CFA Ethics

Q. Which of the following is least likely a requirement of the GIPS standards? Firms are required to: A have their performance records verified by an independent third party. Binclude all discretionary, fee-paying portfolios in at least one composite. C present a minimum of five years of annual investment performance compliant with GIPS standards.

A is correct because it is a recommendation but not a requirement that firms obtain independent third-party verification to claim GIPS compliance. Firms are required to include all discretionary, fee-paying portfolios in at least one composite. They must also present a minimum of five years of annual investment performance compliant with GIPS standards. B is incorrect because it is a requirement. C is incorrect because it is a requirement.

Q. According to the Fundamentals of Compliance section of the Global Investment Performance Standards, issues that a firm must consider when claiming compliance include all of the following except: A replicating performance. B properly defining the firm. C documenting firm policies and procedures used in establishing and maintaining compliance with the Standards.

A is correct. Replication of performance is not included in the Fundaments of Compliance section within the GIPS standards.

Decision makers who use a compliance approach are most likely to: (a) avoid situational influences. (b)oversimplify decision making. (c) consider more factors than when using an ethical decision-making approach.

B is correct. A compliance approach can oversimplify decision making and may not encourage decision makers to consider the larger picture. A strong compliance culture may be a good start in developing an ethical culture but can become another situational influence that may result in employees failing to consider other important factors.

Q. Charlie Mancini, CFA, is the Managing Director for Business Development at SV Financial (SVF), a large US-based mutual fund organization. Mancini has been under pressure recently to increase revenues. In order to secure business from a large hedge fund manager based in Asia, Mancini recently approved flexible terms for the fund's client agreement. To allow for time zone differences, the agreement permits the hedge fund to trade in all of SVF's mutual funds six hours after the close of US markets, which is prohibited by US regulators. Did Mancini violate any CFA Institute Standards of Professional Conduct? A No. B Yes, with regard to Fair Dealing. C Yes, with regard to Fair Dealing and Material Nonpublic Information.

C is correct because clients should be treated fairly and impartially [Standard III(B)]. In addition, the flexible trading terms allow the hedge fund manager to enrich themselves and is a violation of Standard II(A), concerning trading on material nonpublic information. This is also a conflict of interest [Standard VI(A)-Disclosure of Conflicts]. A is incorrect because violations of several Standards have occurred. B is incorrect because a violation of the Fair Dealing standard has occurred.

Monique Gretta, CFA, is a research analyst at East West Investment Bank. Previously, Gretta worked at a mutual fund management company and has a long-standing client relationship with the managers of the funds and their institutional investors. Gretta often provides fund managers, who work for Gretta's former employer, with draft copies of her research before disseminating the information to all of the bank's clients. This practice has helped Gretta avoid several errors in her reports, and she believes it is beneficial to the bank's clients, even though they are not aware of this practice. Regarding her research, Gretta least likely violated the CFA Institute Code of Ethics and Standards of Professional Conduct because: A her report is a draft. B this practice benefits all clients. C the long-standing client relationships are not disclosed.

C is correct because the analyst does not violate any of the Standards of Professional Conduct by having long-standing client relationships and generally is not required to disclose such relationships. However, the analyst is not treating all clients fairly as required by Standard III(B)-Fair Dealing when disseminating investment recommendations; disclosure of the relationship with long-standing clients is not the issue. The analyst has advantaged some clients over others by providing advance information, and all clients do not have a fair opportunity to act on the information within the draft report. Members and candidates may differentiate their services to clients, but different levels of service must not disadvantage or negatively affect clients. A is incorrect because research should be disseminated to clients fairly as required by Standard III(B)-Fair Dealing when disseminating investment recommendations, and not selectively as is current practice. Just because the research is in draft form it does not exempt it from being disseminated fairly. B is incorrect because even though the research may benefit from the additional reviews, this practice favors clients who receive the research before others and as a result, the analyst has not treated clients fairly as required by Standard III(B)-Fair Dealing, when disseminating investment recommendations.

Q. Which of the following statements is a stated purpose of disclosure in Standard VI(C)-Referral Fees? A Disclosure will allow the client to request discounted service fees. B Disclosure will help the client evaluate any possible partiality shown in the recommendation of services. C Disclosure means advising a prospective client about the referral arrangement once a formal client relationship has been established.

The correct answer is B. Answer B gives one of the two primary reasons listed in the Handbook for disclosing referral fees to clients under Standard VI(C)-Referral Fees. (The other is to allow clients and employers to evaluate the full cost of the services.) Answer A is incorrect because Standard VI(C) does not require members or candidates to discount their fees when they receive referral fees. Answer C is inconsistent with Standard VI(C) because disclosure of referral fees, to be effective, should be made to prospective clients before entering into a formal client relationship with them.

Q. Alexandra Zagoreos, CFA, is the head of a government pension plan. Whenever Zagoreos hires a money management firm to work with the pension plan, she finalizes the deal over dinner at a nice restaurant. At these meals, Zagoreos also arranges for the money manager to provide her payments equal to 10% of the management fee the manager receives from the pension plan with no formal documentation of this agreement. Zagoreos keeps half of the payments for her own use and distributes the remainder as cash incentives to a handful of her most trusted staff. Zagoreos least likely violated which of the following CFA Institute Code of Ethics and Standards of Professional Conduct? A Referral fees. B Loyalty, Prudence and Care. C Additional Compensation Arrangements.

A is correct as the money should not be accepted without receiving written consent from all parties involved; therefore, Zagoreos is in violation of Standard IV(B)-Additional Compensation Arrangements. The manager has acted for her own benefit by receiving compensation that competes with or might reasonably be expected to create a conflict of interest with her employer's interest without receiving written consent from all parties involved. This action is a violation of Standard III(A)-Loyalty, Prudence, and Care, which requires that members act for the benefit of their clients, and places their client's interests before their employer's or their own interests. However, there is no indication that the member has received compensation, consideration, or benefit received from, or paid to, others for the recommendation of products or services and therefore has not violated Standard VI(C) related to referral fees. B is incorrect because the manager has acted for their own benefit by receiving compensation that competes with or might reasonably be expected to create a conflict of interest with her employer's interest without receiving written consent from all parties involved. This action is a violation of Standard III(A)-Loyalty, Prudence, and Care, which requires that members act for the benefit of their clients, and places their client's interests before their employer's or their own interests. C is incorrect as the manager has accepted compensation that competes with or might reasonably be expected to create a conflict of interest with her employer's interest without receiving written consent from all parties involved, in violation of Standard IV(B)-Additional Compensation Arrangements.

Q. Maria Martinez is a research analyst and a Level II CFA candidate. Recently, friends of Martinez organized a party for her thirtieth birthday. At the party, Martinez received an inexpensive gift from a friend who is the CEO of a publicly listed company Martinez recommends to clients. Martinez also received gifts from some of the firm's best clients. Aware of her employer's policy requiring her to report all gifts received within one week of receipt, Martinez declares the gifts she received from the firm's clients two days after the party. Does Martinez most likely violate the CFA Institute Standards of Professional Conduct? A Yes. BNo, because her CEO friend's gift was inexpensive. C No, because the gifts do not impact her research independence and objectivity.

A is correct because Standard I(D)-Misconduct states that members and candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence. By only reporting the gifts she received from clients but not the inexpensive gift from her CEO friend, she does not conform to her employer's gift policy of reporting all gifts. Her non-compliance with employer policies reflects adversely on her professional reputation and honesty. B is incorrect because the company policy is to report all gifts, not just those from clients. C is incorrect because while she would likely maintain her appearance of being independent and objective by accepting an inexpensive gift from a CEO of a publicly listed company, she does not comply with her employer's policy of disclosing all gifts, regardless of value.

Q. When Jefferson Piedmont, CFA, joined Branch Investing, Branch began using a quantitative stock selection model Piedmont had developed on his own personal time prior to his employment with Branch. One year later when Piedmont left the firm, he found the original copy of the model he had developed in a file at his home and presented it to his new employer, who immediately began using the model. According to the Standards of Practice Handbook, did Piedmont most likelyviolate any CFA Institute Standards of Professional Conduct? A No. B Yes, because he misappropriated property now belonging to Branch. C Yes, because he failed to inform his new employer the model was the same one used by his previous employer.

A is correct because although departing employees may not take employer property when departing [Standard IV(A)-Duties to Employers (Loyalty)], the model Piedmont presented to his new employer was not Branch's property. It was created by Piedmont prior to his employment with Branch. The model was not created for Branch in the course of his employment, but was adopted by Branch. B is incorrect because the model Piedmont presented to his new employer was not Branch's property. It was created by Piedmont prior to his employment with Branch. C is incorrect because the model was not created for Branch in the course of his employment, but was adopted by Branch.

Q. As a condition of his employment with an investment bank, Abasi Hasina, CFA, was required to sign an employment contract, including a non-compete clause restricting him from working for a competitor for three years after leaving the employer. After one year, Hasina quits his job for a comparable position with an investment bank in a country where non-compete clauses are illegal. Lawyers with whom he consulted prior to taking the new position determined that the non-compete clause was a violation of human rights and thus illegal. Did Hasina most likely violate the CFA Institute Code of Ethics and Standards of Professional Conduct? A Yes B No, because the non-compete clause violates his human rights C No, because the non-compete clause is illegal in the new country of employment

A is correct because by failing to adhere to the non-compete clause he agreed to abide by when signing his employment contract, Hasina shows a lack of professional integrity toward his employer. This behavior reflects poorly on the good reputation of members and is a violation of the Code of Ethics, which states that members and candidates must act with integrity, and Standard I(D)-Misconduct, which states that members and candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence. The Code of Ethics at times requires a member or candidate to uphold a higher standard than that required by law, rule, or regulation, or in this case the strict application of the employment agreement. B is incorrect because Hasina agreed to abide by the three-year non-compete clause when he signed the contract. C is incorrect because Hasina broke the contract he signed which obligated him to not work for a competitor for three years after leaving the employment of the employer. This would be a violation of Standard I(A)-Knowledge of the Law, which requires that in the event of conflict, Members and Candidates must comply with the more strict law, rule, or regulation.

Q. Lawrence Hall, CFA, and Nancy Bishop, CFA, began a joint research report on Stamper Corporation. Bishop visited Stamper's corporate headquarters for several days and met with all company officers. Prior to the completion of the report, Bishop was reassigned to another project. Hall utilized his and Bishop's research to write the report but did not include Bishop's name on the report because he did not agree with and changed Bishop's conclusion included in the final report. According to the CFA Institute Standards of Practice Handbook, did Hall most likely violate any CFA Institute Standards of Professional Conduct? A No. B Yes, with respect to misrepresentation. C Yes, with respect to diligence and reasonable basis.

A is correct because members are in compliance with Standard V (A)-Diligence and Reasonable Basis if they rely on the research of another party who exercised diligence and thoroughness. Because Bishop's opinion did not agree with the final report, disassociating her from the report is one way to handle this difference between the analysts. B is incorrect because Hall did not make any misrepresentation. C is incorrect because Hall is allowed to rely on a third party who exercised diligence and thoroughness.

Q. Leng Bo, CFA, is a bond portfolio manager for individual investors. Last year, a client whose portfolio is limited to investment-grade bonds approved Bo's purchase of a below investment grade bond. Because yields in the high grade fixed-income markets declined, Bo subsequently decides to enhance this client's portfolio by investing in several additional bonds with ratings one or two notches below investment grade. The investment strategy implemented by Bo most likely violated which of the following CFA Institute Standards of Professional Conduct? A Suitability B Communications with Clients C Independence and Objectivity

A is correct because the client only approved the purchase of one below investment grade bond while the portfolio manager has purchased several additional bonds below investment grade without client approval in violation of Standard III(C). B is incorrect because no violation of this Standard has occurred. C is incorrect because no violation of this Standard has occurred.

Q. Ileana Inkster, CFA, was recently offered a senior management position within the trust department at a regional bank. The department is new, but the bank has plans to expand it significantly over the next few months. Inkster has been told she will be expected to help grow the client base of the trust department. She is informed that the trust department plans to conduct educational seminars and pursue the attendees as new clients. Inkster notices that recent seminar advertisements prepared by the bank's marketing department do not mention that investment products will be for sale at the seminar. The ads indicate attendees can "learn how to immediately add $100,000 to their net worth." What should Inkster most likely do to avoid violating any CFA Institute Standards of Professional Conduct? A Decline to accept the new position B Accept the position and revise the marketing material C Accept the position and inform senior management of inadequate compliance procedures

A is correct because the prospective supervisor's first step should be to not take the position. Accepting the position with inadequate procedures in place or improper marketing material would leave Inkster at risk of incurring a violation of the Code and Standards—Standard IV(C)-Responsibilities of Supervisors. She could agree to be hired as an interim consultant with the bank in order to implement adequate procedures before taking on any supervisory role. B is incorrect because Inkster should bring the improper marketing material to the attention of the firm's senior managers and recommend corrective action before taking the position. C is incorrect because Inkster should bring the inadequate compliance system to the attention of the bank's senior managers and recommend corrective action be taken before accepting the position.

Q. Molly Burnett, CFA, is a portfolio manager for a fund that only invests in environmentally friendly companies. A multinational utility company recently acquired one of the fund's best performing investments, a wind power company. The wind power company's shareholders received utility company shares as part of the merger agreement. The utility has one of the worst environmental records in the industry, but its shares have been one of the top performers over the past 12 months. Because the utility pays a high dividend every three months, Burnett holds the utility shares until the remaining two dividends are paid for the year then sells the shares. Burnett most likely violated the CFA Institute Standard of Professional Conduct concerning: A suitability. B disclosure of conflicts. C independence and objectivity.

A is correct because the utility is not a suitable investment for a fund that only invests in companies with good environmental records. Continuing to hold this investment, therefore, was a violation of Standard III(C)-Suitability. B is incorrect because the violation concerns an unsuitable investment. Although the manager has a conflict of interest concerning her desire to hold onto a high dividend stock that has performed well in the past despite it being unsuitable for the Fund, disclosing this would not alleviate the fact that the holding is unsuitable for the Fund that only investments in companies with good environmental records. C is incorrect because there has not been a violation of independence and objectivity.

Q. Lee Chu, a CFA candidate, develops a new quantitative security selection model exclusively through back-testing on the Chinese equity market. Chu is asked to review marketing materials including an overview of the conceptual framework for his model, providing back-tested performance results, and listing the top holdings. Chu directs the marketing group to remove the description of his model due to concerns competitors may attempt to replicate his investment philosophy. He also instructs the marketing group to remove the list of the top holdings because it shows that the top holding represents 30 percent of the back-tested model. Which of the following actions is least likely to result in a violation of the Code and Standards? Chu's: A use of back-tested results in communication with prospective clients. B failure to adequately describe the investment process to prospective clients. C failure to disclose that the top holding represents such a large allocation in the model.

A is correct because use of back-tested results is not prohibited, providing it is appropriately disclosed. B is incorrect because under Standard V(B) members and candidates must adequately describe to clients and prospective clients the manner in which the member or candidate conducts the investment decision making process. C is incorrect because Chu is intentionally omitting a material fact regarding the concentration of the model portfolio which would likely have an impact on the prospective client's perception of the riskiness of this strategy.

Q. According to the Fundamentals of Compliance—Requirements section of the GIPS standards, a firm must: A include in total firm assets those assigned to a sub-advisor selected by the firm. B alter historical composite performance after a significant change in the firm's organization occurs. C represent that the calculation methodology used by the firm is "in accordance with the Global Investment Performance Standards" when presenting performance.

A is correct. According to GIPS Provision 0.A.14, total firm assets must include assets assigned to a sub-advisor provided the firm has discretion over selecting the sub-advisor. B is incorrect because according to GIPS Provision 0.A.15, changes in a firm's organization must not lead to alteration of historical composite performance. C is incorrect because according to GIPS Provision 0.A.7, statements referring to the calculation methodology as being "in accordance", "in compliance", or "consistent" with the Global Investment Performance Standards, or similar statements, are prohibited.

Q. The Fundamentals of Compliance section of the GIPS standards recommends that firms: A conduct a verification. B adopt a limited definition of the firm, regardless of the actual name of the individual investment management company. C annually provide existing clients with compliant presentations for each composite on the firm's list of composite descriptions.

A is correct. According to Section 0.B.2 of the Fundamentals of Compliance—Recommendations of the GIPS standards, it is recommended that firms perform an independent, third-party verification of the firm's claim of compliance. B is incorrect because Section 0.B.3 of the Fundamentals of Compliance—Recommendations of the GIPS standards recommends that firms adopt the broadest (rather than limited), most meaningful definition of the firm. The scope of firm definition should include all geographical offices operating under a common brand name regardless of the actual name of the individual investment management company. C is incorrect because Section 0.B.4 of the Fundamentals of Compliance—Recommendations of the GIPS standards recommends that firms annually provide each existing client with a compliant presentation of the composite in which the client's portfolio is included. The standards do not recommend that firms provide compliant presentations for each composite maintained by the firm.

Q. Ensuring that a country's interests are taken into account when effectively implementing the GIPS standards on a country-wide basis most likely relies on which of the following entities? A A local sponsoring organization B The local regulator(s) C Local independent valuation firms

A is correct. Effective implementation of the GIPS standards in countries is highly reliant on a local sponsoring organization. The local sponsoring organization ensures that the country's interests are taken into account as the GIPS standards are developed. B is incorrect because compliance with GIPS standards is voluntary, so regulators may not be involved with its implementation. C is incorrect because independent valuations are not required for GIPS compliance. Therefore, independent valuation firms may not be involved with its implementation.

Q. Disclosure of confidential CFA exam information will most likely be detected by the Professional Conduct staff through: A monitoring online and social media. B analysis of Proctor Reports. C annual Professional Conduct Statements.

A is correct. Professional Conduct inquiries come from a number of sources including the monitoring of online and social media to detect disclosure of confidential exam information. B is incorrect because candidate conduct is monitored by exam proctors who complete reports on candidates suspected to have violated testing rules during the exam and at the exam center. C is incorrect because members and candidates must self-disclose on the annual Professional Conduct Statement all matters that question their professional conduct, such as involvement in civil litigation or a criminal investigation or being the subject of a written complaint. Disclosure of confidential exam information will not be found on the annual statement.

Q. Which CFA Institute Standard of Professional Conduct most likely includes a sub-section entitled "Communication with Clients and Prospective Clients"? AInvestment Analysis, Recommendations, and Actions B Conflicts of Interest C Duties to Clients

A is correct. Standard V-Investment Analysis, Recommendations, and Actions includes the sub-section Communication with Clients and Prospective Clients. The other sub-sections within Standard V include Diligence and Reasonable Basis and Record Retention. B is incorrect because Standard V-Investment Analysis, Recommendations, and Actions includes the sub-section Communication with Clients and Prospective Clients. C is incorrect because Standard V-Investment Analysis, Recommendations, and Actions includes the sub-section Communication with Clients and Prospective Clients.

Q. Which of the following best outlines the minimally acceptable behaviors expected of a member belonging to a societal group? A Standards of conduct B Code of ethics C A firm's employee handbook

A is correct. Standards of conduct outline the minimally acceptable behaviors expected of a member of a societal group. The code of ethics serves as a general guide for how community members should act. B is incorrect because a code of ethics does not outline the minimally acceptable behaviors expected of its societal members, it serves as a general guide for how community of members should act. C is incorrect because a firm's employee handbook does not outline the minimally acceptable behaviors expected of its societal members, it outlines the expected behavior of the firm's employees.

Q. The CFA Institute Code of Ethics and Standards of Professional Conduct are most likelydesigned to foster and reinforce a culture of: A responsibility and professionalism. B regulatory compliance. C service to the firm.

A is correct. The CFA Institute Code of Ethics and Standards of Professional Conduct are designed to foster and reinforce a culture of responsibility and professionalism. The Code and Standards apply to all members and candidates regardless of title, position, occupation, geographic location, or specific situation, and they apply to all professional activities of investment professionals. B is incorrect because the CFA Institute Code of Ethics and the Standards of Professional Conduct are not designed to foster and reinforce a culture of regulatory compliance. C is incorrect because the CFA Institute Code of Ethics and the Standards of Professional Conduct are not designed to foster and reinforce a culture of service to the firm.

Q. In order to achieve compliance with GIPS Standards, it is recommended that firms: A adopt the broadest, most meaningful definition of the firm. B provide existing clients a compliant presentation applicable to their portfolio, at a minimum of a bi-annual basis. C define the firm by including all geographical offices operating under the same firm name.

A is correct. The Fundamentals of Compliance recommend that firms should adopt the broadest, most meaningful definition of the firm. B is incorrect because firms are recommended to provide each client, on an annual basis, a compliant presentation of the composite in which the client's portfolio is included. C is incorrect because the scope of the definition should include all geographical offices operating under the same brand name regardless of the actual name of the individual investment management company.

Q. To claim compliance with the GIPS standards, a firm is required to: A adhere to certain calculation methodologies. B conduct an independent third-party verification of its claim of compliance. C perform periodic internal compliance checks of its investment performance process.

A is correct. The GIPS standards require firms to adhere to certain calculation methodologies and to make specific disclosures along with the firm's performance. B is incorrect because firms may choose (but are not required) to have an independent third-party verification to claim compliance with the GIPS standards. Verification is merely a recommendation of the GIPS standards. Being verified is considered best practice. C is incorrect because the GIPS standards strongly encourage (but do not require) firms to perform periodic internal compliance checks of their investment performance process. Internal compliance checks do instill confidence in the validity of the performance presented as well as in the claim of compliance.

Q. Which of the following statements related to why the GIPS standards were created is least likelycorrect? GIPS standards were created to: A provide clients certainty in what is presented and allow them to make reasonable comparisons. B identify a set of ethical principles for firms to follow in calculating and presenting historical investment results. C establish a standardized, industry wide approach for investment firms to follow.

A is correct. The GIPS standards were created to ensure fair representation and full disclosure of investment performance, not to provide certainty in what is presented. B is incorrect because this is a correct statement as to why the GIPS standards were created. C is incorrect because this is a correct statement as to why the GIPS standards were created.

Q. Which of the following situations most likely helps to explain why the GIPS standards were created? A Firms only including top performing funds to represent their performance history. B Asset managers including the performance of all portfolios including those no longer managed in their performance history. C Consistency amongst fund managers when making investment performance presentations.

A is correct. The GIPS standards were created to help prevent misleading practices such as Representative Accounts, whereby firms select top-performing portfolios to represent the firm's overall investment results for a specific mandate. B is incorrect because by including all portfolios a manager no longer manages, any Survivorship Bias is eliminated. Survivorship Bias is a misleading practice that the GIPS standards aim to eliminate. C is incorrect because by having consistent reporting styles for performance measurement between asset managers, valid comparisons are easier for the client and potential client to obtain. This was one of the objectives of the GIPS standards.

Q. The most important factor in promoting ethical decision making among an investment firm's employees is: A a strong culture of integrity by the firm's senior management. B adoption of a code of ethics that clearly defines the firm's ethical principles. C the investment professional's natural desire to do the right thing.

A is correct. The single most important factor in promoting ethical behavior within an investment firm is done by the development, maintenance, and demonstration of a strong culture of integrity by the firm's senior management. B is incorrect because while adopting a code that clearly lays out the ethical principles that guide the thought processes and conduct the firm expects of its employees, a code of ethics alone is insufficient. C is incorrect because while an investment professional's natural desire to do the right thing can be reinforced by the firm's culture of integrity, it is not the single most important factor in promoting ethical behavior.

Q. Which of the following is least likely part of the CFA Institute Standards of Professional Conduct, Standard V(B)-Communication with Clients and Prospective Clients? Members and candidates must: A make reasonable efforts to ensure that when communicating investment performance information it is fair, accurate, and complete. B disclose to clients and prospective clients significant limitations and risks associated with the investment process. C distinguish between fact and opinion in the presentation of investment analysis and recommendations.

A is correct. The statement, "When communicating investment performance information, Members and Candidates must make reasonable efforts to ensure that it is fair, accurate, and complete." can be found in The CFA Institute Standards of Professional Conduct, Standard III-Duties to Clients (D) Performance Presentation. It is not part of Standard V-Investment Analysis, Recommendations, and Actions (B) Communication with Clients and Prospective Clients. B is incorrect because the statement, "Members and Candidates must disclose to clients and prospective clients significant limitations and risks associated with the investment process" can be found in The CFA Institute Standards of Professional Conduct, Standard V-Investment Analysis, Recommendations, and Actions (B) Communication with Clients and Prospective Clients. C is incorrect because the statement, "Members and Candidates must distinguish between fact and opinion in the presentation of investment analysis and recommendations" can be found in The CFA Institute Standards of Professional Conduct, Standard V-Investment Analysis, Recommendations, and Actions (B) Communication with Clients and Prospective Clients.

Which of the following categories completely represents an ethical principle of CFA Institute as outlined in the Standards of Practice Handbook? A Individual professionalism B Responsibilities to clients and employers C Ethics involved in investment analysis and recommendations

A is correct. Within the Standards of Practice Handbook, CFA Institute addresses ethical principles for the profession, including individual professionalism; responsibilities to capital markets, clients, and employers; ethics involved in investment analysis; recommendations, and actions; and possible conflicts of interest. B is incorrect because it does not include responsibilities to capital markets. C is incorrect because the ethical principles not only address ethics involved in investment analysis and recommendations but also address actions.

Q. Quinn sat for the Level III CFA exam this past weekend. He updates his resume with the following statement: "In finishing the CFA Program, I improved my skills related to researching investments and managing portfolios. I will be eligible for the CFA charter upon completion of the required work experience." A Quinn violated the Code and Standards by claiming he improved his skills through the CFA Program. B Quinn violated the Code and Standards by incorrectly stating that he is eligible for the CFA charter. C Quinn did not violate the Code and Standards with his resume update.

Answer B is correct. According to Standard VII(B)-Reference to CFA Institute, the CFA Designation, and the CFA Program, Quinn cannot claim to have finished the CFA Program or be eligible for the CFA charter until he officially learns that he has passed the Level III exam. Until the results for the most recent exam are released, those who sat for the exam should continue to refer to themselves as "candidates." Thus, answer C is incorrect. Answer A is incorrect because members and candidates may discuss areas of practice in which they believe the CFA Program improved their personal skills.

Q. A former hedge fund manager, Jackman, has decided to launch a new private wealth management firm. From his prior experiences, he believes the new firm needs to achieve US$1 million in assets under management in the first year. Jackman offers a $10,000 incentive to any adviser who joins his firm with the minimum of $200,000 in committed investments. Jackman places notice of the opening on several industry web portals and career search sites. Which of the following is correct according to the Code and Standards? A A member or candidate is eligible for the new position and incentive if he or she can arrange for enough current clients to switch to the new firm and if the member or candidate discloses the incentive fee. B A member or candidate may not accept employment with the new firm because Jackman's incentive offer violates the Code and Standards. C A member or candidate is not eligible for the new position unless he or she is currently unemployed because soliciting the clients of the member's or candidate's current employer is prohibited.

Answer C is correct. Standard IV(A)-Loyalty discusses activities permissible to members and candidates when they are leaving their current employer; soliciting clients is strictly prohibited. Thus, answer A is inconsistent with the Code and Standards even with the required disclosure. Answer B is incorrect because the offer does not directly violate the Code and Standards. There may be out-of-work members and candidates who can arrange the necessary commitments without violating the Code and Standards.

Q. Firms claiming GIPS compliance must make every reasonable effort to provide a compliant presentation to which of the following? A Existing clients B Prospective clients C Both existing and prospective clients

B is correct because GIPS standards (0.A.9) state "firms must make every reasonable effort to provide a compliant presentation to all prospective clients." As long as a prospective client has received a compliant presentation within the previous 12 months, the firm has met this requirement. It is a GIPS recommendation, not a requirement, that all clients receive a compliant presentation on an annual basis (0.B.4). A is incorrect because firms are not required to provide a complaint presentation to existing clients, only prospective clients. However, it is a recommendation that existing clients receive at least annually a compliant presentation. C is incorrect because firms are not required to provide a complaint presentation to existing clients, only prospective clients. However, it is a recommendation that existing clients receive at least annually a compliant presentation.

Q. Kazuya Kato, CFA, is a widely followed economist at a global investment bank. When Kato opines on economic trends, markets react by moving stock valuations considerably. When Kato receives information of a temporary oversupply of rare earth metals, he issues a forecast that price trends for rare earth metals will be down significantly on a long-term basis. Kato also secretly sells his report to a widely followed Internet site. Prior to issuing this forecast, Kato emailed all portfolio managers at his bank with a copy of his report indicating that his opinion would be reversed shortly so there will be trading opportunities. Kato least likely violated which of the following CFA Institute Code of Ethics and Standards of Professional Conduct? A Market Manipulation. B Priority of Transactions. C Additional Compensation Arrangements.

B is correct because Kato exaggerated the potential for negative price movement with rare earth metals and violated Standard II(B)-Market Manipulation by aiming to profit on the volatility created by his actions. Standard II(B) requires that members and candidates uphold market integrity by prohibiting market manipulation. Market manipulation includes the dissemination of false or misleading information and transactions that deceive or would be likely to mislead market participants by distorting the price-setting mechanism of financial instruments. Standard IV(B)-Additional Compensation Arrangements was violated when he sold his report to the internet site. Standard VI(B)-Priority of Transactions has not been violated as it relates to investment transactions for clients and employers having priority over Member or Candidate transactions. A is incorrect because Kato exaggerated the potential for negative price movement with rare earth metals and violated Standard II(B)-Market Manipulation by aiming to profit on the volatility created by his actions. Standard II(B) requires that members and candidates uphold market integrity by prohibiting market manipulation. Market manipulation includes the dissemination of false or misleading information and transactions that deceive or would be likely to mislead market participants by distorting the price-setting mechanism of financial instruments. C is incorrect because Standard IV(B)-Additional Compensation Arrangements was violated when he sold his report to the internet site.

Q. Dimitri Kuznetsov, CFA, is a portfolio manager and holds shares of Barnikoff Limited and Matric Ventures in all client portfolios. Both companies have upcoming annual general meetings scheduled for the same day. The management of Barnikoff proposes to change its financial year-end from September to December, while Matric Ventures proposes to enter into a high-risk venture. The proxy voting policy clause in all client investment management agreements managed by Kuznetsov states, "When voting proxies provides a cost benefit to the client, the manager must vote a proxy." With regard to the proxy votes for Matric and Barnikoff, Kuznetsov would least likelyviolate CFA Institute Standard III(A)-Loyalty, Prudence, and Care if he votes: A with management. B only the Matric proxy. C only the Barnikoff proxy.

B is correct because Standard III(A)-Loyalty, Prudence, and Care states that it is a member or candidate's duty to vote proxies on behalf of clients in an informed and responsible manner. However, if a cost-benefit analysis shows voting all proxies may not benefit the client, voting all proxies may not be necessary. The member or candidate is responsible for informing all clients if this is the policy of the fund manager. The member or candidate must take steps to disclose this proxy voting policy to clients. Voting the Barnikoff proxy does not appear to offer a benefit because the issue is not of a critical nature, but voting the proxy for Matric involves a material issue and is a benefit that should be voted on. A is incorrect because Standard III(A)-Loyalty, Prudence, and Care states that it is a member or candidate's duty to vote proxies on behalf of clients in an informed and responsible manner. A manager must not blindly vote with management without first considering the impact of the issue at hand and its benefit to the client. C is incorrect because while Standard III(A)-Loyalty, Prudence, and Care states that it is a member or candidate's duty to vote proxies on behalf of clients in an informed and responsible manner, if a cost-benefit analysis shows voting all proxies may not benefit the client, voting all proxies may not be necessary.

Q. Heidi Katz is a CFA candidate and an analyst at a pension consulting firm. Her father is a major shareholder and managing director at Saturn Partners, a large hedge fund. When assisting in an alternative manager search for a pension client, Katz plans to recommend Saturn's market-neutral strategy because she feels it meets all of the pension plan's criteria. Given this situation, the best course of action for Katz is to: A not present this strategy to the client and recommend another strategy. B disclose the potential conflict to the pension client when discussing this recommendation. C disclose the potential conflict to her employer and follow their guidance regarding disclosure of her relationship to the client.

B is correct because Standard VI(A) requires disclosure of conflicts but does not prohibit members from making recommendations as long as the potential conflicts are appropriately disclosed. A is incorrect because if Katz believes the Saturn strategy is the best available choice she can make this recommendation, but she must disclose the relationship with her father's fund. C is incorrect because even if her employer guides Katz not to disclose a potential conflict, she must still disclose any reasonable influences on her objectivity when making a recommendation to a client or prospective client.

Q. Colleen O'Neil, CFA, manages a private investment fund with a balanced global investment mandate. Her clients insist that her personal investment portfolio replicate the investments within their portfolio to ensure them that she is willing to put her money at risk. By undertaking which of the following simultaneous investment actions for her own portfolio would O'Neil most likely be in violation of Standard VI(B)-Priority of Transactions? A Sale of a listed US blue chip value stock. B Participation in a popular frontier market IPO. C Purchase of a UK government bond in the primary market.

B is correct because Standard VI(B)-Priority of Transactions dictates that members and candidates give their clients and employer priority when making personal investment transactions. Even when clients allow or insist the manager invest alongside them, the manager's transactions must never adversely affect the interests of the clients. A popular or "hot" IPO in a frontier market is likely to be oversubscribed. In such cases, Standard VI(B) dictates that the manager should not participate in this event to better ensure that clients would have a higher probability of getting their full subscription allotment, even though clients have allowed or dictated she do so. A is incorrect because the clients are unlikely be harmed by the manager also selling a US blue chip value stock in a stable market as the liquidity of the stock is likely to be large enough that a simultaneous sale would not negatively impact on the price of the share. C is incorrect because the volume of UK government bonds offered through a primary market is likely to be large and at a fixed price based on the auction outcome. O'Neil's bid would, however, need to be the same as her clients' bids.

Q. Norman Bosno, CFA, acts as an outside portfolio manager to a Sovereign Wealth Fund. Raphel Palmeti, a Fund official, approaches Bosno to interest him in investing in Starlite Construction Company. He tells Bosno if he approves a two million dollar investment in Starlite by the Fund, Bosno will receive a "bonus" that will make him wealthy. Palmeti also adds if Bosno decides not to invest, he will lose the Fund account. After doing a quick and simple analysis, Bosno determines the investment is too risky for the Fund. If Bosno agrees to make the investment, what Standard isleast likely to be violated? A Loyalty, Prudence, and Care B Diligence and Reasonable Basis C Additional Compensation Arrangements

B is correct because despite Bosno undertaking a quick and simple analysis to determine the investment would be too risky for the Sovereign Wealth Fund doesn't necessarily mean he was not diligent and did not have a reasonable basis for making that determination. A is incorrect because Bosno has a duty to ensure loyalty, prudence, and care to his client, the Sovereign Wealth Fund, not the Fund Official. The Fund's interests must come before the Official's, Bosno's, or his company's. C is incorrect because the Standard Duties to Employers-Additional Compensation Arrangements calls for a member or candidate to not accept gifts or benefits that compete with or might reasonably be expected to create a conflict of interest with their employer's interests unless they obtain written consent from all parties involved prior to receiving the compensation.

Q. Bob White is a new CFA charterholder and he is updating his resume and company biography (bio) to reflect this accomplishment. In his bio, he states that he successfully passed all three CFA exams in three consecutive years. On his resume he adds the following line: "CFA, 2013, CFA Society of Pittsburgh". Are either his bio or his resume in violation of the Standards regarding referencing the CFA designation and program? A No. B Yes, his resume is incorrect. C Yes, both his bio and his resume are in violation of the Standards.

B is correct because his resume should read CFA, 2013, CFA Institute. The resume is incorrect because it lists the CFA Society of Pittsburgh instead of the CFA Institute as the organization associated with the CFA designation. A is incorrect because his resume is wrong. C is incorrect because stating that he passed the three exams in three years is simply a statement of fact (assuming it is true) and permissible.

Q. Marc Davidson, CFA, works as a trust specialist for Integrity Financial. On his own time, Davidson starts a part time consulting business providing advice to Trustees for a fee. Since this is only part time work, he doesn't inform Integrity of the consulting business. Davidson asks his assistant to compile a list of Integrity's clients and their contact information. The following month, Davidson is offered a similar role at Integrity's largest competitor, Legacy Trust Services, Inc. After he begins working at Legacy, his new manager arranges for him to meet with a number of prospective clients, many of whom are clients of Integrity. After meeting with Davidson, a number of former Integrity clients decide to transfer their business to Legacy. Did Davidson's action violate the Code and Standards? A No. B Yes, Davidson's part time consulting business is a violation of the Standards. C Yes, both Davidson's part time consulting business and his meetings with Integrity clients are a violation of the Standards.

B is correct because members and candidates are required to disclose any compensation arrangement to their employers that involves performing tasks or services that their employers can charge for. Disclosure is required even if the activities occur during non-work hours. C is incorrect because being hired by a competing firm does not constitute a violation of Standard IV(A). In addition, Davidson is not utilizing confidential information from Integrity to solicit former clients. Although Davidson had a list of client contacts prepared while at Integrity, his new employer arranges the meetings. A is incorrect because his consulting business is a violation of Standard IV(A).

Q. Praful Chandarana, CFA, is starting a new business to offer investment consulting services to pension fund trustees in response to a new regulation that requires all pension fund Investment Policy Statements (IPS) to be reviewed and approved by an independent CFA charterholder. Prior to starting the new business, he meets with the pension fund regulator to clarify if the CFA charterholder undertaking the IPS review should be a licensed financial advisor by the capital markets regulator. The capital markets regulator requires and grants licenses to those giving investment advice to clients. The pension regulator states that they do not require the CFA charterholder to hold a financial advisor's license, despite financial-related advice being given to the pension funds during any IPS review. Chandarana therefore starts his new business to undertake IPS reviews without obtaining a financial advisor's license from the capital markets regulator. Subsequently, when clients of his former employer contact him he informs them of his new company and the services he offers. Does Chandarana most likely violate the CFA Code and Standards? A No. B Yes, with regard to Professionalism. C Yes, with regard to Duties to Employer.

B is correct because the CFA Code of Ethics requires Chandarana to uphold the rules governing financial advisors. However, he failed to do so in the absence of obtaining a financial advisor's license. The CFA Standard I(A)-Knowledge of the Law states that when rules or regulations are in conflict, members must comply with the more strict law, in this case the requirement for financial advisors to be licensed. Chandarana is not restricted from speaking with clients of his old employer by Duties to Employer Standard IV(A)-Loyalty. A is incorrect because Chandarana failed to obtain a financial advisor's license. The CFA Code of Ethics requires Chandarana to uphold the rules governing capital markets. The CFA Standard I(A)-Knowledge of the Law states that when rules or regulations are in conflict, members must comply with the more strict law, in this case the requirement for financial advisors to be licensed. C is incorrect because Chandarana is not restricted from speaking with clients of his old employer by Duties to Employer Standard IV(A)-Loyalty. Chandarana did not contact the old employer's clients; they contacted him. He did not use the old employer's contact list. In addition, he is able to inform the clients of his new business after he has left the service of his old employer.

Q. William Wong, CFA, is an equity analyst with Hayswick Securities. Based on his fundamental analysis, Wong concludes that the stock of a company he follows, Nolvec Inc., is substantially undervalued and will experience a large price increase. He delays revising his recommendation on the stock from "hold" to "buy" to allow his brother to buy shares at the current price. Wong is least likely to have violated the CFA Institute Standards of Professional Conduct related to: A duty to clients. B reasonable basis. C priority of transactions.

B is correct because there is nothing to suggest that Wong does not have a reasonable basis for his conclusion related to Nolvec [Standard V(A)]. A is incorrect because by delaying the revision of his recommendation so that his brother can buy shares at a lower price, he has violated the CFA Institute Standards relating to duty to clients [Standard III(A), Standard VI(B)]. C is incorrect because by delaying the revision of his recommendation so that his brother can buy shares at a lower price, he has violated the CFA Institute Standards relating to priority of transactions [Standard III(A), Standard VI(B)].

Q. Atlantic Capital Management has access to a limited number of shares in a popular new issue expected to be oversubscribed. Atlantic's portfolio managers have determined the issue to be a prudent addition within Atlantic's developing growth equity strategy. A number of the firm's investment professionals have family-member accounts that are managed to the developing growth strategy. Which of the following allocation options most likely adheres to the Code and Standards? Atlantic should allocate the shares: A to family-member accounts only after non-family accounts have been allocated their shares. B on a prorated basis across all developing growth accounts, including the family-member accounts. C on a prorated basis across all developing growth accounts, excluding the family-member accounts.

B is correct because under Standard III(B) if an investment professional's family member accounts are being managed similarly to other clients of the firm, they should not be excluded from buying such shares as they are considered clients despite their familial relationships. A is incorrect because as stated above, the family member accounts are being managed in the same strategy as other client accounts and do not need to be treated differently. C is incorrect because as stated above, the family member accounts are being managed in the same strategy as other client accounts and do not need to be treated differently.

Q. An investment fund manager has a finance degree and over 20 years of experience working for a top-ranking asset management firm. Based only on this information, could the investment fund manager most likely claim to be part of a profession? A Yes, a person working in this industry requires specialized knowledge and skills. B No. C Yes, as part of the industry, he is providing a service to others.

B is correct. For the investment fund manager to claim he is part of a profession, the activity must be based on specialized knowledge and skills, must include service to others, and must be practiced by members who share and agree to adhere to a common code of ethics. Investment management is based on providing service to a firm's clients and also requires specialized knowledge and skills, but it would not be considered a profession unless there exists a common code of ethics among similar investment fund managers. A is incorrect because for the fund manager to claim he is part of a profession the activity must be based on a specialized knowledge and skills, service to others, and practiced by members who share and agree to adhere to a common code of ethics. C is incorrect because for the fund manager to claim he is part of a profession the activity must be based on a specialized knowledge and skills, service to others, and practiced by members who share and agree to adhere to a common code of ethics.

Q. The relationship between an investment professional and her clients is predominately based on trust, most likely because the investment professional: A sells or gives advice related to tangible products and services. B has specialized knowledge, leading her to have more power. C has access to information on which to base investment decisions.

B is correct. Investment professionals have access to specialized knowledge and often have better access to information that gives them an advantage and more power than the client. Clients expect their advisers to use this knowledge and information to their benefit, not for the investment professional to take advantage of them. A is incorrect because investment professionals sell or give advice on intangible products, not tangible products, so trust is harder for the client to give. C is incorrect because investment professionals sometimes have access to more information on which to make investment decisions, however, it is not unlimited.

The Duties to Employers standard states that members and candidates must not: A accept any gifts that might compromise their independence and objectivity. B deprive their employer of their skills and abilities as related to their employment. C accept compensation competing with their employer's interest and with the written consent of all parties involved.

B is correct. The IV.A Loyalty section of the Duties to Employers standard states that members and candidates cannot deprive their employer of the advantage of their skills and abilities in matters related to their employment. A is incorrect because accepting gifts that might compromise a member or candidate's independence and objectivity is addressed by Standard I.B Independence and Objectivity, a section of Professionalism, not under Standard IV Duties to Employers. C is incorrect because IV.B Additional Compensation Arrangements, part of the Duties to Employers standard, permits members and candidates to accept compensation that competes with their employer's interest if they obtain written consent from all parties involved.

Based on the Conflicts of Interest standard, members and candidates must: A disclose, as required by law, those conflicts interfering with their professional duties. B disclose, as appropriate, any benefit paid to others for the recommendation of products. C seek employer approval before prioritizing their investment transactions over those clients.

B is correct. The VI.C Referral Fees section of the Conflicts of Interest standard requires members and candidates to disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services. A is incorrect because the VI.A Disclosure of Conflicts section of the Conflicts of Interest standard requires members and candidates to make full and fair disclosure of all matters (not limited to legal requirements) that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients, and employer. C is incorrect because the VI.B Priority of Transactions section of the Conflicts of Interest standard requires members and candidates to give priority to investment transactions for clients and employers versus those in which a member or candidate is the beneficial owner. This requirement is not waived by an employer's approval.

Which is an example of an activity that may be legal but that CFA Institute considers unethical? A Making legally required disclosures in marketing materials B Trading while in possession of material nonpublic information C Disclosure by an employee of his or her own company's dishonest activity

B is correct. The investment industry has examples of conduct that may be legal but that CFA Institute considers unethical. Trading while in possession of material nonpublic information is not prohibited by law worldwide and can, therefore, be legal, but CFA Institute considers such trading unethical.

Q. Florence Zuelekha, CFA, is an equity portfolio manager at Grid Equity Management (GEM), a firm specializing in commodities. Zuelekha, who previously focused on alternative energy, recently attends her first commodity conference, sponsored in large part by GEM. Independent industry experts argued that commodities would increase in value and recommended that investors hold at least 10% of their portfolio assets in commodities based on consistent increases in their values over the previous two years. Without doing any additional research, Zuelekha recommends to all her clients an immediate allocation of 5% of their portfolio into commodities. Over the next few weeks, Zuelekha moves her own portfolio to a 10% commodity allocation. Which of the CFA Standards did Zuelekha most likely violate? A Priority of Transactions. B Independence and Objectivity. C Diligence and a Reasonable Basis.

C is correct as Standard (V)-Diligence and a Reasonable Basis requires members and candidates to have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action. Relying solely upon attendance at a one-day conference listening to industry experts to make an investment recommendation, especially when the industry experts have based their recommendations upon price data only, would not meet the requirements of the Code and Standards with regard to Diligence and a Reasonable Basis. A is incorrect because there has not been a violation of this standard. B is incorrect as even though the portfolio manager has allocated a portion of her portfolio to an asset class she recommended for clients there has not been a violation of this Standard since the manager has not front run any of her clients.

Q. Teresa Avila, CFA, is a micro cap investment analyst at a hedge fund. The fund requires Avila to hold any securities she recommends for the fund in her own account as well. Because Avila has such a small account, whenever she trades for her own portfolio she combines the transactions with those of the hedge fund so she is sure to have her account aligned with the fund. Has Avila most likely violated any CFA Institute Standards of Professional Conduct? A No. B Yes, related to Misconduct. C Yes, related to Priority of Transactions.

C is correct as Standard VI(B) requires that investment transactions for clients and employers have priority over transactions in which members have beneficial ownership. By executing her own accounts transactions with those of the hedge fund the analyst has violated this Standard as micro cap securities can be thinly traded and easily influenced by changes in the volume of activity. So the analyst may benefit when she combines her transactions with the hedge funds and she should let the fund execute its orders before she makes changes to her account. A is incorrect because the Priority of Transactions Standard has been violated. B is incorrect because this Standard has not been violated.

Q. David Bravoria, CFA, is an independent financial advisor for a high-net-worth client with whom he had not had contact in more than two years. During a recent brief telephone conversation, the client states that he wants to increase his risk exposure. Bravoria subsequently recommends and invests in several high-risk venture capital funds on behalf of the client. Bravoria continues, as he has done in the past, to send to his client monthly, detailed, itemized investment statements. Did Bravoria most likely violate any CFA Standards? A No. B Yes, with regard to investment statements. C Yes, with regard to purchasing venture capital funds.

C is correct because Bravoria violated Standard III(A)-Loyalty, Prudence, and Care as he had not updated his client's profile in more than two years and thus should not have made further investments, particularly in high-risk investments, until such time as he updated the client's risk and return objectives, financial constraints, and financial position. Bravoria provided his client with investment statements more frequently than that which is required, i.e., quarterly, so was not in violation of regular account information. A is incorrect because Bravoria violated Standard III(A)-Loyalty, Prudence, and Care. B is incorrect because Bravoria provided his client with investment statements more frequently than required, i.e., quarterly.

Q. Alexandra Smirnov, CFA, is a pension consultant to the Springwell Pension Fund. After reviewing Springwell's three-year performance presentation showing the fund's underperformance relative to its investment objectives and agreed benchmarks, Smirnov recommends that the fund hire new asset managers. Smirnov proposes that the fund hire Newday Managers on the basis of recent meetings she has had with the firm. Lengthy discussions at these meetings included Newday's investment strategy, its suitability to manage pension funds, its ability to adhere to its stated strategy, the firm's historical investment performance, and its adoption of the CFA Institute Code and Standards. Smirnov turned down Newday's offer of an introduction fee when recommending its services, but did not inform Springwell trustees of this offer. Which of the following CFA Institute Standards does Smirnov most likely violate? A Referral Fees B Loyalty, Prudence, and Care C Diligence and Reasonable Basis

C is correct because Smirnov violated Standard V(A)-Diligence and Reasonable basis because she recommended an external advisor without first understanding the adviser's compliance and internal control procedures. She was correct in seeking to understand the proposed fund manager's code of ethics, quality of performance returns, and ability to adhere to its stated investment strategy, but to complete her work she also needed to perform due diligence about the firm's compliance and internal control procedures. A is incorrect because Smirnov refused the referral fee [Standard VI(C)-Referral Fees], so she did not need to inform her client of this matter. There is also no indication that she did not act with reasonable care and prudent judgment when recommending a change in asset managers to meet the objectives of the client. B is incorrect because there is no indication that she did not act with reasonable care and prudent judgment when recommending a change in asset managers to meet the objectives of the client. Nor is it evident that she had any conflicts of interest when recommending a particular manager, especially because she refused the referral fee.

Q. Jack Steyn, CFA, recently became the head of the trading desk at a large investment management firm that specializes in domestic equities. While reviewing the firm's trading operations he notices that clients give discretion to the manager to select brokers on the basis of their overall services to the management firm. Despite the client directive, Steyn would most likelyviolate Standard III(A)-Loyalty, Prudence, and Care if he pays soft commissions for which of the following services from the brokers? A Equity research reports B Investment conference attendance C Database services for offshore investments

C is correct because Standard III(A)-Loyalty, Prudence, and Care stipulates that the client owns the brokerage. Therefore, members and candidates are required to only use client brokerage to the benefit of the clients (soft commissions policy). As the firm specializes in domestic equity, an offshore investment database service would not benefit clients. A is incorrect because it is likely that equity research reports would benefit all clients. B is incorrect because it is likely that attendance at an investment conference could lead to ideas and subsequent investment actions that would benefit all clients.

. Jean-Luc Schlumberger, CFA, is an independent research analyst providing equity research on companies listed on exchanges in emerging markets. He often incorporates statistical data he obtains from the web sites of the World Bank and the central banks of various countries into the body of his research reports. While not indicated within the reports, whenever his clients ask where he gets his information he informs them the information is in the public domain but he doesn't keep his own records. When the clients ask for the specific web site addresses he provides the information. Which Standard has Schlumberger least likely violated? A Record Retention B Misrepresentation C Performance Presentation

C is correct because Standard III(D)-Performance Presentation pertains to investment performance information, and there is no indication any violation has occurred. A is incorrect because under Standard V(C)-Record Retention, Members and Candidates must develop and maintain appropriate records to support their investment analyses, recommendations, actions, and other investment-related communications with clients and prospective clients. B is incorrect because Schlumberger has plagiarized the information he obtained from the websites of the World Bank and the various central banks by not quoting the sources within his research reports. This is a violation of Standard I(C)-Misrepresentation.

Q. Abe Seneca, CFA, supervises a team of analysts who create index funds for institutional investors. When Seneca makes sales demonstrations without his colleagues to potential clients simulating the fund's performance, the scenarios he prepares show outcomes based on assumptions reflecting upside bias and positive risk assessments. Gail Tremblay, CFA, an analyst in Seneca's group, observes that the actual performance of these index funds is less than indicated in the scenario outcomes shown in the sales meetings. Seneca least likely violated which of the following CFA Institute Standards of Professional Conduct? A Loyalty B Performance Presentation C Responsibilities of Supervisors

C is correct because Standard IV(C)-Responsibilities of Supervisors has not been violated as Seneca is not responsible for the supervision of any employees when he makes sales demonstrations to clients because he prepared the material himself. Seneca violated Standard IV(A)-Loyalty by misleading potential investors on the performance they might achieve with the index funds, thereby causing reputational risk to his employer. Seneca has also violated Standard III(D)-Performance Presentation because the sales demonstrations he conducts do not provide a fair and accurate representation of performance clients are likely to experience. A is incorrect because Seneca understates risks and only includes positive assumptions in his sales presentations in order to achieve higher simulated performance. This is a violation of Standard IV(A)-Loyalty because he is causing reputational risk to his employer by misleading potential investors on the performance they might achieve with the index funds. Standard IV(A) requires members and candidates to protect the interests of their firm by refraining from any conduct that would injure the firm. B is incorrect because Seneca has violated Standard III(D)-Performance Presentation because the sales demonstrations he conducts do not provide a fair and accurate representation of performance clients are likely to experience.

Q. On a flight to Europe, Romy Haas, CFA, strikes up a conversation with a fellow passenger, Vincent Trujillo. When Trujillo learns that Haas is in the investment profession, he asks about the CFA designation. Haas tells him the following about the CFA designation: Statement 1: Individuals who have completed the CFA Program have the right to use the CFA designation. Statement 2: The CFA designation is globally recognized, which is why I use it as part of my firm's name. Statement 3: CFA charterholders must satisfy membership requirements to continue using the designation. In explaining the use of the CFA designation, Haas least likely violated the CFA Institute Standards of Professional Conduct concerning which of the following statements? A Statement 1 B Statement 2 C Statement 3

C is correct because according to Standard VII(B)-Reference to CFA Institute, the CFA Designation, and the CFA Program this is an accurate statement concerning the CFA designation. A is incorrect because according to Standard VII(B)-Reference to CFA Institute, the CFA Designation, and the CFA Program completion of the CFA Program is not the only requirement for use of the CFA designation as individuals must also have the required years of acceptable work experience. B incorrect because according to Standard VII(B)-Reference to CFA Institute, the CFA Designation, and the CFA Program the designation must not be used as part of a firm's name.

Q. Benefits of compliance with the CFA Institute Global Investment Performance Standards (GIPS) least likely include: A strengthening of internal controls. B participation in competitive bidding. C elimination of in-depth due diligence for investors.

C is correct because compliance with the GIPS standards does not eliminate the need for in-depth due diligence on the part of the investor. A is incorrect because compliance with GIPS standards may strengthen internal controls. B is incorrect because compliance with GIPS standards enables a firm to participate in competitive bids against other compliant firms throughout the world.

Q. Gregor Pavlov, CFA, is a fund manager working for the general partner of a new private equity fund. Pavlov includes in the fund marketing material his performance history from his previous employer. He received permission from his former employer to take his historical recommendations and the supporting research reports he used to make those recommendations. Did Pavlov most likely violate the CFA Institute Standards? A No B Yes, with regard to Loyalty C Yes, with regard to Record Retention

C is correct because even though Pavlov had his former employer's permission to take his performance record and supporting research reports with him, he does not have the underlying performance data to support those historical recommendations and is therefore most likely in violation of Standard V(C)-Record Retention. Pavlov had the permission of his employer to take his historical performance record and research reports with him when he left the firm so he is not in violation of Standard IV(A)-Loyalty. A is incorrect because even though Pavlov had his former employer's permission to take his performance record and research reports with him, he does not have the underlying performance data to support those historical return calculations and therefore is most likely in violation of Standard V(C)-Record Retention. B is incorrect because Pavlov had the permission of his employer to take his historical performance record and research reports with him when he left the firm so he is not in violation of Standard IV(A)-Loyalty.

Q. According the GIPS standards, for periods beginning on or after 1 January 2011, the aggregate fair value of total firm assets most likely includes all: A fee-paying discretionary accounts. B fee- and non-fee-paying discretionary accounts. C fee- and non-fee-paying discretionary and non-discretionary accounts.

C is correct because for periods beginning on or after 1 January 2011, total firm assets must include the aggregate fair value of all discretionary and non-discretionary assets managed by the firm. This includes both fee-paying and non-fee-paying portfolios (0.A.13). A is incorrect because with effect from 1 January 2011, Total Firm Assets include the aggregation of the fair value of all discretionary accounts, not just fee-paying discretionary accounts. It also includes non-discretionary accounts. B is incorrect because with effect from 1 January 2011, Total Firm Assets include the fair value of non-discretionary accounts as well as discretionary accounts.

Madeline Smith, CFA, was recently promoted to senior portfolio manager. In her new position, Smith is required to supervise three portfolio managers. Smith asks for a copy of her firm's written supervisory policies and procedures, but is advised that no such policies are required by regulatory standards in the country where Smith works. According to the Standards of Practice Handbook, Smith's most appropriate course of action would be to: A require her firm to adopt the CFA Institute Code of Ethics and Standards of Professional Conduct. B require the employees she supervises to adopt the CFA Institute Code of Ethics and Standards of Professional Conduct. C decline to accept supervisory responsibility until her firm adopts procedures to allow her to adequately exercise such responsibility.

C is correct because if a member cannot fulfill supervisory responsibilities because of the absence of a compliance system or because of an inadequate compliance system, the member should decline in writing to accept supervisory responsibility until the firm adopts reasonable procedures to allow the member to adequately exercise such responsibility [Standard IV(C)]. A is incorrect because these actions will not provide a complete compliance system with which the portfolio manager can adequately exercise her supervisory responsibilities. B is incorrect because these actions will not provide a complete compliance system with which the portfolio manager can adequately exercise her supervisory responsibilities.

Q. Priscilla Moab, CFA, is the director of marketing at Red Lantern Investments. Red's investment approach uses technical and fundamental analysis as well as portfolio construction to minimize risk. Moab plans to market an online investment newsletter to retail clients. Moab decides to let prospective clients have access to Red's buy and sell recommendation list by posting this information on a social media site. The posting also provides information on Red's basic investment process and logic. To avoid violating the CFA Institute Code of Ethics and Standards of Professional Conduct, Moab should most likely: A describe the investment approach in detail. B update investment process changes annually. C indicate that additional information and analysis are available.

C is correct because if recommendations are contained in capsule form (such as a recommended stock list), members and candidates should notify clients that additional information and analysis are available from the producer of the report as required by Standard V(B)-Communication with Clients and Prospective Clients. In this case, a clear statement on the website that more information is available upon request would be required. A is incorrect because Moab's plans for the social media recommendations do not violate Standard V(B)-Communication with Clients and Prospective Clients, so it does not need to describe the investment system in detail. The recommendation outlines the basic process and logic of Red's investment approach and is sufficient enough for clients to understand its limitations or inherent risks. B is incorrect because according to Standard V(B)-Communication with Clients and Prospective Clients, the member or candidate must keep clients and other interested parties informed on an ongoing basis about changes to the investment process, and an annual update may not be sufficient.

Q. While waiting in the business class lounge before boarding an airplane, Becca Msafari, CFA, an equity analyst, overhears a conversation by a group of senior managers, including members of the Board, from a large publicly listed bank. The managers discuss staff changes necessary to accommodate their regional expansion plans. Msafari hears several staff names mentioned. Under what circumstances could Msafari most likely use this information when making an investment recommendation to her clients? A Under no circumstances. B If she does not breach the confidentiality of names of staff. C If the discussed changes are unlikely to affect investor perception of the bank.

C is correct because in order to comply with the Code and Standards, a member or candidate cannot use material nonpublic information when making investment recommendations. The information overheard would not be considered material only if any public announcement of the staff removal would be unlikely to move the share price of the bank, nor would the regional expansion substantially impact the value of the bank. A is incorrect because if the staff under discussion for possible termination are in low-level positions, the information is unlikely to be considered material. B is incorrect because the absence of specific names being mentioned does not necessarily make the information non-material when disclosed to clients prior to any public dissemination.

Q. Jefferson Piedmont, CFA, a portfolio manager for Park Investments, plans to manage the portfolios of several family members in exchange for a percentage of each portfolio's profits. As his family members have extensive portfolios requiring substantial attention, they have requested that Piedmont provide the services outside his employment with Park. Piedmont notifies his employer in writing of his prospective outside employment. Two weeks later, Piedmont begins managing the family members' portfolios. By managing these portfolios, which of the following CFA Institute Standards of Professional Conduct has Piedmont violated? A Conflicts of Interest B Additional Compensation C Both Additional Compensation and Conflicts of Interest

C is correct because members should disclose all potential conflicts of interest, the substantial time involved in managing family accounts, and when engaging in independent practice for compensation should not render services until receiving written consent from all parties [Standard IV(B), Standard VI(A)]. A is incorrect because both standards have been violated. B is incorrect because both standards have been violated.

Q. Mailaka Securities (MS) advertises the use of a "bottom up" investment style in its marketing material. Recently, MS senior management decided to switch to a "top down" approach, citing the fact that it is less labor intensive. All other aspects of the research process are to remain the same. The head of research at MS, Mara Cherogony, CFA, is instructed to supervise the implementation of the new procedures, notify clients of the changes, and revise the text of marketing materials when new material is produced. Which of the following CFA Standards pertaining to Investment Analysis, Recommendations, and Actions is Cherogony least likely in danger of violating? ASupervisory Responsibility B Communication with Clients C Diligence and Reasonable Basis

C is correct because research can still be considered diligent and having a reasonable basis if done using a "top down" research methodology as opposed to a "bottom up" methodology. By not communicating to prospective clients the change in the investment process through the delay in the creation of new marketing material, however, Cherogony violates Standard V(B)-Communication with Clients, which requires members and candidates to disclose to clients and prospective clients the basic format and general principles of the investment processes they use to analyze investments, select securities, and construct portfolios and must promptly disclose any changes that might materially affect those processes. As a supervisor, Cherogony is responsible for ensuring compliance with the Code and Standards. A is incorrect because by delaying the change in the marketing material until the inventory is depleted, there is a possibility that the new investment process policy will not be clearly communicated to prospective clients. As a supervisor, Cherogony is responsible to ensure the compliance with the Code and Standards. B is incorrect because Cherogony violates Standard V, which requires members and candidates to disclose to clients and prospective clients the basic format and general principles of the investment processes they use to analyze investments, select securities, and construct portfolios and must promptly disclose any changes that might materially affect those processes. By delaying the change in the marketing material until the inventory is depleted, there is a possibility that the new investment process policy will not be clearly communicated to prospective clients.

Q. Tamlorn Mager, CFA, is an analyst at Pyallup Portfolio Management. CFA Institute recently notified Mager that his CFA Institute membership was suspended for a year because he violated the CFA Code. A hearing panel also came to the same conclusion. Mager subsequently notified CFA Institute that he does not accept the sanction or the hearing panel's conclusion. Which of the following actions by Mager is most consistent with the CFA Institute Standards of Professional Conduct Program? A Presenting himself to the public as a CFA charterholder. B Providing evidence for his position to an outside arbitration panel. C Using his CFA designation upon expiration of the suspension period.

C is correct because the Designated Officer may impose a summary suspension on a member or candidate, which may be rejected or accepted by the member or candidate. If the member or candidate does not accept the proposed sanction, the matter is referred to a hearing panel composed of DRC members and CFA Institute member volunteers affiliated with the DRC. In this case, the hearing panel also affirmed the suspension decision by the Designated Officer and therefore the member loses the right to use his designation for a one-year period. Upon expiration of the suspension period, the analyst would be able to use his CFA designation. A is incorrect because even though the member or candidate does not accept the proposed sanction, the hearing panel review process has affirmed the original disciplinary action, so the member loses the right to use his designation for a one-year period. The analyst would not be able to continue use of his CFA designation because he disagrees with the sanction. B is incorrect because all members agree to abide by the CFA Institute Code and Standards, and there is no process for adjudication by an outside arbitration panel.

Q. Kirsten Kelso, CFA, is a research analyst at an independent research firm. Kelso is part of a team of analysts who focus on the automobile industry. Recently, Kelso disagreed with two research sell recommendations written by her team even though she felt confident the research process was properly conducted. In a webcast open to all institutional but not retail clients, Kelso states "even though my name is on the sell reports, these stocks are a buy in part because sales and share prices for both auto companies will rise significantly due to strong demand for their vehicles." Kelso's actions would least likely violate which of the following CFA Institute Standards of Professional Conduct? A Fair Dealing B Communication with Clients C Diligence and Reasonable Basis

C is correct because the recommendation is based on a reasonable and adequate research process, so the analyst could follow the research team's opinion, as required by Standard V(A)-Diligence and Reasonable Basis. A is incorrect because the analyst can express her disagreement with the team by documenting her difference of opinion, but Standard III(B)-Fair Dealing requires members and candidates to treat all clients fairly when disseminating investment recommendations or making material changes to prior investment recommendations or when taking investment action. The discussion with institutional clients is inappropriate as the analyst is making selective disclosure. Members and candidates must make every effort to treat all individual and institutional clients in a fair and impartial manner. B is incorrect because the analyst has not separated fact from opinion as required by Standard V(B)-Communication with Clients and Prospective Clients when she makes a verbal buy recommendation on the auto companies.

Q. Charles Mbuwanga, a Level III CFA Candidate, is the Business Development Manager for Sokoza Investment Group, an investment management firm with high-net-worth retail clients throughout Africa. Sokoza introduced listed Kenyan Real Estate Investment Trusts (REITs) to its line of investment products based on new regulations introduced in Kenya so as to diversify its product offering to clients. The product introduction comes after months of researching Kenyan property correlations with other property markets and asset classes in Africa. Sokoza assigns Mbuwanga as part of the sales team in introducing this product to its clients across Africa. Mbuwanga subsequently determines that most of Sokoza's clients' portfolios would benefit from having a small Kenyan property exposure to help diversify their investment portfolios. By promoting the Kenyan REITS for Sokoza's client portfolios as planned, Mbuwanga would least likely violate which of the following Standards? A Suitability B Knowledge of the Law C Independence and Objectivity

C is correct because there is no indication Mbuwanga's recommendation is based on any compensation package based on sales targets as being part of the sales team. If he had a sales target as part of his responsibility to promote the new product, it could be conceived his independence and objectively was in question. Mbuwanga does however seem to be in violation of Standard III(C)-Suitability in that while research with regard to correlation was undertaken, an analysis based on each individual client's return and risk objectives was not done. He may also be in violation of Standard I(A)-Knowledge of Law in that he would need to determine if the Kenyan REIT product is allowable in each of the countries where his clients reside. A is incorrect because while research with regard to correlation was undertaken, an analysis based on each individual clients' return and risk objectives was not done. B is incorrect as the new REIT products are being recommended to all clients based on new regulations introduced in Kenya. Mbuwanga may be in violation of Standard I(A)-Knowledge of the Law depending on the rules and regulations in each of the African countries where his clients reside if those regulations do not allow investments outside of the country and/or in this investment type.

Q. Tonya Tucker, CFA, is a financial analyst at Bowron Consolidated. Bowron has numerous subsidiaries and is actively involved in mergers and acquisitions to expand its businesses. Tucker analyzes a number of companies, including Hanchin Corporation. When Tucker speaks with the CEO of Bowron, she indicates that many of the companies she has looked at would be attractive acquisition targets for Bowron. After her discussion with the CEO, Tucker purchases 100,000 shares of Hanchin Corporation at $200 per share. Bowron does not have any pre-clearance procedures, so the next time she meets with the CEO, Tucker mentions she owns shares of Hanchin. The CEO thanks her for this information but does not ask for any details. Two weeks later, Tucker sees a company-wide email from the CEO announcing Bowron's acquisition of Hanchin for $250 a share. With regards to her purchase of Hanchin stock, Tucker least likely violated the CFA Institute Standards of Professional Conduct concerning: A Loyalty. B Priority of Transactions. C Material Nonpublic Information.

C is correct because there is no indication the analyst had access to material nonpublic information and was in violation of Standard II(A)-Material Nonpublic Information. Specifically, Tucker did not have information concerning any decision by Bowron to acquire Hanchin stock since she is not a part of the decision-making team at Bowron, which determines the companies it plans to take over. The analyst had indicated numerous companies were viable options for takeover, and she did not single out any one company in particular. A is incorrect because even though the company does not have a stock pre-clearance procedure, trading the stock of a company the analyst recommended as an acquisition candidate is an act which violates Standard IV(A)-Loyalty, as she did not give her employer the opportunity to take advantage of her skill/recommendation prior to buying the shares for her own portfolio. B is incorrect because there has been a violation of Standard VI(B)-Priority of Transactions, which requires that investment transactions for clients and employers must have priority over investment transactions in which a Member or Candidate is the beneficial owner despite the fact that there are no stock pre-clearance procedures at Bowron.

Q. Which of the following statements concerning the requirements of GIPS Fundamentals of Compliance is correct? A Firms claiming compliance have full discretion over the dissemination of their compliant presentation. B Firms may claim partial compliance with the standards provided the performance presented is not false or misleading. C The definition of the firm creates defined boundaries whereby total firm assets and the basis for firm-wide compliance are determined.

C is correct. According to Section 0 of the Fundamentals of Compliance, the definition of the firm is the foundation for firm-wide compliance with the GIPS standards and creates defined boundaries whereby total firm assets can be determined. A is incorrect because according to GIPS Provision 0.A.9, to claim compliance with the GIPS standards, firms cannot choose to whom they present a compliant presentation and must make every reasonable effort to provide a compliant presentation to all prospective clients. B is incorrect because according to GIPS Provision 0.A.6, if a firm does not meet all of the requirements of the GIPS standards, it must not represent or make any statements that may indicate partial compliance with the standards.

Q. Under what circumstances could a client possibly win a lawsuit against a financial adviser despite the financial adviser abiding by all regulatory and legal requirements? A The adviser benefiting more from the relationship than the client B The adviser not being subject to a code of ethics C The adviser violating his employer's published code of ethics

C is correct. If the client could prove the firm marketed its code of ethics (i.e., putting the interests of the client first) as a reason to hire the firm and the adviser violated the code, the court may rule in the client's favor. A is incorrect because an adviser can still act in a fiduciary manner while benefiting more than the client. This is particularly true when investment returns are unexpectedly negative and the client pays fees to the adviser. B is incorrect because unethical behavior is not necessarily illegal. However, if the client could prove the firm marketed their code of ethics (i.e., putting the interests of the client first) as a reason to hire the firm and the adviser violated the code, the court may rule in the client's favor.

Q. Teresa Staal, CFA, is an investment officer in a bank trust department. She manages money for celebrities and public figures, including an influential local politician. She receives a request from the politician's political party headquarters to disclose his stock holdings. The request indicates that local law requires the disclosure. What steps should Staal most likely take to ensure she does not violate any CFA Institute Standards of Professional Conduct? A Provide the information and inform her client. B Send the requested documents and inform her supervisor. C Check with her firm's compliance department to determine her legal responsibilities.

C is correct. In order to avoid violating Standard III(E) Staal should determine if applicable securities regulations require disclosing the records before she provides the confidential information concerning her client's investments. A is incorrect as providing the requested information would violate the confidentiality of the client's records. B is incorrect as providing the requested information would violate the confidentiality of the client's records.

A current Code of Ethics principle reads in full, "Promote the integrity: A and viability of the global capital markets." B of and uphold the rules governing capital markets." C and viability of the global capital markets for the ultimate benefit of society."

C is correct. One of the principles in the Code of Ethics was updated to reflect the role that the capital markets have in society as a whole. A is incorrect because it is incomplete, missing the additional language to reflect the role that the capital markets have in society as a whole. B is incorrect because this is the old principle as written in the Code of Ethics, which was recently updated to reflect the role of the capital markets in society as a whole.

The Responsibilities as a CFA Institute Member or CFA Candidate Standard explicitly states a requirement regarding: A loyalty. B responsibility of supervisors. C reference to the CFA Program.

C is correct. The VII.B Reference to CFA Institute, the CFA Designation, and the CFA Program section of the Responsibilities as a CFA Institute Member or CFA Candidate standard explicitly states the appropriate manner to make reference to CFA Institute, CFA Institute membership, the CFA designation, or candidacy in the CFA Program. A is incorrect because Standard VII Responsibilities as a CFA Institute Member or CFA Candidate standard does not refer to loyalty. Loyalty is addressed in two other standards, Standard III.A Loyalty, Prudence, and Care and Standard IV.A Loyalty. B is incorrect because Standard VII Responsibilities as a CFA Institute Member or CFA Candidate standard does not refer to the responsibility of supervisors. The responsibility of supervisors is addressed in Standard IV.C Responsibility of Supervisors.

Q. A regulator who requires financial advisers to merely consider the suitability of a product when making recommendations to their clients would most likely be setting: A both a legal and an ethical standard. B an ethical standard. C a legal standard.

C is correct. The regulator only sets a legal standard when requiring a financial adviser to merely consider suitability when making recommendations to their clients. Requiring advisers to act as fiduciaries would be setting both a legal and an ethical standard; it would require the interests of the client to be above those of the firm or employee. A is incorrect because requiring financial advisers to act as fiduciaries would be setting both a legal and an ethical standard by requiring the interests of the client to be above those of the firm or employee B is incorrect because the regulator is not setting an ethical standard by requiring a financial adviser to consider suitability; they are setting a legal standard.

Q. From the point of view of an investor, unethical behavior by investment professionals can most likely lead to which of the following? A Increased willingness to accept risk B Rise in the demand for investments C Demand for a higher return

C is correct. Unethical behavior erodes and destroys trust. Investors with low levels of trust are less willing to accept risk and, therefore, will likely demand a higher return for the use of their capital. They may also choose to invest elsewhere or to not invest at all. A is incorrect because the loss of trust leads to less willingness to accept risk, not increased willingness to accept risk. B is incorrect because the loss of trust may lead to less demand for investment, not an increase in the demand for investments.

An ethical decision-making framework will most likely: A include a pre-determined, uniform sequence. B focus exclusively on confirmable facts and relationships. C help avoid a decision that has unanticipated ethical consequences.

C is correct. Using an ethical decision-making framework consistently will help you develop sound judgment and decision-making skills and avoid making decisions that have unanticipated ethical consequences. The decision-making process is often iterative, and the decision maker may move between phases of the framework. A decision maker should consider more than confirmable facts and relationships; for example, the decision maker should consider situational influences and personal biases.

One of the discretionary accounts managed by Farnsworth is the Jones Corporation employee profit-sharing plan. Jones, the company president, recently asked Farnsworth to vote the shares in the profit-sharing plan in favor of the slate of directors nominated by Jones Corporation and against the directors sponsored by a dissident stockholder group. Farnsworth does not want to lose this account because he directs all the account's trades to a brokerage firm that provides Farnsworth with useful information about tax-free investments. Although this information is not of value in managing the Jones Corporation account, it does help in managing several other accounts. The brokerage firm providing this information also offers the lowest commissions for trades and provides best execution. Farnsworth investigates the director issue, concludes that the management-nominated slate is better for the long-run performance of the company than the dissident group's slate, and votes accordingly. Farnsworth: A Violated the Standards in voting the shares in the manner requested by Jones but not in directing trades to the brokerage firm. B Did not violate the Standards in voting the shares in the manner requested by Jones or in directing trades to the brokerage firm. C Violated the Standards in directing trades to the brokerage firm but not in voting the shares as requested by Jones.

The correct answer is B. This question relates to Standard III(A)-Loyalty, Prudence, and Care—specifically, a member's or candidate's responsibility for voting proxies and the use of client brokerage. According to the facts stated in the question, Farnsworth did not violate Standard III(A). Although the company president asked Farnsworth to vote the shares of the Jones Corporation profit-sharing plan a certain way, Farnsworth investigated the issue and concluded, independently, the best way to vote. Therefore, even though his decision coincided with the wishes of the company president, Farnsworth is not in violation of his responsibility to be loyal and to provide care to his clients. In this case, the participants and the beneficiaries of the profit-sharing plan are the clients, not the company's management. Had Farnsworth not investigated the issue or had he yielded to the president's wishes and voted for a slate of directors that he had determined was not in the best interest of the company, Farnsworth would have violated his responsibilities to the beneficiaries of the plan. In addition, because the brokerage firm provides the lowest commissions and best execution for securities transactions, Farnsworth has met his obligations to the client in using this brokerage firm. It does not matter that the brokerage firm also provides research information that is not useful for the account generating the commission because Farnsworth is not paying extra money of the client's for that information.

Which of the following statements is correct under the Code and Standards? A CFA Institute members and candidates are prohibited from undertaking independent practice in competition with their employer. B Written consent from the employer is necessary to permit independent practice that could result in compensation or other benefits in competition with a member's or candidate's employer. C Members and candidates are prohibited from making arrangements or preparations to go into a competitive business before terminating their relationship with their employer.

The correct answer is B. Under Standard IV(A)-Loyalty, members and candidates may undertake independent practice that may result in compensation or other benefit in competition with their employer as long as they obtain consent from their employer. Answer C is not consistent with the Standards because the Standards allow members and candidates to make arrangements or preparations to go into competitive business as long as those arrangements do not interfere with their duty to their current employer. Answer A is not consistent with the Standards because the Standards do not include a complete prohibition against undertaking independent practice.