years. James has asked Trader to commit to a large purchase of AMD stock for Trader's clients' portfolios. Trader had previously determined that AMD was a questionable investment but agreed to reconsider. Her reevaluation deemed the stock to be overpriced, but Trader nevertheless decides to purchase for her portfolios. Which standard was least likely violated?

III(B) Fair Dealing.

Which of the following best describes elements of a framework for ethical decision making?

Identify relevant facts; consider influences and alternatives; decide and act; reflect on outcomes.

Bob Hatfield, CFA, has his own money management firm with two clients. The accounts of the two clients are equal in value. One of the clients gets married and the assets of the new spouse and the client are combined. With the larger portfolio of the now married client, Hatfield determines that they can assume a higher level of risk and begins a change in the policy concerning that portfolio. Which of the following would violate Standard III(C), Suitability?

Implement a similar policy for the other client who did not just get married.

The Global Investment Performance Standards (GIPS) were designed to apply primarily to which of the following groups?

Investment management firms located worldwide that seek to comprehensively and accurately present historical investment performance.

Amanda Brad, CFA, is a security analyst at UpTrend, Inc. During a routine visit to a beauty salon, she learns that a major cosmetic company, Lorean, is expected to present a revolutionary formula for facial cream. Brad buys Lorean stock for her portfolio and prepares a special report on the company. Brad also makes a call to Hillary Lang, CFA, another security analyst at UpTrend, to inform her about the news. Lang starts trading on her clients' portfolios. Brad's report states that given the on-going research activity at Lorean within the last months, investors can expect some successful new products and a sharp increase in the price of the stock. It is most likely that:

Lang violated the Standard concerning diligence and reasonable basis.

Ralph Lim and Susan Bland have both passed Level I of the CFA Program. Both are currently enrolled to sit for Level II. Lim's business card reads, "Ralph Lim, CFA Level I." Bland's resume states, "Level II Candidate in the CFA Program." According to CFA Institute Standards of Professional Conduct involving use of the professional designation:

Lim violated the Standard, but Bland did not.

Which of the following is a component of the Code of Ethics?

Members shall use reasonable care and exercise independent professional judgment.

An analyst belongs to a nationally recognized charitable organization, which requires dues for membership. The analyst has worked out a deal where he provides money management advice in lieu of paying dues. Which of the following must the analyst do?

Must treat the charitable organization as his employer.

Which of the following statements is a violation of Standard VII(B) if it is included on a CFA charterholder's resume?

My earning the CFA designation indicates my superior ability

Jane Dawson, CFA, an analyst at a New York brokerage firm, suspects that Bob Boatman, CFA, another analyst at the same firm, has violated a state securities law. According to the CFA Institute Standards of Professional Conduct, Dawson is:

NOT required to report the violation to the appropriate governmental or regulatory organizations.

A copyrighted technique for measuring the downside risk of an investment has just been revealed to the public. If an analyst adopts the technique, he must cite the use of the technique in all research reports in which the technique is used EXCEPT:

Neither of these answers provide grounds for an exception.

Julie Stades retired several years ago and relinquished her membership in CFA Institute. She had the CFA designation up until then. She has decided to go back to work and puts the following statement on her resume: "I earned the CFA designation 10 years ago." Is this a violation of Standard VII(B)?

No, as long as she does not indicate she currently has the designation.

Brian Bellow, a CFA Institute member, is a portfolio manager for Progressive Trust Company. Several friends asked Bellow to review their investment portfolios. On his own time, Bellow examined their portfolios and made several recommendations. He received no monetary compensation from his friends for his investment advice and provided no future investment counsel to them. According to CFA Institute Standards of Professional Conduct, did Bellow violate his duty to Progressive Trust?

No, because Bellow received no compensation for his services.

A CFA Institute member works for Secure Securities, Inc., and plays rugby on the firm's rugby team. Secure Securities' team recently played the team of a rival firm. During the game, a fight broke out and the CFA Institute member was the instigator, but no one was seriously hurt. Is this a violation of I(A) concerning maintaining knowledge and complying with laws, rules, and regulations?

No, because a fight at a rugby game is not a professional activity.

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)?

No, because it is a statement of fact.

Lora Murphy has an account at Ferrell Investments, a GIPS-compliant firm. Murphy invests in small-cap value stocks and pays Ferrell a standard fee to execute her buy and sell orders. According to GIPS, is Ferrell required to include Murphy's portfolio in their small-cap value stock composite?

No, because the portfolio is non-discretionary.

Fran Lester, CFA, works for a broker based in a country in which participation in any IPO is permitted with her employer's permission. She lives and works in a country that has no restrictions on her participation in IPOs. If Lester's firm is distributing shares of an oversubscribed IPO through the office Lester works in, can Lester receive shares in the IPO?

No, not under any circumstances

Jerry Brock, CFA, is a partner in a small investment advisory firm that caters to high net worth individuals. He has experienced a number of personal and financial setbacks over the past two years and has filed for bankruptcy protection. Has Brock violated CFA Institute Standards of Professional Conduct?

No, unless his personal financial difficulties result from actions that reflect adversely on his honesty and integrity.

Mark Roberts has resigned from a local investment advisory firm and begun working at Benjamin Investments. Without getting approval from his supervisor at Benjamin, Roberts uses a phone book to find the contact information of his old clients and asks for their continued business. Has Roberts violated any CFA Institute Standards of Professional Conduct?

No.

Linda Schultz, CFA, is an investment advisor at Wheaton Investments. Schultz has been employed there for five years, and has never signed a "non-compete" clause. While at Wheaton, Schultz makes preparations to set up her own money management firm. She does not contact any existing clients before leaving Wheaton and does not take any firm records or files. After her resignation becomes effective, Schultz replicates a list of former clients from memory and uses public sources to get their contact information. She then contacts these former clients and solicits their business for her new firm. Has Schultz violated any CFA Institute Standards?

No. Schultz is in compliance with CFA Institute Standards.

In calculating total firm assets for a GIPS-compliant performance statement, Allen Bund, CFA, finds that there is a mix of fee-paying and non-fee-paying accounts, some of which are discretionary and some of which are non-discretionary accounts. Should Bund include nondiscretionary accounts and non-fee-paying accounts in the calculation of total firm assets?

Non-discretionary accounts Non-fee-paying accounts. Yes Yes

The following scenarios refer to two analysts who are employed at Global Securities, a large brokerage firm. Paula Linstrom, CFA, is instructed by her supervisor to write a research report on Delta Enterprises. Delta's stock is widely held by institutional and individual investors. Although Linstrom does not own any of Delta's stocks, she believes that one of her friends may own 10 shares of Delta. The stock currently sells for $25 per share. Linstrom does not believe that informing her employer about her friend's possible ownership of Delta shares is necessary. Hershel Wadel, a member of CFA Institute, is asked by his supervisor to write a research report on Gamma Company. Wadel's wife inherited 500 shares of Gamma Company from her father when he died five years ago. Gamma stock currently sells for $35 per share. Wadel does not believe that informing his employer about his wife's ownership of Gamma shares is necessary. According to CFA Institute Standards of Professional Conduct, which the following statements about Linstrom and Wadel's conduct is most accurate?

Only one of these analysts must disclose a potential conflict of interest.

Jean Davis and Brian Taylor were recently hired by a local brokerage. Davis is registered for the Level II CFA exam and does not reference the CFA designation on her business card. In her marketing materials, Davis factually describes CFA requirements and notes that she expects to pass in June. Taylor passed the Level II exam and has not yet registered for the Level III CFA exam. Taylor also does not reference the CFA designation on his card and writes in his marketing materials that he passed both Levels I and II of the CFA exam on his first try, which is true. Have Davis or Taylor violated any CFA Institute Standards of Professional Conduct?

Only one violated the Standards.

All of the following are required for a CFA Institute member to maintain his or her active status EXCEPT:

Passing each exam in no more than two tries.

Which of the following is a component of the Code of Ethics?

Practice and encourage others to practice in a professional and ethical manner that will reflect credit on members and their profession.

David Saul, CFA, heads the trust department at Savage National Bank. Fairway Enterprises invites Saul to sit on its Board of Directors. In return for his services on the Board, Fairway offers to provide Saul and his family with access to the facilities at Wilmont Country Club at no cost. Saul will not receive any monetary compensation for his services on the Board. According to CFA Institute Standards of Professional Conduct, which of the following actions must Saul take?

Saul must obtain written consent from Savage Bank and Fairway Enterprises if he decides to accept the offer to serve on the Board of Directors.

Which of the following statements is least accurate with regard to the Standard concerning loyalty to employers?

Skills and experience a former employee obtained through work at a firm are considered privileged information of that firm.

Steven Wade, CFA, writes an investment newsletter focusing on high-tech companies, which he distributes by e-mail to paid subscribers. Wade does not gather any information about his clients' needs and circumstances. Wade has developed several complex valuation models that serve as the basis for his recommendations. Each month, his newsletter contains a list of "buy" and "sell" recommendations. He states that his recommendations are suitable for all types of portfolios and clients. Because of their proprietary nature, Wade does not disclose, except in general terms, the nature of his valuation models. He conducted numerous statistical tests of these models and they appear to have worked well in the past. In his newsletter, Wade claims that subscribers who follow his recommendations can expect to earn superior returns because of the past success of his models. Wade violated all of the following CFA Institute Standards of Professional Conduct EXCEPT:

Standard III(B), Fair Dealing.

An analyst receives a research report from a colleague. The colleague's report has an elaborate table with performance data on publicly traded stocks. The colleague says the data in the table consists of measures provided by Standard & Poor's. The analyst finds the table a useful reference for a report she is writing. She uses several pieces of data from the table. The analyst is potentially in violation of:

Standard V(A), Diligence and Reasonable Basis, if she does not first verify the data in the table is accurate.

While copying some of her research materials at work, Mary Jones comes across a few incomplete research notes written by one of her colleagues. As a result of reading the notes, and without further review, Jones immediately changes one of her stock recommendations from sell to buy. Which of the following CFA Institute Standards has Jones violated?

Standard V(A), Diligence and Reasonable Basis.

Preston Partners is an investment management firm that adopted the Code and Standards as part of its policy manual. Gerald Smithson, CFA, has recently added the stock of Utah Biochemical Company and Norgood PLC to all his client's investment portfolios. Shortly afterwards Utah Biochemical and Norgood announced a merger that increased the share price of both companies. Smithson contends he saw the president of Utah Biochemical dining with the chairman of Norgood, but did not overhear their conversation. Smithson researched both companies extensively and determined that each company was a good investment. He put in a block trade for shares in each company. Preston's policies were not clear in this area as he allocated the shares by starting with his largest client accounts and working down to the small accounts. Some of Smithson's clients were very conservative personal trust accounts, others were pension funds who had aggressive investment objectives. Which standard was NOT broken?

Standard V(A)—Diligence and Reasonable Basis.

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?

Standard VI(A), Disclosure of Conflicts, and III(C), Suitability.

Gordon McKinney, CFA, works in the trust department of a bank. The bank's trust account holds a large block of a particular company. McKinney learns that this company is going to buy back one million shares at a 15% premium to the market price on a first-come-first-served basis. McKinney immediately tells his mother-in-law to tender her shares but waits until the end of the day to tender the trust's shares. McKinney has most likely violated:

Standard VI(B), Priority of Transactions.

Paul Salyer, a portfolio manager, is making a presentation to a prospective client. Paul says that as a new portfolio manager, he made an average annual rate of return of 50% in the last two years at his previous firm and that based on this, he can guarantee a 50% return to the client. Which of the following statements is in accordance with Standard III(D), Performance Presentation?

Stating his past performance as long as it is fact.

Ron Taylor, a Level I CFA candidate, trades cotton contracts for a small commodity broker. Taylor convinces a government cotton inspector to issue a warning that the Texas cotton crop is in danger from insect infestation. The price of cotton soars. Taylor immediately shorts cotton futures. Once the position is created, the government inspector issues a second report reversing his original opinion and cotton prices plummet. Cedric Sims, a Level III CFA candidate, would like to generate a tax loss on a security held in his personal portfolio; however, he believes the security has significant upside potential. To avoid the wash sale provisions of the income tax code, Sims sells the security and simultaneously creates a synthetic long position using derivatives. With regard to Standard II(B) Market Manipulation, which of the following statements concerning Taylor's and Sims's conduct is CORRECT?

Taylor is in violation of Standard II(B), but Sims is not in violation.

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?

The fact that Stone's son worked at Amity as a laborer during the summer while in school.

An analyst with his own money management firm trades on behalf of several large pension funds. The analyst now performs all trades through a particular brokerage firm because the brokerage provides his firm with a no-interest line of credit if paid within 60 days. The line of credit is available to all brokerage clients. The brokerage provides the analyst with personal account privileges that he would not otherwise be eligible for. The brokerage also provides the analyst with free research reports on many companies. Which of these benefits are violations of Standard III(A), Loyalty, Prudence, and Care?

The personal account privileges.

While servicing his clients' accounts, an analyst who is a CFA charterholder, determines that one client is probably involved in illegal activities. According to Standard III(E), Preservation of Confidentiality, the analyst may NOT do which of the following?

There are no exceptions in this list.

Brendan Duval works as a research analyst for Toby Securities. Duval recommends changing a recommendation from "sell" to "buy" on Dalton Company. His firm, which manages several mutual funds, may be interested in buying Dalton's stock. He also manages the retirement account that his parents established with Toby. Duval wants to buy shares of Dalton's stock because it is an appropriate investment for his parent's retirement account and obtains approval from his employer to do so. Duval is also thinking about personally investing in Dalton stock. According to CFA Institute Standards of Professional Conduct, which of the following best describes the priority of transactions? Duval should give:

Toby's clients and his parent's account equal priority, followed by his employer, and then his personal account.

Which of the following would be a violation of Standard III(B), Fair Dealing?

Trading for regular accounts before discretionary accounts.

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?

Tripp may delegate some or all of his supervisory duties to Brown, even though Brown is not subject to the Standards.

Phil Trobb, CFA, is preparing a purchase recommendation on Aneas Lumber for his research firm. Which of the following least likely represents a conflict of interest that Trobb should disclose in his report?

Trobb's cousin repairs machines for Aneas.

Jake Miles, CFA, includes the following phrase on his business card: "Jake Miles is your trusted local CFA." Is this a violation of Standard VII(B)?

Yes, because he uses CFA as a noun.

A CFA charterholder takes a trip for which his firm will pay the expenses. Upon his return, he alters some of the numbers on restaurant receipts to inflate the expenses by about one half of a percent. Is this a violation of the Code and Standards?

Yes, because it reflects dishonesty.

Karen Jackson is a portfolio manager. Jackson is friendly with David James, president of Acme Medical, a rapidly growing biotech company. James has provided Jackson with recommendations in the biotech industry, which she buys for her own portfolio before buying them for her clients. For three years, Jackson has also served on Acme Medical's board of directors. She has received options and fees as compensation. Recently, the board of Acme Medical decided to raise capital by voting to issue shares to the public. This was attractive to board members (including Jackson) who wanted to exercise their stock options and sell their shares to get cash. When the demand for initial public offerings (IPO) diminished, just before Acme Medical's public offering, James asked Jackson to commit to a large purchase of the offering for her portfolios. Jackson had previously determined that Acme Medical was a questionable investment but agreed to reconsider at James' request. Her reevaluation confirmed the stock to be overpriced, but she nevertheless decided to purchase Acme Medical for her clients' portfolios. Did Jackson violate Standard III(C) Suitability concerning portfolio recommendations and actions?

Yes, because she did not consider the appropriateness and suitability of investment recommendations or actions for each portfolio or client.

A CFA charterholder is caught shoplifting and is sentenced to nine months in prison. Is this a violation of Standard I(D) Misconduct?

Yes, because the crime involved stealing.

The Securities and Exchange Board of India (SEBI) has just enacted a new stock-trading rule. SEBI will give brokers a 10-day grace period, during which violators of the rule will be immediately notified and given a chance to remedy their situation to comply with the new rule. If a CFA Institute member located in India or doing business in India unknowingly violates the rule and then remedies the situation within the 10-day grace period, has the member violated Standard I(A)?

Yes, because the member did not maintain knowledge and know of the rule. Explanation

McGregor Investment Management promotes itself as a fixed-income investment management firm. The vast majority of the portfolios it manages are fixed-income portfolios. McGregor does, however, manage a few portfolios, utilizing a growth equity investment strategy, but the firm has no intention of ever promoting this strategy. Under the Global Investment Performance Standards (GIPS), must these portfolios be included in a composite?

Yes, because the portfolios are discretionary and fee paying.

Connie Baker, CFA, is an analyst with the brokerage and investment banking firm Hill and Stevens (H&S). Baker's supervisor, John Lewis, has asked her to write a research report on Jagged Rock Brewing. The H&S mergers and acquisitions department has represented Jagged Rock in all of its acquisitions for the past 12 years. Both Hill and Stevens sit on Jagged Rock's board. According to the Standards of Professional Conduct, can Baker write the report?

Yes, if she discloses the directorships and the mergers-and-acquisitions relationship.

A money manager, who is a member of CFA Institute, states that, "Our aggressive growth fund produced a 12% annualized return last quarter. This illustrates the superior results our firm produces." The fund return stated by the manager is accurate. Is this a violation of Standard III(D) Performance Presentation?

Yes.

Four years ago, American Securities discontinued its international small-cap investment strategy and terminated the GIPS composite for presenting its performance. To comply with GIPS, does American Securities still need to offer a compliant presentation for this composite?

Yes.

Trude Front, CFA, is a portfolio manager. While in the normal course of her duties, she happens to overhear material non-public information concerning the stock of VTT Bowser. She purchases several exchange traded funds which contain VTT Bowser, while shorting similar exchange traded funds which do not contain VTT Bowser. This is most likely:

a violation of Standard II(A) "Material Non-Public Information." Explanation

Shortly after becoming employed by Valco & Co., an investment banking firm, Stan McDowell, CFA, learns that most of Valco's initial public offerings (IPO) are really effected in order to profit management via price manipulation of the shares. McDowell observes an illegal act, sanctioned by senior management, in progress and refuses to sign off on his responsibility. Instead, McDowell takes the documentation to his supervisor and tells him he should sign it in his place. This action is:

a violation of the Code and Standards since he is required not to knowingly participate or assist in such an act.

Marc Randall, CFA, is an investment analyst. During a meeting with a potential client, Randall's boss states that, "You can be sure our investments will always outperform Treasury Bonds because of our fine research staff members, like Marc." Randall knows that this statement is:

a violation of the Standard concerning prohibition against misrepresentation.

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 violation of the standard.

Which of the following characteristics distinguishes a profession from an occupation? Members of a profession:

abide by a code of ethics.

An analyst likes to trade commodity futures in her own account. She does not deem any of her client accounts suitable for commodity futures trading. When she identifies a favorable commodity futures position, the Standard concerning priority of transactions suggests she should:

act on it on her own behalf as she sees fit.

Ken Koski, CFA, issues a press release that includes the following statement: We are proud to announce that two of our managers have earned the right to use the CFA designation. In addition, four of our junior analysts have become Level III CFA candidates. These individuals have proven their dedication to the investment community and shown commitment to the highest ethical standards. With regard to the statements in the press release:

all these statements are in compliance with CFA Institute Standards.

Luis Rodriguez, CFA, is an analyst at XYZ Investments. He covers a company that is located in a region that is not easily accessible. The company invites analysts for their annual analyst meeting and pays for the transportation to the remote location. Rodriguez is:

allowed to accept the payment for transportation because the trip was all business and was out of the way.

Bill Valley has been working for Advisors, Inc., for several years, and he just joined CFA Institute. Valley routinely writes research reports on Pharmaceutical firms. Valley has recently been asked to serve on the board of directors of an organization that promotes the search for a cure of a certain cancer. Serving on the board is an unpaid position without any direct benefits other than meeting new people and potential clients. To comply with Standard VI, Disclosure of Conflicts, Valley needs to:

both disclose the position on the board to his supervisor and describe his responsibilities on the board.

An analyst is serving on the Board of Directors of a local publicly traded company. To avoid violating the CFA Institute Code and Standards, the analyst must disclose this to:

both his employer and his clients and prospective clients.

Bill Valley has been working for Advisors, Inc., for several years, and he just joined CFA Institute. Valley's sister just received a large bonus in the form of stock options in Zephyr, Inc. Valley's sister knows nothing about financial assets and offers Valley a week at her holiday home each year in exchange for Valley monitoring Zephyr and the value of her stock options. In order to comply with the Code and Standards, Valley needs to inform Advisors of:

both the use of the holiday home and his sister's options.

Greg Allen is a security analyst and visits David Dawson, the Chief Financial Officer of Edmonds Company. Dawson reveals a great deal of nonmaterial financial data to Allen, data that Dawson routinely reveals to all security analysts who visit him. From this data and other industry information, Allen conjectures that Edmonds is likely to make a tender offer for another company in the industry, a fact that if true would be considered material to the value of the company. Allen:

can publish his conclusion in a research report

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:

can use the information to make investment recommendations and decisions.

A CFA charterholder in a managerial position is in the process of hiring new analysts. If the charterholder conducts background checks on the job applicants with respect to their character, the charterholder has:

complied with Standard I(D) concerning professional misconduct

An analyst writes a report and includes the forecasts of an econometric model developed by the firm's research department. The analyst identifies the source of the forecast and includes all the relevant statistics concerning the model. With respect to diligence and reasonable basis, the analyst has:

complied with the Standards.

Yankee Investments wants to comply with Global Investment Performance Standards (GIPS). Local law requires returns for portfolios that have been in existence for less than one year to be annualized, while GIPS prohibits this practice. To make a valid claim of GIPS compliance, Yankee should:

comply with local law and disclose the conflict in the performance presentation.

The El Rey Investment Company, located in Barcelona, Spain, is in the process of adopting the Global Investment Performance Standards (GIPS) for the current fiscal year. One of the GIPS standards is in direct conflict with Spanish investment reporting regulations. In order to be in full compliance with GIPS, El Rey must:

comply with the local regulation and make full disclosure of the conflict.

An analyst has a large personal holding of a security, and he has just determined that market conditions warrant selling this security. The analyst contacts clients who have a position in the security and advises them to sell some or all of the security. After waiting 24 hours, he sells the security from his personal accounts. This is:

congruent with Standard VI(B), Priority of Transactions.

If an analyst suspects a client or a colleague of planning or engaging in ongoing illegal activities, which of the statements about the actions that the analyst should take is most correct? According to the CFA Institute Standards of Professional Conduct, the analyst should:

consult counsel to determine the legality of the activity and disassociate from any illegal or unethical activity if the member has reasonable grounds to believe that the activity is illegal or unethical.

Jack Stevens is employed by a company to provide investment advice to participants in the firm's 401(k) plan. One of the investment options is a stable value fund run by the company. Stevens' research indicates that the fund is far riskier and less liquid than the typical stable value fund and has a fundamental asset value lower than the book value of the assets. He tells Jessica Cox, the head of employee benefits, about his research, and indicates that he will advise new employees to not invest in the fund and will advise employees who already own the fund to reduce their holdings in the fund. Cox points out that the fund is not in any current danger because there are very few redemptions requested of the fund. Cox also states that a sell recommendation may become a self fulfilling prophecy, causing investors to redeem their shares and forcing the fund to liquidate, which in turn will cause the remaining investors to receive less than their promised value. Stevens agrees with this assessment and feels his fiduciary duty is to all employees. Stevens should:

continue to recommend that new investors do not invest in the fund and existing investors reduce their holdings.

Wanda Kirby, CFA, recently joined Allegheny Investments as a senior analyst. Because of her extensive experience in the investments business and knowledge of the Code and Standards, Allegheny's management asked her to assume supervisory responsibility. Kirby reviewed Allegheny's existing compliance system and determined that it was inadequate to allow her to clearly discharge her supervisory responsibility. According to CFA Institute Standards, Kirby should:

decline in writing to accept supervisory responsibility until Allegheny adopts reasonable procedures to allow her to adequately exercise such responsibility.

Chuck Daniels has just been hired to manage a security analysis group for Aaron Asset Management. Daniels performed a similar function at another firm and finds the compliance system at Aaron inadequate. He develops a system that he feels is appropriate, but senior management tells him he will have to wait six months to implement the system. Daniels should:

decline in writing to accept supervisory responsibility until a satisfactory compliance system is put into place.

Francisco Perez, CFA, CPA, is a portfolio manager for an investment advisory firm. Due to the prominence of his position, he is often invited to attend free marketing and educational events hosted by firms which seek to inform the investment community about their investment processes. One such firm, Unlimited Horizons, has invited Perez to attend free educational events which qualify for Continuing Education credits which could help Perez maintain his CPA designation. Perez should most likely:

decline to attend the event as it could result in a violation of Standard I(B) "Independence and Objectivity."

Maria Valdes, CFA, is an analyst for Venture Investments in the country of Newamerica, which has laws prohibiting the acceptance of any gift from a vendor if the gift exceeds US $250. Valdes has evidence that her Venture Investments colleague, Ernesto Martinez, CFA, has been receiving gifts from vendors in excess of US $250.

disassociate herself from the activity, and urge Venture to persuade Martinez to cease the activity.

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:

disassociate himself from the problem and seek legal advice.

Ryan Brown, CFA, is an analyst with a large insurance company. His personal portfolio includes a significant investment in QRS common stock. The director of the research department asked Brown to analyze QRS and write a report about its investment potential. Based on the Standards of Professional Conduct, Brown is required to:

disclose the ownership of the stock in the report.

Janet Reilly has just approached Betty Miller, CFA, about purchasing 10,000 shares of Brookshire Co., a newly incorporated real estate development firm. Reilly is a retired schoolteacher living off the income from her late husband's life insurance policy. This investment will represent a significant shift in her investment portfolio. Miller believes this trade is unsuitable with respect to Reilly's investment policy statement. Consistent with the Standards, Miller should most appropriately:

discuss with Reilly whether she wishes to update her investment policy statement.

The Konkol Company implements a new methodology for portfolio valuation that is licensed to them by ABC Statistics. Konkol complies with the CFA Institute Code and Standards by:

discussing the new methodology with the clients, in its entirety.

Deloris Johnson, CFA, observed that her supervisor has violated a federal securities regulation. Johnson discussed the matter with her company's compliance department but they have taken no action. According to the CFA Institute Code and Standards of Professional Conduct, Johnson is required to:

dissociate from the supervisor's activity

According to CFA Institute Standards of Professional Conduct, members are least likely required to:

distribute a detailed research report to clients with any recommendation.

A stockbroker who is a CFA Institute member is called on the telephone by the CEO of a large company. The CEO asks to buy shares of the CEO's company for the accounts of the CEO's children. In the course of the conversation, the CEO says this will really pay off when the upcoming takeover goes through. The stockbroker checks her sources and finds no information about the takeover. In this case the broker should:

do neither of the actions listed here.

Jill Marsh, CFA, works for Advisors where she manages various portfolios. Marsh's godfather is an accountant and has done Marsh's tax returns every year as a birthday gift. Marsh's godfather has recently become a client of Advisors and asked specifically for Marsh to manage his account. In order to comply Standard IV(B), Disclosure of Additional Compensation Arrangements, she needs to:

do neither of the actions listed here.

Jan Hirsh, CFA, is employed as manager of a college endowment fund. The college's board of directors has recently voted to consider divesting from companies located in a country that has a poor civil rights record. Hirsh has personal investments in several firms in the country. Hirsh needs to:

do nothing since the board has not made a decision yet

Liam McCoy has lunch with a wealthy client whose portfolio he manages. McCoy advises the client to double his current position in the JKM Corporation due to an anticipated increase in sales. In accordance with Standard (V) Investment Analysis, Recommendations and Actions, when McCoy returns to his office he should:

document the details of the conversation with the client with regard to his investment recommendation.

An independent analyst has only one client. One of the client's largest holdings is a brokerage firm. Because of the large holding by his client, the brokerage firm recently began allowing the analyst to tap into the firm's computer network to use the firm's research facilities. This is allowable as long as the analyst:

does both of the actions listed here.

Which of the following statements about a code of ethics is most accurate? A code of ethics:

does not need to include standards of conduct.

Motivations for creating the Global Investment Performance Standards (GIPS) least likely include:

encouraging greater involvement of government agencies in the investment industry.

Regarding (1) not voting all client proxies, and (2) using a directed brokerage arrangement, a member would violate the Standards by:

engaging in neither of these practices.

Which of the following is NOT an important characteristic of how a firm defines itself? The firm definition establishes the:

entity to which local securities laws apply when they exceed the GIPS requirements.

Jessica French is an individual investment advisor with 200 clients and claims she conforms to Global Investment Performance Standards (GIPS). French includes all of the clients on her books. One of those clients is her father, to whom she charges no fee. However, she manages that portfolio using the same processes as she uses for her paying clients. Another client included in the composite is John Randolph, a wealthy entrepreneur. Randolph is the only client who does not give her discretion over the assets and makes every decision himself, getting suggestions from French and using her to implement decisions. French:

has violated GIPS because it includes Randolph's account, but not because it includes her father's account.

Nancy McCoy, CFA, is preparing a report on Gourmet Food Mart. As part of her research, she contacts the company's contractors, suppliers, and competitors. McCoy is told by the CEO of a major produce vendor that he is about to file a lawsuit against Gourmet Food Mart, seeking significant damages. McCoy incorporates this information into her research report, which projects a decline in profitability for Gourmet Food Mart due to the impending litigation. According to the CFA Institute Standards of Professional Conduct, McCoy:

has violated the Standards by utilizing material nonpublic information.

A CFA charterholder who comes to work intoxicated is:

in violation of Standard I(D) concerning professional misconduct.

Dave Kline, CFA, is a personal investment advisor with 200 individual, family, and corporate accounts. After a dispute with a coworker on margin policy, he formally resigns his position by giving suitable notice. However, he does not follow his firm's established "Transition and Exit Policies" regarding his accounts. The firm's stated policies require him to notify each client of his planned departure and personally introduce them to their new account representative, Greg Potter. Kline sees Potter as a rival and states "...let Potter do his own work and find his own clients." Kline is most likely:

in violation of Standard IV(A) "Loyalty" for failing to follow the employer's policies and procedures related to notifying clients of his departure.

Lee Hurst, CFA, is an equity research analyst who has recently left a large firm to start independent practice. He is able to re-create several of his previous recommendation reports, based on his clear recollection of supporting documentation he compiled at his previous employer. He publishes the reports and obtains several new clients. Hurst is most likely:

in violation of Standard V(C) Record Retention.

Tony Calaveccio, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto. He places trades for the fund with River City Brokerage. River City provides Calaveccio with soft dollars to purchase research. River City also deals in municipal bonds, some of which Calaveccio holds in his personal portfolio. He periodically uses the soft dollars to request research reports on various small cap stocks and also on the status of the municipal bond market and issues that he holds. These actions are:

in violation of his fiduciary duties regarding the municipal bond research but not so regarding the research on the small cap issues.

The following information pertains to the Galaxy Trust, a trust established by Stephen P. House and managed by Gamma Investment LLC: At the time the trust was established House provided $5 million in cash to fund the trust, but Gamma was aware that 93% of his personal assets were in the form of Oracle stock. Gamma has been asked to view his funds and the trust as a single entity for planning purposes, since House's will stipulates that all of his estate will pass to the trust upon his death. The investment policy statement, developed in September 1996, stipulates that the trust should maintain a short position in Oracle stock and use the proceeds to diversify the trust more adequately. House was able to sell all of his Oracle shares back to the corporation in January 1999 for cash. The policy statement redrawn in September 1999 continues to stipulate that the trust hold a short position in Oracle stock. House has given the portfolio manager in charge of the trust an all expenses paid vacation package anywhere in the world each year at Christmas. The portfolio manager has reported this fact in writing to his immediate supervisor at Gamma. Which of the following is most correct? The investment manager is:

in violation of the Code and Standards by not properly updating the investment policy statement in light of the change in the circumstances but is not in violation with regard to the acceptance of the gift from House.

Stephanie Irons, a Level II CFA candidate, regularly posts in Internet chat rooms dedicated to candidates studying for the Level II exam. Throughout the season, she and other candidates discuss curriculum content in great detail. Three days after her exam window ends, she returns to the site and vents her frustrations over complicated exam questions by posting questions she remembers on the site, and asking others for their responses and reasoning. Other candidates follow suit and post the questions they remember. Irons and her fellow candidates are most likely:

in violation of the Code and Standards for providing confidential information about the exam.

When measuring and presenting their investment performance, GIPS compliant firms are required to:

include terminated accounts in their performance history.

Longhorn Investments prepares its performance presentations in accordance with Global Investment Performance Standards (GIPS). As part of its employee benefits package, Longhorn does not charge a fee to its employees for managing their portfolios. When calculating total firm assets for the purpose of GIPS compliance, Longhorn should:

include these employee portfolios.

Jess Green, CFA is the research director for Castle Investment, Inc., and has supervisory responsibility over eight analysts, including three CFA charterholders. Castle has a compliance program in place. According to CFA Institute Standards of Professional Conduct, which of the following is least likely an action that Green should take to adhere to the compliance procedures involving responsibilities of supervisors? Green should:

incorporate a professional conduct evaluation as part of the performance review only for the three CFA charterholders.

WEB, an investment-banking firm, is the principal underwriter for MTEX's upcoming debenture issue. Wendy Berry, CFA, an analyst with WEB, has found out from an employee in MTEX's programming department that a serious glitch was recently discovered in the software program of their major new product line. In fact, the glitch is so bad that most of their orders have been canceled. Berry checked the debenture's prospectus and found no mention of this development. The red herring prospectus has already been distributed. Berry's best course of action is to:

inform her immediate supervisor at WEB of her discovery.

Jan Hirsh, CFA, is employed as manager of a college endowment fund. The college's endowment is held by the brokerage firm Advisors, Inc. Over the years, Hirsh has developed a solid relationship with Advisors. Because of this relationship, Advisors has given her their Platinum level service for her personal account. Advisors ordinarily gives the Platinum level only to clients who do a minimum of $2,500 of commission business in a year. Hirsh has never reached the $2,500 commission level and probably will never do so. According to Standard IV(B), Additional Compensation Arrangements, Hirsh needs to:

inform her supervisor in writing about the Platinum account

Lynn Black, CFA, is an analyst with the underwriter for an upcoming issue of Mtex Software debentures. Black learns from an employee in Mtex's programming department that there is a serious problem with Mtex's newest software program and that many customers have canceled their orders with Mtex. There is no mention of these problems in the prospectus for the debentures, which has been circulated. According to the CFA Institute Standards of Professional Conduct, Black's best course of action is to:

inform her supervisor of her discovery.

One year ago, Karen Jason left the employment as a portfolio manager of Howe Advisors. The departure was contentious and both parties threatened legal action. As a result, both parties signed a settlement in which Jason was paid a pro rated bonus, but agreed not to work on the portfolios of any existing Howe client for two years. The terms of the agreement were that both parties agreed to keep all aspects of the agreement confidential, including the fact that there was hostility surrounding the departure. Jason now works for Torre Advisors, who has the Stein Company as a new client. At the time Jason left Howe, Stein was a client of Howe, although Jason did not personally work on the Stein portfolio. Jason's supervisor at Torre wants Jason to work on the Stein portfolio. Jason should:

inform her supervisor that she cannot work on the portfolio because of a legal agreement, but cannot tell him why.

An analyst working at an investment firm has a client that rents limousines. The client tells the analyst that as long as he is the client's analyst, he can have free use of a limousine several times a year. The analyst needs to:

inform his supervisor in writing of the offer if the analyst intends to accept the offer.

Bob Hatfield, CFA, has his own money management firm with two clients. The accounts of the two clients are equal in value. It is Hatfield's opinion that interest rates will fall in the near future. Based upon this, Hatfield begins increasing the bond allocation of each portfolio. In order to comply with Standard V(B), Communication with Clients and Prospective Clients, the analyst needs to:

inform the clients of the change and tell them it is based upon an opinion and not a fact.

Mark Williamson is "bearish" on ABC Manufacturing Company. Williamson is so convinced that ABC is overpriced, two weeks ago, he shorted 100,000 shares. Today, Williamson is "surfing" several popular investment bulletin boards on the internet and posting false derogatory comments about company management. According to Standard II(B), Market Manipulation, Williamson has engaged in:

information-based manipulation, but not transaction-based manipulation

A financial analyst and CFA Institute member sends a preliminary research report on a company to his supervisor. The supervisor approves the report, but then the analyst receives news that causes him to revise downward the earnings estimate of the company. The analyst resubmits the report to the supervisor with the new earnings estimate. The analyst soon finds out that the supervisor plans to release the first version of the report with the first earnings estimate without a reasonable and adequate basis. In response to this the analyst must:

insist that the supervisor change the earnings forecast or remove his (the analyst's) name from the report.

An analyst has been covering a particular firm for years. Recently, the analyst's uncle died and left the analyst a sizable position in the firm's stock. To comply with the Code and Standards, the analyst:

is required to disclose the ownership of the stock to his employer.

Chuck Hill, CFA, the financial manager of Niseron Corp., has just learned that Niseron's quarterly net income will fall well short of consensus analyst expectations. Hill decides that he should immediately notify analysts covering Niseron of this negative development. He calls two particular analysts first who have followed Niseron stock for several years and have alerted Hill to important developments at competing firms. Failing to notify these analysts might damage Hill's ability to monitor his competition, to the detriment of his own shareholders. Under CFA Institute's Code and Standards, Hill should most appropriately:

issue a press release regarding Niseron's earnings prior to calling analysts.

While visiting the CSI Company, Mark Ramsey, CFA, overheard management make comments that were not public information, but were not really meaningful by themselves. However, when this information is combined with his own analysis and other outside sources, Ramsey decides to change his recommendation on CSI from buy to sell. According to CFA Institute Standards of Professional Conduct, Ramsey should:

issue his sell report because the facts are nonmaterial, but maintain a file of the facts and documents leading to this conclusion.

Ted Riczek, CFA, is an independent investment advisor. Riczek often makes investment recommendations to clients based on research from several third-party sources. The Code and Standards most likely require Riczek to:

make a reasonable effort to verify that the third-party research is sound.

Insider trading can be defined as information that is:

material and nonpublic

Steve Jones is a member of CFA Institute but has not earned the CFA designation yet. CFA Institute is investigating Jones' activities. If Jones declines to cooperate, he:

may be suspended from membership

John McNeal, CFA, has a friend named Stan Green, a journalist at Investment News, a weekly magazine. In one of their conversations, Green tells McNeal he has written an article about undisclosed financial problems at Brightstar Company. Green says the article will appear in the issue of Investment News that will be released tomorrow. According to the Standards, McNeal:

may not act on this information.

A money manager works for a full-service brokerage firm. After meeting with a new client and gathering all relevant information, the money manager says that she thinks her firm can perform all the financial services the new client needs. With respect to Standard I(C), Misrepresentation, this:

may not be a violation if the manager's opinion is based upon the factual information gathered.

An analyst who is a member of CFA Institute has composed an introductory information packet for her new clients, which includes information on fees she receives for referring clients to other professionals and those she pays for having clients referred to her. With respect to Standard VI(C), Referral Fees, this action:

may not satisfy the Standard if such information is only provided after the receivers of the information have become clients.

An analyst has not paid his CFA Institute dues for several years but has filed a professional conduct statement annually. Which of the following statements regarding his status with CFA Institute is most accurate? The analyst:

may not use the CFA designation.

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:

may trade or make recommendations based on his analysis.

Lynne Jennings is a chemical industry research analyst for a large brokerage company. That industry is currently seeing an increase in mergers and acquisitions. While flying through Chicago, Jennings sees several senior officers who she knows are from the largest and fourth largest chemical companies walk into a conference room. She concludes that negotiations for an acquisition might be taking place. Jennings:

may use this information to support an investment recommendation.

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:

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.

Which of the following statements most accurately describes why the Global Investment Performance Standards (GIPS) were created? To:

meet the need for a single globally accepted set of investment performance presentation standards.

What is the rule for members, CFA charterholders, and candidates in the CFA program with regard to the requirements of the Code and Standards and the requirements of local laws? If the applicable laws are:

more strict, members and candidates are responsible for complying with the applicable laws.

Wes Smith, CFA, refers many of his clients to Bill Towers, CPA, for accounting services. In return, Towers performs routine services for Smith, such as his tax returns, for no charge. With respect to this relationship, Smith:

must disclose to his clients that Towers provides services to Smith.

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:

must inform her employer of the arrangement because it provides her with additional compensation.

A CFA Institute member, undertaking independent practice that could result in compensation or other benefit:

must notify his employer of the types of service to be rendered, the expected duration, and the expected compensation.

Betsy Fox is an investment advisor who has a client, Don Gordon, who is an employment lawyer. At lunch, Fox noticed Gordon and the Chief Financial Officer of Blue Star Company at the next table. She overhears them talking and ascertains that Blue Star is about to announce higher than expected earnings. Before the earnings release, Gordon contacts Fox and asks her to purchase 3,000 shares for his portfolio. Fox:

must refuse to purchase shares for Gordon.

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:

none of the Standards if Smith does not make the cards public until after he defends his thesis and receives his degree.

According to CFA Institute Standards of Professional Conduct, which of the following statements about material nonpublic information is NOT correct? Information is:

nonpublic until it has been disseminated to a select group of investors.

Susan Plumb is the supervisor of her firm's research department. Her firm has been seeking the mandate to underwrite Wings Industries' proposed secondary stock offering. Without mentioning that the firm is seeking the mandate, she asks Jack Dawson to analyze Wings common stock and prepare a research report. After reasonable effort, Dawson produces a favorable report on Wings stock. After reviewing the report, Plumb then adds a footnote describing the underwriting relationship with Wings and disseminates the report to the firm's clients. According to CFA Institute Standards of Professional Conduct, these actions are:

not a violation of any Standard.

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:

not a violation of his duty to employer.

Marion Klatt, CFA, is a representative for Thiel Financial Network. Klatt received a phone call at home from William Kind, a junior executive at Westtown Development Company, asking whether Klatt had heard that Westtown had just reached an agreement to acquire a major shopping mall chain at a very favorable price. (Klatt had not heard this news, and Klatt was able to confirm that the information had not yet been made public.) Kind requested that Klatt acquire 10,000 shares of Westtown for Kind's personal account. Klatt should:

not acquire the shares until the information is made public.

Andrew Mader, CFA, is an analyst with Metro Investment Services. During lunch with some of Metro's managers, Mader is told, "There are going to be major problems at Gebco (a firm that Metro had brought public last year). I was just over there and the place is just crawling with government inspectors." Mader had just issued a report with a "buy" recommendation on Gebco last week. Mader should:

not do anything because to do so would violate his obligation to preserve confidentiality.

Susan Nielsen, CFA, is an equity research analyst on a fact-finding property tour with 6 other analysts to learn about Just Kittens, Inc. Just Kittens sells tungsten ball-bearings and has 16 warehouses, and 20 manufacturing, research, and wholesale sales outlets scattered over 8 countries - mostly emerging markets. Because of the remote location of some of the facilities, commercial travel is effectively unavailable. Just Kittens charters a jet and various busses to take the research analysts to the properties. If Nielsen accepts these accommodations, she is most likely:

not in violation of Standard I(B) "Independence and Objectivity" because commercial travel is effectively unavailable.

May Frost, CFA, is an equity research analyst for a "precious metals mining" exchange traded fund which has recently started significantly outperforming its benchmark after several years of stagnation. Upon investigating the source of the outperformance, Frost learns that the fund has experienced severe style drift, and now has a significant proportion of its resources invested in technology and Internet stocks. Frost reviews the fund's prospectus and learns the current sector weighting violates multiple prospectus covenants. Frost contacts her supervisor and the fund's compliance department and is told the portfolio weighting is not her responsibility and that she should not pursue the matter further. Frost reviews the firm's whistleblower policy, contacts personal legal counsel, and then contacts regulatory authorities regarding the style drift and prospectus violations. Frost is most likely:

not in violation of the Code and Standards.

An analyst meets with a new client. During the meeting, the analyst sees that the new client's portfolio is heavily invested in one over-the-counter stock. The analyst has been following the stock and thinks it will perform well in the long run. The analyst arranges through a brokerage firm to simultaneously sell a large number of shares of the stock via a series of cross trades from the new client's portfolio to various existing clients. He arranges the trades to be executed at a price that approximates the current market price. This action is:

not in violation of the Standards.

A company has a defined benefit plan that is currently under-funded. The plan sponsor has instructed the portfolio manager of the plan to invest more aggressively to bring the funding level up to an adequate amount. Which of the following statements best describes the course of action the portfolio manager should take? The portfolio manager should:

not invest more aggressively since this may expose the plan to too much risk and may not be in the best interest of the plan's beneficiaries.

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:

not permissible under the Code and Standards.

Benito Salvatore, CFA, is licensed in the established country of Oldworld but has clients and makes investments in the emerging country of Newworld. The regulations of Oldworld prohibit licensed investment professionals from taking gifts or gratuities in any amount from vendors or persons connected with potential investments. The laws of Newworld are silent on this issue. Unsolicited, Salvatore is offered a vase worth US $75 by a Newworld trust company and a bronze statue worth US $200 by a Newworld company that Salvatore is considering as a potential investment.

not permitted to accept either gift.

Darlene Hess, CFA, manages a pension fund that has a sizeable position in Knoll Corporation common stock. Hess also holds Knoll common stock in her personal account. Hess participates in an analyst conference call in which Knoll's chief financial officer advises that the company's current-quarter earnings will slip below consensus forecast. Knoll has not disclosed this to the public. Hess believes news of the poor earnings will reduce the stock's value significantly. Hess may:

not sell Knoll stock from either the pension fund or her personal account.

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:

not trade ahead of her clients in either country.

Joan Platt, CFA, operates an investment advisory service in New York but maintains an office in Xania. Xania recently established a stock market, which is not very efficient. None of the Xanian stocks trade in the U.S. market. Xania legally permits the use of material nonpublic information. Platt believes that using nonpublic information would help her compete against other Xanian investment advisors and also help some of her Xanian clients reach their investment objectives. Platt is considering adopting local investment practices in Xania. According to CFA Institute Standards of Professional Conduct, Platt may:

not use material nonpublic information.

Randy Wesson is a research analyst for a large brokerage company following the chemical industry. Wesson receives a phone call from his nephew who works part-time in an airport hospitality center for an airline while going to business school. Many meetings take place at the center on any given day. The nephew tells Wesson that while bringing some faxes into a conference room, he overheard executives of Hunt Chemical talking about the likely divestiture of one of their subsidiaries. His nephew wants to know whether that will be good for Hunt. Wesson should:

not use the information.

Wallace Manaugh, CFA, is analyzing the stock of a manufacturer of fishing boats. By analyzing public information, speaking with the firm's suppliers and customers, and counting the new boats in the company's boat yard, Manaugh concludes that the company's new fishing boat is not meeting sales expectations. Anticipating that this will cause the stock price to decline, Manaugh takes a short position in the stock. Manaugh has:

not violated CFA Institute Standards

An analyst finds a stock with historical returns that are not correlated with interest rate changes. The analyst writes a report for his clients that have large allocations in fixed-income instruments and emphasizes the observed lack of correlation. He feels the stock would be of little value to investors whose portfolios are composed primarily of equities. The clients with allocations of fixed income instruments are the only clients to see the report. According to Standard V(B), Communication with Clients and Prospective Clients, the analyst has:

not violated the Standard.

Brenda Simone is a money manager and the Blue Streets Pension Fund is one of her clients. The director of the pension fund calls Simone and asks her to use a particular broker so that the fund can obtain some research services with the soft dollars from that broker. Simone believes that the desired broker will provide the same price and execution as the normal broker that Simone uses. Simone does as the client wishes. Simone has:

not violated the Standards as long as the research provided by the broker will benefit the plan beneficiaries.

Edwin McNeill, CFA, is a senior trader for Grey Securities. In his monthly review of his team's activity, McNeill notices a series of suspicious trades by one of the traders. McNeill consults his manager, who agrees that these trades are a potential violation. McNeill informs the trader that her duties will be restricted while these trades are being investigated and refers the matter to Grey's compliance officer for further action. McNeill has:

not violated the Standards.

Graham Carson, CFA, is an investment advisor to Ron Grayson, a client with moderate risk tolerance and an investment horizon of 15 years. Grayson calls Carson to complain about two stocks in his account that have performed poorly. He feels that one stock was too risky for him as it paid no dividend and had a beta of 1.4. The other stock had a beta of 0.9 and paid a dividend of 3%, but financial regulators have indicated that the firm's reported earnings were incorrectly stated. Based on this information, Carson has most likely:

not violated the Standards.

Nancy Westfall is an individual investment advisor who uses mutual funds for her clients. She typically chooses funds from a list of 40 funds that she has thoroughly researched. The Craigs, a married couple that is a client, asked her to consider the Eligis fund for their portfolio. Westfall had not previously considered the fund because when she first conducted her research three years ago, Eligis was too small to be considered. However, the fund has now grown in value, and after doing thorough research on the fund, she finds the fund has suitable characteristics to be included in her acceptable list of funds. She puts the fund in the Craigs' portfolio but not in any of her other clients' portfolios. The fund ends up being the poorest performing fund in the Craigs' portfolio. Has Westfall violated any Standards? Westfall has:

not violated the Standards.

Victor Logan is a portfolio manager for McCoy Advisors, and Jack Brisco is the Director of Research for McCoy. Brisco has developed a proprietary model that has been thoroughly researched and is known throughout the industry as the McCoy model. The model is purely quantitative and screens stocks into buy, hold, and sell categories. The basic philosophy of the model is thoroughly explained to clients. Brisco frequently alters the model based on rigorous research—an aspect that is well explained to clients, although the specific alterations are not continually disclosed. Portfolio managers then make specific sector and security holding decisions, purchasing only securities that are indicated as "buys" by the model. Logan has conducted very thorough research on his own, using the same process that Brisco uses to validate his findings. Logan feels the model is missing some key elements that would further reduce the list of acceptable securities to purchase, however, Brisco has refused to look at Logan's research. Frustrated by this, Logan applies his own version of the model, with the justification that he is still only purchasing securities on the buy list. Because of the conflict with Brisco, he does not disclose the use of the model to anyone at McCoy or to clients. Which of the following statements regarding Logan and Brisco is CORRECT? Logan is:

not violating the Standards by applying his version of the model, but is violating the Standards by not disclosing it to clients. Brisco is not violating the Standards.

Steve Jones is a portfolio manager for Gregg Advisors. Gregg has developed a proprietary model that has been thoroughly researched and is known throughout the industry as the Gregg model. The model is purely quantitative and screens stocks into buy, hold, and sell categories. The basic philosophy of the model is thoroughly explained to clients. The director of research frequently alters the model based on rigorous research—an aspect that is well explained to clients, although the specific alterations are not continually disclosed. Portfolio managers then make specific sector and security holding decisions, purchasing only securities that are indicated as "buys" by the model. Jones thoroughly understands the model and uses it with all of his clients. Jones is:

not violating the Standards either in purchasing stocks without a thorough research basis or in not disclosing all alterations of the model to clients.

Steve Phillips is the new director of equity research for a brokerage company. He receives a call from a reporter at the Financial News, a weekly publication that comes out on Mondays. The reporter explains the relationship she had with his predecessor. They would share information that they both learned on stocks—the former director would benefit the company's clients by news he obtained from the reporter in exchange for information he gave to her. The former director could ask her not to publish any information he gave her until after a certain date, ensuring that the brokerage clients would be informed before the publication date. After the conversation, Phillips called the former director, who confirmed that the reporter was trustworthy with respect to honoring the agreement for delaying publication until clients have been informed. Philips should:

only disclose research that has already been disseminated to clients, as long as the reporter is providing valuable information of her own.

An analyst manages the assets of a charitable organization. Her supervisor tells her to buy a certain stock because the company's chief executive, who is also a board member in the organization, told her the company's earnings will exceed the market forecast when they are released next week. The analyst objects, but the supervisor says this is what they have always done and sees no reason for changing now. The analyst complies with the request. With respect to Standard IV(A) Loyalty and Standard II(A) Material Nonpublic Information, the analyst violated:

only one of these Standards.

According to CFA Institute Standards of Professional Conduct, which of the following statements about the prohibition against plagiarism is most correct? The prohibition against plagiarism applies to written materials:

oral communications, and telecommunications.

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:

passed Levels I, II, and III of the CFA examination.

Which of the following is NOT expressly prohibited by Standard I(C), Misrepresentation?

providing information on guaranteed investment products.

Sanctions that CFA Institute may impose on a member or candidate under the Professional Conduct Program include:

public censure.

Peggy Green, CFA, is a research analyst following Brown Co. All the information she has gathered suggests the stock should be rated a weak "hold." During a recent lunch, Green overheard another analyst say that the stock should be rated a "buy." Green returns to her office and issues a "buy" recommendation. Green has most likely violated the Code and Standards by:

recommending an investment action without a reasonable basis.

All of the following activities might constitute a violation of Standard IV(A), Loyalty to Employer, EXCEPT:

solicitation of the employer's clients following termination of employment.

Jason Jones, a stock broker who has completed Level I of the CFA program and is registered for the next Level II CFA exam, may:

state that he is a Level II candidate in the CFA Program.

Which of the following is a component of the Code of Ethics? CFA Institute members shall:

strive to maintain and improve their competence and the competence of others in the profession.

Sometimes a CFA Institute member simply feels a law has been violated by his firm, and sometimes the member knows a law has been violated. Which of the following pairs of guidelines is CORRECT with respect to the first step a member should take in each case? The member should first contact:

the firm's counsel if he feels a law has been violated and contact his supervisor if he knows a law has been violated.

Lee Hurst, CFA, is an equity research analyst for a long-term investment fund. His annual bonus is linked to quarterly trading profits. Under a new policy, the quarterly assessment period is switched to a monthly assessment period. According to the Code and Standards, best practices dictate:

updating disclosures when the policy change is implemented.

Juan Lopez manages accounts for Street Capital. Lopez's mother is a client of the firm. Lopez does not make trades in his mother's accounts until all other clients of the firm have been given an opportunity to trade. Lopez has:

violated CFA Institute Standards of Professional Conduct because family accounts that are client accounts should be treated like any other firm accounts.

Paul Thomas, CFA, is designing a new layout for research reports his firm writes and issues on individual stocks. In his design, Thomas includes a stock chart on the first page of each report. He does not reference that the charts are copied from the Standard & Poor's web site. Thomas has:

violated CFA Institute Standards of Professional Conduct because he did not state the source of the charts.

John Johnson, portfolio manager at Sunshine Investments, has passed all three levels of the CFA® Program and has completed his work experience requirements. He expects to receive his charter in the near future. He includes the following statement in his firm's brochure: "Johnson has passed all three levels of the exam and has completed the required work experience for the CFA Charter. He is eligible for the CFA Charter and expects to receive the charter in the near future. Over the years, he has demonstrated a superior performance and his CFA Charter will be rightfully awarded." Johnson has:

violated CFA Institute Standards of Professional Conduct because he implied superior performance that would be linked to the CFA Charter.

Nicole Wise, CFA, is an analyst at Chicago Securities. She attends a meeting with management of one of the companies that she covers. During the meeting, management expresses great optimism about the company's recent acquisition of a new business. Wise is excited about these prospects and issues a research report that states that the company is about to achieve significant success with the new acquisition. Wise has:

violated CFA Institute Standards of Professional Conduct because she misrepresented the optimism by turning it to certainty.

Jason Blackwell, CFA, works as an investment manager for Mega Capital, a large multinational brokerage firm. Mega Capital is based in a country whose applicable law is stricter than the CFA Institute Code and Standards, but does business with clients in a country whose applicable law is less strict than the Code and Standards. Blackwell decides to follow the requirements of the Code and Standards for clients in the less strict country, which is sufficient to also comply with that less-strict country's local laws. While Blackwell is still employed at Mega, Lego Associates verbally asks Blackwell to review client portfolios during evenings and weekends for a fee. Blackwell gets written consent from his immediate supervisor at Mega to undertake this independent activity for a one-month trial basis.

violated Standard I but did not violate Standard IV(A).

Rachel Young, CFA, is making preparations to start a competitive business before terminating her relationship with her employer, a large money management company. Young asks Dot Wiggins, a colleague, to consider joining her. In subsequent discussions with Young, Wiggins learns that Young has used excerpts from research reports by others with only a slight change in wording without acknowledging the source. According to CFA Institute Standards of Professional Conduct, Young has:

violated Standard I(C) Misrepresentation, because she did not acknowledge the source of excepts that she used in research reports.

Millie Walker, CFA, established an aggressive growth portfolio for her client, Jesse Wilmer, over three years ago. Wilmer was placed on Walker's employer's client mailing list, and received monthly account statements and the firm's newsletter, which regularly informed clients that they should contact their account representative with any change in their personal circumstances or investment objectives. As of January, of this year, Walker had not spoken to Wilmer nor received any correspondence from Wilmer since the account was established. Walker has:

violated the Code and Standards because the manager has not performed an update of Wilmer's financial situation and investment objectives.

Rhonda Meyer, CFA, is preparing a research report on Moon Ventures, Inc. In the course of her research she learns the following: Moon had its credit rating downgraded by a prominent rating agency 3 years ago due to sales pressure in the industry. The rating was restored 3 months later when the pressure resolved. Moon's insider trading has been substantial over the last 3 months. Holdings of Moon shares by officers, directors, and key employees were reduced by 50% during that period. In Meyer's detailed report making a buy recommendation for Moon, both the credit rating downgrade and the insider trading were omitted from the report. Meyer has:

violated the Code and Standards by not including the insider trading information in her report.

Robert Hamilton, a CFA candidate, is preparing a research report on Pets-R-Us for public distribution. Hamilton's preliminary report contains unfavorable earnings forecasts for the next four quarters. As part of his analysis, Hamilton met with Linda Brisson, the president of Pets-RUs, and asked her to review the preliminary report for factual inaccuracies. Brisson revised Hamilton's earnings forecasts so that the quarterly earnings showed an upward trend and resulted in positive earnings by the fourth quarter. Hamilton included the revised earnings figures in his report without further review. Although the final report included the basic characteristics of Pets-R-Us, it emphasized certain areas such as projected quarterly earnings but only briefly touched on others. According to CFA Institute Standards of Professional Conduct on research reports, Hamilton:

violated the Standard because he did not thoroughly review and analyze any information provided by Brisson.

Maggie McCarthy is an individual investment advisor who uses mutual funds for her clients. She typically chooses from a list of 40 funds that she has thoroughly researched. The Figgs, a married couple that are a client, asked her to consider the Boilermaker fund for their portfolio. McCarthy had not previously considered the fund because when she first conducted her research three years ago, Boilermaker was too small to be considered. However, the fund has now grown in value, and after doing thorough research on Boilermaker, she found the fund was by far the most outstanding large company value fund in her list of funds. She puts the fund in the Figgs' portfolio, and in all new clients' portfolios, but not in any of her other clients' portfolios. Her reasoning is that her existing clients were comfortable with their current holdings, and she did not want to risk disturbing their comfort. Has McCarthy violated any Standards? McCarthy has:

violated the Standards by not dealing fairly with clients.

Fern Baldwin, CFA, as a representative for Fernholz Investment Management, is compensated by a base salary plus a percentage of fees generated. In addition, she receives a quarterly performance bonus on a particular client's fee if the client's account increases in value by more than 2 points over a benchmark index. Baldwin had a meeting with a prospect in which she described the firm's investment approach but did not disclose her base salary, percentage fee, or bonus.

violated the Standards by not disclosing her performance bonus.

Patricia Hoolihan is an individual investment advisor who uses mutual funds for her clients. She typically chooses funds from a list of 40 funds that she has thoroughly researched. The Burns, a married couple that are a client, asked her to consider the Hawkeye fund for their portfolio. Hoolihan had not previously considered the fund because when she first conducted her research three years ago, Hawkeye was too small to be considered. However, the fund has now grown in value, and cursory research uncovers no fundamental flaws with the fund. She puts the fund in the Burns' portfolio but not in any of her other clients' portfolios. The fund ends up being the best performing fund on her list. Hoolihan has:

violated the Standards by not having a reasonable and adequate basis for making the recommendation.

Todd Gable, CFA, was attending a noon luncheon when he overheard two software executives talking about a common vendor, Datagen, about how wonderful they thought the company was, and about a rumor that a major brokerage firm was preparing to issue a strong buy recommendation on the stock. Gable returned to the office, checked a couple of online sources, and then placed an order to purchase Datagen in all of his discretionary portfolios. The orders were filled within an hour. Three days later, a brokerage house issued a strong buy recommendation and Datagen's share price went up 20%. Gable then proceeded to gather data on the stock and prepared a report that he dated the day before the stock purchase. Gable has:

violated the Standards by not having a reasonable basis for making the purchase of Datagen.

Dan Jeffries is a portfolio manager who is being sued by one of his clients for inappropriate investment advice. The Professional Conduct Program of CFA Institute is investigating Jeffries for the same offense. Jeffries settles the lawsuit with the client while the Professional Conduct Program investigation is ongoing. When the Professional Conduct Program staff questions Jeffries about the problematic investment advice, Jeffries claims he cannot talk about it because doing so would violate the confidentiality of his client. Jeffries has:

violated the Standards by refusing to talk about the case with the Professional Conduct Program, but not by executing the settlement agreement.

Chuck Thomas is the trustee of a trust of which Jill Wyatt is the main beneficiary. Wyatt's husband is the president of a company. In emptying the recycling bin at home, Wyatt finds some papers that lead her to believe that her husband's company will make a tender offer to acquire another firm. Wyatt takes the information to Thomas, who uses it to purchase shares of the company for the trust, but does not further disclose the information. Thomas has:

violated the Standards concerning material nonpublic information.

Bill Fox, CFA, has been preparing a research report on New London Wire and Cable, one of his major investment clients. He had completed much of his analysis and had planned on having his report typed and bound today. Unfortunately, his briefcase was stolen while he ate breakfast, and he lost all his notes and working papers. The lost materials included his notes from management interviews, conversations with suppliers and competitors, dates of company visits, and his computer diskette containing much of his quantitative analysis. Fox's client needs this report tomorrow. In a panic, Fox called New London's vice president of finance and was faxed a copy of the company's most recent financial projections. Fox remembered that his own analysis showed that management's estimates were too high. He did not remember the exact amount, so he revised New London's figures downward 10%. Fox incorporated some charts and graphs on New London from a research report he received last week from a small regional research firm and some information from a Standard & Poor's reference work in his report, without reference to their sources. Fox has:

violated the requirement to have a reasonable basis for a recommendation, the prohibition against plagiarism, and the requirement to maintain appropriate records.

Greg Stiles, CFA, CAIA, is liquidating a large portion of a client's portfolio because the client is planning to buy a vacation home. Stiles informs one of his colleagues at the firm that the client is looking for a vacation home, because the colleague's wife is a licensed real estate broker. With respect to Standard III(E) Preservation of Confidentiality, this action:

violates the Standard unless the client has given explicit permission to disclose his plans.

Bertha Mader, CFA, received proxy material related to a hostile takeover attempt of Danube Industries by Balnet Company. She holds shares of Danube in most of her client accounts. Mader has a high opinion of Danube's management because they have run the company successfully and have always responded directly and honestly to her inquiries. She is not acquainted with Balnet's management team but knows they have a reputation for improving the bottom line at the companies they acquire, partly because they tend to replace upper management at their targets and assume their functions. Balnet's offer is 60% higher than the price of Danube shares before the announcement. Danube's management has contacted Mader and requested that she vote the shares she controls against the takeover because the management is concerned for their jobs and for the welfare of the company. To comply with the Code and Standards, Mader should:

vote for the takeover if it is in the best interest of Danube's shareholders, regardless of the consequences to current management.

The Global Investment Performance Standards (GIPS) were designed to be applied with the goal of full disclosure and fair representation of investment performance in all instances EXCEPT:

when applicable local laws or regulations conflict with the GIPS, in which case, firms must comply with local laws and fully disclose the conflict.

Patricia Spraetz is the chief financial officer and compliance officer at Super Selection Investment Advisors. Super Selection is a medium-sized money management firm which has incorporated the CFA Institute Code of Ethics and Standards of Practice into the firm's compliance manual. Karen Jackson is a portfolio manager for Super Selection. She is not a CFA charterholder. Jackson is friendly with David James, president of AMD, a rapidly growing biotech company. James has provided Jackson with recommendations in the biotech industry, which she buys for her own portfolio before buying them for her clients. For three years, Jackson has also served on AMD's board of directors but has never notified Super Selection of this fact. She has received options and fees as compensation. Recently, the board of AMD decided to raise capital by voting to issue shares to the public. This was attractive to board members (including Jackson) who wanted to exercise their stock options and sell their shares to get cash. When the demand for initial public offerings (IPO) diminished, just before AMD's public offering, James asked Jackson to commit to a large purchase of the offering for her portfolios. Jackson had previously determined that AMD was a questionable investment but agreed to reconsider at James' request. Her reevaluation confirmed the stock to be overpriced, but she nevertheless decided to purchase AMD for her clients' portfolios. Which of the following statements is NOT correct?

) Jackson did not violate Standard III(A) on Fiduciary Duty to clients because she was bound by her fiduciary duty to AMD and its stockholders as a board member. Therefore, when she reversed her decision to buy AMD shares for Super Selection's clients, portfolios on James' request, her obligation to AMD took precedence.

Ed Socho states that in a GIPS-compliant presentation, (1) total firm assets must include all accounts, including non-fee-paying accounts and accounts where the client makes the investment decisions, and (2) the firm must include the performance results of third-party advisors selected by the firm in its composite performance. Are Socho's statements accurate?

Both of these statements are accurate.

The CFA Institute Professional Conduct Program may impose sanctions on:

CFA charterholders and candidates for the CFA designation.

The following scenarios refer to recommendations made by two analysts. Jean King, CFA, is a quantitative analyst at Quantlogic, Inc. King uses computer-generated screens to differentiate value and growth stocks based on accounting numbers such as sales, cash flow, earnings, and book value. Based on her analysis of all domestically traded stocks in the U.S. over the past year, King concludes that value stocks as a class have underperformed growth stocks over that period. Using only this analysis, she recommends that account executives at Quantlogic sell all value stocks from the portfolios for which they have discretionary authority to trade and replace these stocks with growth stocks. James Capelli, CFA, is a fundamental analyst at Wheaton Capital Management, which focuses on regional stocks. His analysis of Branson Wireless includes the investment's basic characteristics such as information about historical earnings, ownership of assets, outstanding contracts, and other business factors. In addition to conducting both a general industry analysis and a company financial analysis, Capelli interviews key executives at Branson. Based on his analysis, he concludes that the company's future prospects are strong and issues a "buy" recommendation. According to CFA Institute Standards of Professional Conduct, did King and Capelli have a reasonable and adequate basis for making their recommendations?

Capelli has a reasonable basis for his recommendation, but King does not.

Fred Dean, CFA, has just taken a job as trader for LPC. One of his first assignments is to execute the purchase of a block of East Street Industries. While working with East Street on an assignment for his previous employer, he learned that East Street's sales have weakened and will likely be significantly below the LPC analyst's estimate, but no public announcement of this has been made. Which of the following actions would be the most appropriate for Dean to take according to the Standards?

Contact East Street's management and urge them to make the information public and make the trade if they refuse.

According to the GIPS standards, which of the following statements is most accurate?

GIPS compliant firms are required to maintain written documentation of policies and procedures used to establish and maintain compliance with GIPS.

Which of the following is most likely permitted under Standard I(C), Misrepresentation?

Including data showing the current government bond yield curve in a report to a client without stating its source.

Albert Long, CFA, manages portfolios of high net worth individuals for HKB Corp. Alice Thurmont, one of his close friends, heads a local charity for homeless children that depends on donations to operate. Because donations have declined during the past year, the charity is experiencing financial difficulty. Thurmont asks Long to give her a partial list of his clients so that she can contact them to make tax-deductible donations. Because Long knows that the charity provides much benefit to the community, he provides Thurmont with the requested list. Betty Short, CFA, also works for HKB Corp. She receives a letter from CFA Institute's Professional Conduct Program (PCP) requesting that she provide information about one of HKB's clients who is being investigated. Short complies with the request despite the confidential nature of the information requested by the PCP. Based on Standard III(E), Preservation of Confidentiality, which of the following statements about Long and Short's actions is CORRECT?

Long violated Standard III(E) but Short did not violate Standard III(E).

Michel Marchant, CFA, recently became an independent money manager. After six months, he has only ten clients, who are family and friends. To supplement his income, Marchant accepted part-time employment as an advisor at Middleton Financial Advisors. According to CFA Institute Standards of Professional Conduct, which of the following statements about Marchant's duty to his new employer is CORRECT?

Marchant must inform Middleton to keep his existing clients and must inform his existing clients of his new part-time employment at Middleton.

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®)." Does Mendoza's brief presentation and information sheet violate GIPS?

No.

Will Lambert, CFA, is a financial analyst for Offshore Investments. He is preparing a purchase recommendation on Burch Corporation for internal use. According to the CFA Institute Standards of Professional Conduct, which of the following statements about disclosure of conflicts is not required? Lambert would NOT need to disclose to his employer that:

Offshore is an OTC market maker for Burch Corporation's stock.

Bob Smith, CFA, is an independent board member of Atlantic Technologies, but is not paid by the firm for his services. An employee at Atlantic informs Smith that Atlantic has improperly timed the booking of contracts to achieve the desired quarterly financial results. The misleading financial statements would turn losses into profits. Smith confers with the firm's legal counsel who indicates that this conduct is, in fact, illegal. Smith urges Sharon White, Atlantic's chief financial executive, to change the financial statements, but she refuses to do so and indicates the firm's external auditors have approved the method of revenue recognition she has used. According to CFA Institute Standards of Professional Conduct, which of the following actions is least likely appropriate for Smith: in this situation?

Report the illegal activity to CFA Institute.

Janice Melfi is a portfolio manager for Soprano Advisors. Soprano has developed a proprietary model that has been thoroughly researched and is known throughout the industry as the Soprano model. The model is purely quantitative and screens stocks into buy, hold, and sell categories. The basic philosophy of the model is thoroughly explained to clients. The director of research frequently alters the model based on rigorous research—an aspect that is well explained to clients, although the specific alterations are not continually disclosed. Portfolio managers use the model to assist them in making portfolio decisions, but, based on their own fundamental research, are allowed to purchase securities not recommended by the model. This fact is not disclosed to the clients, because the head of marketing does not think it is relevant. Which of the following statements regarding the portfolio manager's investment decisions is CORRECT?

Soprano is violating the Standards by not disclosing the fundamental research aspect of the investment process.

Which one of the following constitutes the illegal use of material nonpublic information?

Trading on information your sister, the firm's attorney, told you over dinner.

Which of the following statements most accurately describes the requirements for GIPS verification?

Verification of GIPS compliance is recommended, but not required.

A framework for ethical decision making is most appropriately applied to:

aid decision makers in considering alternatives and their potential impacts.

When verifying a firm's compliance with Global Performance Investment Standards (GIPS), the verifier must:

attest that the firm's processes and procedures are established to present performance in accordance with GIPS requirements.

While attending his wife's office party, Donald North, CFA, overhears two top executives from Parker Industries discussing that the company's Board of Directors just approved to omit its cash dividend due to unexpected losses during the quarter. Parker has paid a quarterly dividend for the past ten years. The next day, North calls his broker and instructs her to sell short Parker's common stock. While in a coffee shop, Diane South, CFA, overhears two top executives from Ryland Products say that their company is about to be acquired by another company for a substantial premium over the market price. The next day, South calls her broker and instructs him to buy 500 shares of Ryland's common stock.

both of them violated the Standard.

A firm recently hired Hal Crane, CFA, to be a supervisor in the firm. Crane has reviewed the procedures for complying with the Code and Standards in the company. It is Crane's belief that the procedures need revision in order to be effective. Crane must:

decline supervisory responsibilities in writing until the company adopts an adequate compliance system.

An analyst who is a CFA Institute member receives an invitation from a business associate's firm to spend the weekend in a high-quality resort. In order to abide by the Standards, the analyst should (may):

do both of the actions listed here.

A profession is most accurately described as an occupational group that requires its members to:

have specialized expert knowledge.

Stephanie Orange, Level II CFA candidate, posts blogs for her exam study group three days after the exam to vent her frustrations over the exam. However, to avoid disclosing what was actually on the exam, she only discusses topic areas she thought would be on the exam that were not. She writes "...the topics selected were unnecessarily obscure. Important items like FCF, DDM, and Residual Income were ignored completely..." Orange is most likely:

in violation of Standard VII(A) "the Code and Standards" for providing confidential information about the exam.

Rey Sanchez, CFA, covers the specialty chemical industry for Rock Advisory Associates. Until today he has had a buy recommendation on ChemStar, and many of the firm's customers have purchased shares based upon his recommendation. The firm's client accounts are divided into two fundamental categories: trading and buy-and-hold accounts. The firm holds discretionary trading authority over the trading accounts, but not the buy-and-hold accounts. Sanchez has recently come to believe that the fundamentals are changing for the worse at ChemStar, and is preparing a sell recommendation. He calls a meeting of the firm's portfolio managers with accounts holding ChemStar and tells them of the pending release of the sell recommendation. On this basis, the portfolio managers sell all positions in the discretionary accounts but not in the buy-and-hold accounts. Sanchez completes and mails the report to all clients two days later, and, shortly thereafter, many of the buy-and-hold accounts sell their ChemStar positions. With regard to these actions, Sanchez is:

in violation of the Standard on Fair Dealing; the portfolio managers are in violation of the Standard on Fair Dealing.

Carol Hull, CFA, is an investment advisor whose prospective client, Frank Peters, presents special requirements. To construct an investment policy statement for Peters, Hull inquires about Peters' investment experience, risk and return objectives, and financial constraints. Peters states that he has a great deal of investment experience in the capital markets and does not wish to answer questions about his tolerance for risk or his other holdings. Under Standard III(C), Suitability, Hull:

is permitted to manage Peters' account without any knowledge of his risk preferences.

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:

laws and regulations of the country with stricter securities laws.

Roger Smith, CFA, has been invited to join a group of analysts in touring the riverboats of River Casino Corp. For the tour, River Casino has arranged chartered flights from casino to casino since commercial flight schedules are not practical for the group's time schedule. River Casino has also arranged to pay for the analysts' lodging for the three nights of the tour. According to CFA Institute Standards of Professional Conduct, Smith:

may accept the arrangements as they are.

An analyst, who is a CFA Institute member, manages a high-grade bond mutual fund. This is his only professional responsibility. When the analyst comes across a speculative stock investment that he feels is a good investment for his personal portfolio, the analyst:

may invest in the stock because the analyst would not purchase the stock for the bond portfolio he manages.

Isaac Jones, CFA, wishes to buy Maxima common stock for some of his clients' accounts. Jones also wishes to purchase Maxima for his personal account. In accordance with CFA Institute Standards, Jones:

may purchase Maxima for his personal account, but the transactions for his clients must take priority.

Ken James has been an independent financial advisor for 15 years. He received his CFA Charter in 1993, but did not feel it helped his business, so he let his dues lapse this year. He still has several hundred business cards with the CFA designation printed on them. His promotional materials state that he received his CFA designation in 1993. James:

must cease distributing the cards with the CFA designation, but can continue to use the existing promotional materials.

John Hill, CFA, has been working for Advisors, Inc., for eight years. Hill is about to start his own money management business and has given his two-week notice of his resignation from Advisors. A few days before his resignation takes effect, on his lunch hour, he takes out a loan from a bank on behalf of his new business and uses the money to buy some office equipment for his new business. Since he engaged in these transactions while still an employee of Advisors, Hill violated Standard IV(A), Loyalty to Employer, by:

neither taking out the loan nor buying the equipment.

A CFA charterholder gathers the closing prices of a security from a widely read publication. The charterholder uses the data as part of a report she is preparing and fails to report the data source in the report. This is:

not a violation of Standard I(C) if the data can be gathered from several public sources.

Ron Vasquez is registered to sit for the Level II CFA exam. Unfortunately, Vasquez has failed the exam the past two years. In his frustration, Vasquez posted the following comment on a popular internet bulletin board: "I believe that CFA Institute is intentionally limiting the number of charterholders in order to increase its cash flow by continuing to fail candidates. Just look at the pass rates."

not in violation of Standard I(D) Misconduct or Standard VII(A) Conduct as Participants in CFA Institute Programs

Bjorn Sandvik, CFA, completes a research report with a buy recommendation for Acorn Properties. In the early afternoon, Sandvik e-mails this recommendation to his clients who had responded to his request that they provide Sandvik with their e-mail addresses. Later that afternoon, the printed recommendation is forwarded to the postal service for normal delivery to all customers, who receive the mailing 1 to 3 days later. Sandvik has:

not violated the Code and Standards because he acted fairly in disseminating research information to his clients.

John Hill, CFA, has been working for Advisors, Inc., for eight years. Hill is about to start his own money management business and has given his two-week notice of his resignation from Advisors. A few days before his resignation takes effect, a former client of Advisors calls Hill at his home about his new firm. The former client says that he is very happy that Hill is leaving Advisors because now he and Hill can resume a professional relationship. The client says that he would never become a client of Advisors again. Hill promises to call the client back after he has left Advisors. Hill does not tell his employer about the call. Hill has most likely:

not violated the Standards.

Lance Tuipulotu, CFA, is a portfolio manager for an investment advisory firm. He plans to sell 10,000 shares of Park N'Wreck, Inc. to finance his daughter's new restaurant venture, but his firm recently upgraded the stock to "strong buy." In order to remain in compliance with Standard VI(B) "Priority of Transactions," Tuipulotu must:

notify his firm of his intention to sell the shares before selling the shares.

Kevin Blank, CFA, is a representative for Campbell Advisors. A prospective client inquires about investing in Mexican bonds. Blank assures the client that Campbell can help him with Mexican fixed income investing. In fact, Blank had heard that his colleague, Jon Woller, might have had experience in Mexican bonds. The following day Blank learns that Woller had no such experience. Blank does not correct his earlier statement, and the prospective client invests with Campbell. Blank has:

of his firm and later, when he learned the truth and failed to contact the prospective client and correct his earlier statement.

With respect to CFA Institute enforcement of the Code and Standards, possible disciplinary sanctions least likely include:

payment of a fine.

Lisa Pierce, CFA, has been researching Lander Manufacturing for the past three weeks. She likes the company's history of fulfilling its contracts on time and within budget. She learns from the uncle of a maintenance worker at Lander's headquarters that a group of well-dressed individuals arrived at headquarters in a lime green-colored limousine. Pierce knows from publicly available information that Gilbert Controls needs a large supply of specialized motors in its domestic division. She also knows that the executive officers of Gilbert usually travel in a lime green limousine. Pierce concludes that it is very likely that Gilbert will offer a large contract to Lander. Based on this development and her prior research Pierce would like to acquire Lander Manufacturing shares for her client accounts. Pierce should:

proceed to acquire the shares.

In the preparation of a research report, a CFA Institute member may emphasize certain matters, touch briefly on others, and omit some altogether:

provided that the analyst has a reasonable basis for his or her actions.

Bob Blanford, CFA, is an investment analyst for a large global brokerage firm. He recently moved to Ragatan, a developing country with few securities laws and regulations. As part of conducting a company analysis, Blanford interviews Ravi Shanti, vice-president of finance at Starr Industries. Starr is a major industrial firm in Ragatan and a client at Blanford's firm. Based on his analysis, Blanford suspects that Shanti may have deliberately overstated Starr's current earnings and its earnings for the past several quarters. If this information becomes public, Blanford believes that Starr's stock price will drop substantially. Blanford suspects that Shanti may have violated Ragatan's securities laws. Which of the following statements is least likely to comply with Standard I, Professionalism? Blanford should:

take no action.

Abner Flome, CFA, is writing a research report on Paulsen Group, an investment advisory firm. Flome's brother-in-law holds shares of Paulsen stock. Flome has recently interviewed for a position with Paulsen and expects a second interview. According to the Standards, Flome's most appropriate action is to disclose in the research report:

that he is being considered for a job at Paulsen.

Paul Thomas, CFA, is designing a new layout for research reports his firm writes and issues on individual stocks. In his design, Thomas includes a stock chart on the first page of each report. He does not reference that the charts are copied from an unrecognizable Finance web site. Thomas has:

violated CFA Institute Standards of Professional Conduct because he did not state the source of the charts.

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:

violated Standard IV(A) Loyalty.

Cynthia Abbott, a CFA charterholder, is preparing a research report on Boswell Company for her employer, Capital Asset Management. Bob Carter, president of Boswell, invites Abbott and several other analysts to visit his company and offers to pay her transportation and lodging. Abbott pays for her own transportation and lodging, but while visiting the company, accepts an item of small value from Carter. Abbott does not disclose this gift to her supervisor at Capital when she returns. In the course of the company visit, Abbott overhears a conversation between Carter and his chief financial officer that the company's earnings per share (EPS) are expected to be $1.10 for the next quarter. Abbott was surprised that this EPS is substantially above her initial earnings estimate of $0.70 per share. Without further investigation, Abbott decides to include the $1.10 EPS in her research report on Boswell. Using the high EPS positively affects her recommendation of Boswell.

violated Standard V(A) but she did not violate Standard I(B).

During 2004 Nancy Arnold received an undergraduate business degree with a management major and completed all requirements for the CFA designation imposed by CFA Institute. She is applying for employment at several brokerage firms. Her resume states, "I was awarded the CFA degree in 2004 by CFA Institute." Her resume also states that she graduated "with honors" and majored in finance. Her grade point average was 3.48 but "with honors" requires a 3.50 grade point average. Which of the following statements about Standard VII(B), Reference to CFA Institute, the CFA Designation, and the CFA Program, and Standard I(C), Misrepresentation, is CORRECT? Arnold:

violated both Standard VII(B) and Standard I(C).

Paula Munson, CFA, manages a mutual fund with an objective to emphasize income over capital gains. Magic Technologies is a growth stock that pays no dividend, but Republic's research department believes the stock will dramatically outperform the S&P 500 over the next 12 to 18 months. Based on this strong recommendation, Munson adds Magic stock to her fund's portfolio. Munson has:

violated the Standards by failing to comply with her portfolio's style mandate.

A CFO who is a CFA Institute member is careful to make his press releases—some of them containing material and previously undisclosed information—clear and understandable to his readers. While writing a new release, he often has his current intern proofread rough drafts. He also sends electronic copies to his brother, an English teacher, to get suggestions concerning style and grammar. With respect to Standard II(A), Material Nonpublic Information, the CFO is:

violating the standard by either showing the pre-release version to his intern or sending it to his brother.