Ethics Practice
Beth Kozniak, a CFA candidate, is an independent licensed real estate broker and a well-known property investor. She is currently brokering the sale of a commercial property on behalf of a client in financial distress. If the client's building is not sold within 30 days, he will lose the building to the bank. A year earlier, another client of Kozniak's had expressed interest in purchasing this same property. However, she is unable to contact this client, and she has not discovered any other potential buyers. Given her distressed client's limited time frame, Kozniak purchases the property herself and foregoes any sales commission. Six months later, she sells the property for a nice profit to the client who had earlier expressed interest in the property. Does Kozniak most likely violate the CFA Institute Standards of Professional Conduct? No Yes, she did not disclose her potential conflicts of interest to either client. Yes, she profited on the real estate to the detriment of her financially stressed client.
A is correct because Kozniak does not appear to have violated any CFA Institute Standards of Professional Conduct. Because she is known in the market for investing and brokering property and both parties have worked with Kozniak in the past, both parties would know of her interests. In addition, in both cases she acts for her own account as a primary investor, not as a broker. She buys the property for her own portfolio and then sells the property from her own portfolio. Therefore, Kozniak did not violate Standard VI(A)-Disclosure of Conflicts. When she purchased the property for her portfolio, she saved her client from losing the building to the bank and did not charge a sales commission. Because the sale of the property to her other client did not take place until six months after her purchase and she was unable to contact the client who had earlier expressed interest prior to her purchase, she cannot be accused of violating any loyalty, prudence, or care to either client [Standard III(A)-Loyalty, Prudence, and Care]. B is incorrect because Kozniak is known in the market for investing and brokering property and both parties have worked with Kozniak in the past, so both parties would know of her interests. In addition, in both cases she is acting as a primary investor, not as a broker. She buys the property for her own portfolio and then sells the property from her own portfolio. Therefore, Kozniak did not violate Standard VI(A)-Disclosure of Conflicts). C is incorrect because when she purchased the property for her portfolio she saved her client from losing the building to the bank and did not charge a sales commission. As the sale of the property to her other client did not take place until six months after her purchase and she had not contacted the client who had earlier expressed interest prior to her purchase she cannot be accused of violating any loyalty, prudence or care to either client [Standard III(A)-Loyalty, Prudence, and Care].
Wouter Duyck, CFA, is the sole proprietor of an investment advisory firm serving several hundred middle class retail clients. Duyck claims to be different from his competitors because he conducts research himself. He discloses that to simplify the management of all these accounts he has created a recommended list of stocks, from which he selects investments for all of his clients based on their suitability. Duyck's recommended list of stocks is obtained from his primary broker, who has completed due diligence on each stock. Duyck's recommended list least likely violates which of the following CFA Institute Standards of Professional Conduct? Fair Dealing. Misrepresentation. Diligence and Reasonable Basis.
A is correct because Standard III(B)-Fair Dealing concerns the fair treatment of clients when making investment recommendations or taking investment action, but there is no indication that the advisor has discriminated against any clients with regard to his recommendations as he invests all clients in the same universe of stocks. The advisor has violated Standard I(C)-Misrepresentation with his research, which is not independently created and instead relies upon information provided by his broker. This is contrary to the advisor telling clients he does his own independent investment research. In addition, the advisor has violated Standard V(A)-Diligence and Reasonable Basis, as he has not made reasonable and diligent efforts to determine if the third party's research is sound. B is incorrect, as the advisor has violated Standard I(C)-Misrepresentation with his research, which is not independently created and instead relies upon information provided by his broker. C is incorrect, as the advisor has violated Standard V(A)-Diligence and Reasonable Basis as he does not have a reasonable basis for making his investment recommendations and relies solely on his broker's research to create his list of stock investments. This is directly contrary to telling clients that he does his own independent investment research.
Adira Badawi, CFA, who owns a research and consulting company, is an independent board member of a leading cement manufacturer in a small local market. Because of Badawi's expertise in the cement industry, a foreign cement manufacturer looking to enter the local market has hired him to undertake a feasibility study. Under what circumstances can Badawi most likely undertake the assignment without violating the CFA Institute Code of Ethics and Standards of Professional Conduct? If he: makes full disclosure to both companies. receives written permission from the local company. signs confidentiality agreements with both companies.
A is correct because making full and fair disclosure of all matters that could reasonably be expected to impair one's independence and objectivity or interfere with respective duties to one's clients is required by Standard VI(A)-Disclosure of Conflicts of the CFA Institute Code of Ethics and Standards of Professional Conduct. B is incorrect because written permission from both parties would be needed to provide full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients. The requirement to disclose under Standard VI does not mandate that this be in writing. In fact, members and candidates have the responsibility of determining how often, in what manner, and in what particular circumstances the disclosure must be made [Standard IV(B)-Additional Compensation Arrangements requires written consent]. C is incorrect because the signing of confidentiality agreements does not necessarily provide full and fair disclosure of all matters that could reasonably be expected to impair Badawi's independence and objectivity or interfere with respective duties to his clients as required by Standard VI. Confidentiality agreements could actually restrict the disclosure of information that would provide fair disclosure.
Robin Herring, CFA, is a government bond research analyst at an independent credit rating agency. A competitor credit rating agency just downgraded the bonds of a government Herring follows. Herring notes that all of the information in the competitor's report was covered in his analysis published last week. In the past, Herring has been slow to downgrade bonds, so he starts to doubt his own analysis after seeing the competitor's report. Herring decides to reissue his credit rating of this government bond and match the competitor's downgrade. In his revised report, Herring states that new information has been made available to justify the downgrade. Herring posts the revision on the credit rating agency's website and provides it by e-mail to all clients who received the original. Herring's rating change least likely violated which of the following CFA Institute Code of Ethics and Standards of Professional Conduct? Fair Dealing Communication with Clients Diligence and Reasonable Basis
A is correct because the analyst has dealt fairly with all clients by sending them an e-mail and posting his rating change on the credit rating agency's website when making material changes to his prior investment recommendation; therefore, he has not violated Standard III(B)-Fair Dealing. Clients should be treated fairly when material changes in a member's or candidate's prior investment recommendations are disseminated, which has been done. B is incorrect because the analyst has used the release of a competitor's report, contrary to his own previously published report, as a reason to revise his recommendation and has not used reasonable judgment in identifying which factors are important to his investment analyses, recommendations, or actions, as required by Standard V(B)-Communication with Clients and Prospective Clients. C is incorrect because the analyst does not have a reasonable or adequate basis for his downgrade, as required by Standard V(A)-Diligence and Reasonable Basis. The analyst has also violated Standard I(C)-Misrepresentation which prohibits making misrepresentations relating to investment analysis, recommendations, actions, or other professional activities.
Colin Caldwell, CFA, is the chief investment officer of Northwest Mutual Fund, whose investment objective is to invest in fixed income emerging market securities. Caldwell allocates the fund's assets primarily to bonds of commodity producers in emerging markets and invests in a combination of several different investments to ensure an acceptable level of risk. The allocation is clearly disclosed in all fund communications. High volatility in the commodities markets at the start of the year makes Caldwell pessimistic about returns, so he shifts the fund into emerging market and US government securities, positions he maintains at the end of the year. This change is noted in the next annual report to fund shareholders. Caldwell's investment change least likely violated the CFA Institute Code of Ethics and Standards of Professional Conduct concerning: diversification. communication with clients. investments outside his mandate.
A is correct because the investment officer has invested in a combination of several different investments to ensure an acceptable level of risk rather than having all assets in a single investment, and he has sought a reasonable amount of diversification. However, the shift into emerging market and US government securities was communicated to clients in the annual report and not on an ongoing basis, in violation of Standard V(B)-Communication with Clients and Prospective Clients. Additionally, the investment officer has not followed the investment style previously communicated to fund investors (i.e., to invest in fixed income emerging market securities), specifically when he invested in US government securities, a violation of Standard III(C)-Suitability. B is incorrect because the changes were communicated to clients in the annual report and not on an ongoing basis in violation of Standard V(B)-Communication with Clients and Prospective Clients. C is incorrect because the investment officer has not followed the investment style previously communicated to fund investors, to invest in fixed income emerging market securities. The investment officer has taken investment actions inconsistent with the stated objectives and constraints of the portfolio, specifically when he invested in US government securities, a violation of Standard III(C)-Suitability.
Gardner Knight, CFA, is a product development specialist at an investment bank. Knight is responsible for creating and marketing collateralized debt obligations (CDOs) consisting of residential mortgage bonds. In the marketing brochure for his most recent CDO, Knight provided a list of the mortgage bonds that the CDO was created from. The brochure also states "an independent third party, the collateral manager, had sole authority over the selection of all mortgage bonds used as collateral in the CDO." However, Knight met with the collateral manager and helped her select the bonds for the CDO. Knight is least likely to be in violation of which of the following CFA Institute Standards of Professional Conduct? Suitability Conflicts of Interest Client Communication
A is correct because there is no indication that the investment is unsuitable for investors and in violation of Standard III(C)-Suitability. B is incorrect because the conflict of interest represented when the bank selects the bonds making up the CDO, instead of the collateral manager, should be disclosed as required by Standard VI(A)-Disclosure of Conflicts. C is incorrect because the basic format and general principles of the investment processes used to analyze investments, select securities, and construct portfolios should be disclosed as required by Standard V(B)-Communication with Clients and Prospective Clients, and any changes that might materially affect those processes must be promptly disclosed.
Andrew Smith, CFA, works for Granite, a commercial bank that also has a sizeable sell side research division. Smith is presenting financing solutions to a potential business client, Dynamic Materials Corp. As part of his presentation, Smith mentions that Granite will initiate research coverage on Dynamic. Is Smith's arrangement most likely appropriate with regards to the CFA Standards? Yes. No, because Smith cannot offer to provide research coverage on a company if they become a corporate finance client. No, because Granite cannot provide research coverage on a corporate finance client as this constitutes a violation of research independence.
A is correct because under Standard I(B) members and candidates must protect their independence and objectivity. Agreeing to provide objective research coverage of a company does not constitute a violation of this standard provided the analyst writing the report is free to come up with their own independent conclusion. Smith can agree to provide research coverage but cannot commit Granite's research department to providing a favorable recommendation. B is incorrect because providing research coverage in this situation does not constitute a violation of the Code and Standards as long as the independence of this research is not compromised. C is incorrect because providing research coverage in this situation does not constitute a violation of the Code and Standards as long as the independence of this research is not compromised.
According to the GIPS standards, a verification report confirms all of the following except whether: specific composite presentations are accurate. a firm has complied with all firm-wide composite construction requirements. processes and procedures are designed to calculate and present compliant performance results.
A is correct. According to the Global Investment Performance Standards (GIPS), verification does not ensure the accuracy of any specific composite presentations. Verification tests if a firm has properly constructed composites, and if the firm's systems are designed to properly calculate and present performance in compliance with the GIPS standards. Verification does not, in any way, provide assurance about the results of a specific composite. That level of assurance is provided through an additional level of testing of a specific composite, called a performance examination or performance audit. B is incorrect because GIPS verification confirms that a firm has complied with all firm-wide composite construction requirements. C is incorrect because GIPS verification confirms that a firm's processes and procedures are designed to calculate and present compliant performance results.
Which of the following groups is most likely responsible for maintaining oversight and responsibility for the Professional Conduct Program (PCP)? CFA Institute Board of Governors Disciplinary Review Committee Professional Conduct Division
A is correct. All CFA Institute members and candidates enrolled in the CFA Program are required to comply with the Code and Standards. The CFA Institute Board of Governors maintains oversight and responsibility for the Professional Conduct Program (PCP). B is incorrect. The Disciplinary Review Committee (DRC) works in conjunction with the PCP and is responsible for enforcement of the Code and Standards. C is incorrect. The Professional Conduct Division works with the DRC to establish and review professional conduct policies and is also responsible for enforcing testing policies of other CFA Institute education programs as well as the professional conduct of Certificate in Investment Performance Measurement (CIPM) certificants.
Sanctions imposed by CFA Institute for violations of the CFA Institute Code of Ethics or Standards of Professional Conduct least likely include: monetary fines. public censure. revocation of a CFA Charter.
A is correct. Sanctions available to CFA Institute do not include monetary fines. However, sanctions imposed by CFA Institute may have significant consequences; they include public censure, suspension of membership and use of the CFA designation, and revocation of the CFA charter. Candidates enrolled in the CFA Program who have violated the Code and Standards or testing policies may be suspended or prohibited from further participation in the CFA Program. B is incorrect. Sanctions imposed by CFA Institute may have significant consequences; they do include public censure. C is incorrect. Sanctions imposed by CFA Institute may have significant consequences; they do include revocation of the CFA charter.
According to the CFA Institute Code of Ethics and Standards of Professional Conduct, trading on material nonpublic information is least likely to be prevented by establishing: firewalls. selective disclosure. personal trading limitations.
B is correct as selective disclosure occurs when companies discriminate in making material nonpublic information public. Corporations that disclose information on a limited basis create the potential for insider-trading violations. Standard II(A). A is incorrect as an information barrier commonly referred to as a "firewall" is a widely used approach to preventing the communication of material nonpublic information within firms. C is incorrect as limitations on personal trading by employees is one of the recommended procedures for compliance to prevent employees from trading on material nonpublic information.
Pia Nilsson is a sole proprietor investment advisor. An economic recession has reduced the number of clients she advises and caused revenues to decline. As a result, Nilsson has not paid her CFA Institute membership dues for the past two years. When a national financial publication recently interviewed Nilsson, she indicated that up until two years ago she had been a CFA charterholder and a CFA Institute member in good standing. In addition, she stated the completion of the CFA Program enhanced her portfolio management skills and enabled her to achieve superior returns on behalf of her clients. Which of Nilsson's following actions most likely violated the CFA Institute Standards of Professional Conduct? Nonpayment of CFA Institute membership dues Attributing her superior returns to participation in the CFA Program Indicating that being a CFA charterholder has enhanced her portfolio management skills
B is correct because it is a violation of Standard VII(B)-Responsibilities as a CFA Institute Member or CFA Candidate to claim that the CFA charter helped her to achieve superior returns. A is incorrect because it is appropriate to claim that being a charterholder has improved her portfolio management skills. C is incorrect because it is not a violation to not pay fees if the person does not claim to be a CFA charterholder or a member of the CFA Institute.
Reiko Kimisaki, CFA, is an investment advisor for a national social security fund in a frontier market with a very limited and illiquid capital market. The labor force is young with an investment time horizon of 25 to 30 years. She has been asked to suggest ways to increase the investment return of the overall portfolio. After careful assessment of the fund's previous investment history and available asset classes, she considers investment in private equity. What is Kimisaki's lowest priority to avoid any Code of Ethics and Standards of Professional Conduct violations prior to making this investment recommendation? Assess the risk tolerance of the fund. Analyze the expected returns of private equity in the market. Determine if the Investment Policy Statement allows for alternative investments.
B is correct because prior to undertaking analysis with regard to expected returns, an advisor must determine suitability of an investment class including whether it fits within the client's risk tolerance and if it is an allowable asset class as per the client's Investment Policy Statement. Only once these factors have been determined should she proceed if appropriate to analyze expected returns to determine a particular investment recommendation. A is incorrect because assessing risk of a client is a key role in determining investment suitability. C is incorrect because before introducing a new asset class, it must be determined if that asset class is an allowable asset class as defined by the Investment Policy Statement.
Ron Dunder, CFA, is the CIO for Bling Trust (BT), an investment advisor. Dunder recently assigned one of his portfolio managers, Doug Chetch, to manage several accounts that primarily invest in thinly traded micro-cap stocks. Dunder soon notices that Chetch places many stock trades for these accounts on the last day of the month, toward the market's close. Dunder finds this trading activity unusual and speaks to Chetch who explains that the trading activity was completed at the client's request. Dunder does not investigate further. Six months later, regulatory authorities sanction BT for manipulating micro-cap stock prices at month end in order to boost account values. Did Dunder violate any CFA Institute Standards of Professional Conduct? No. Yes, because he failed to reasonably supervise Chetch. Yes, because he did not report his findings to regulatory authorities.
B is correct because the CFA Institute Standard on Responsibilities of Supervisors, Standard IV(C), requires members/candidates to take steps to detect and prevent violations of laws, rules, and regulations. Dunder failed in his supervisory role when he accepted Chetch's explanation of the unusual trading activity. Dunder should have reviewed the client's goals and objectives and records to see if they in fact requested month-end trading. Regardless of the explanation provided by Chetch, Dunder should have investigated further. A is incorrect because there was a violation of the Standards. C is incorrect because the Standards do not require that the findings be reported to regulatory authorities.
Prudence Charmaine, a CFA charterholder, was recently accused in writing of cheating on a professional accounting exam. She denied cheating and successfully defended herself against the allegation. As part of her defense and as evidence of her character, Charmaine stated that she is a CFA charterholder and upholds the CFA Institute Code of Ethics and Standards of Professional Conduct. On her next annual Professional Conduct Statement, Charmaine does not report this allegation to CFA Institute. Did Charmaine most likely violate the CFA Institute Code of Ethics or Standards of Professional Conduct? No Yes, she improperly used the CFA Institute Code and Standards to defend herself. Yes, she did not report the allegation on her annual Professional Conduct Statement.
C is correct because Charmaine should have reported the cheating allegation when making her annual Professional Conduct Statement. Even though she successfully defended herself against the charges and the charges were dropped, she has a responsibility to report the written complaint involving her integrity. The Code of Ethics requires CFA charterholders to practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession. A is incorrect because Charmaine should have reported the cheating charges and the subsequent successful defense when making her annual Professional Conduct Statement. Even though she successfully defended herself against the charges, she has a responsibility to report the written complaint involving her integrity. The Code of Ethics requires CFA charterholders to practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession. B is incorrect because it is not apparent that Charmaine violated Standard VII(B)-Reference to CFA Institute, the CFA Designation, and the CFA Program. Charmaine was correct in stating she is required to abide by the CFA Code and Standards.
Chris Rodriguez, CFA, is a portfolio manager at Nisqually Asset Management, which specializes in trading highly illiquid shares. Rodriguez has been using Hon Securities Brokers almost exclusively when making transactions for Nisqually clients, as well as for his own relatively small account. Hon always executes Rodriguez's personal trades at a more preferential price than for Rodriguez's client's accounts. This occurs regardless of whether or not Rodriguez personally trades before or after clients. Rodriguez should least likely do which of the following in order to comply with the CFA Institute Code of Ethics and Standards of Professional Conduct? Eliminate the exclusive trading arrangement. Trade client accounts before his own account. Average trade prices across all trading accounts.
C is correct because Rodriguez is in violation of Standard IV(A)-Loyalty, which requires, in matters related to their employment, members and candidates to act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer. Rodriguez should not accept the special treatment from Hon, and he should seek such favors for the clients of Nisqually, specifically the lower costs Rodriguez has been getting for his transactions. Rodriguez should not average transaction costs, as his clients should be given the lower preferential prices according to Standard III(A)-Loyalty Prudence and Care. A is incorrect because Hon is favoring Rodriguez's personal trading account, most likely as an inducement for him to trade client accounts at Hon, which is a violation by Rodriguez of Standard IV(A)-Loyalty, which requires, in matters related to their employment, members and candidates to act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer. By trading ahead of clients the member has also violated Standard VI(B)-Priority of Transactions, and changing this procedure is necessary. Investment transactions for clients and employers must have priority over investment transactions in which a member or candidate is the beneficial owner. Front-running transactions is considered unethical behavior because of the importance of the duty of loyalty investment professionals owe to their clients and the fact that this duty is compromised whenever professionals place their personal interests before those of their clients. B is incorrect because the member has violated Standard VI(B)-Priority of Transactions by trading ahead of clients, and changing this procedure is necessary. Investment transactions for clients and employers must have priority over investment transactions in which a member or candidate is the beneficial owner. Front-running transactions is considered unethical behavior because of the importance of the duty of loyalty investment professionals owe to their clients and the fact that this duty is compromised whenever professionals place their personal interests before those of their clients.
Johannes Meir, CFA, is a compliance officer for Family Estate Planning, LLC, a private wealth consulting firm. Many of his colleagues have family members who have started their own retail businesses. Some of Meir's colleagues have been asked by relatives to serve as non-executive directors or advisors to their companies. Meir should most likely recommend which of the following policies to ensure compliance with the CFA Institute Standards? Prohibit employees from becoming directors or advisors Require employees to declare all income sources annually Require employees to declare all outside business interests
C is correct because Standard VI(A) requires the disclosure of conflicts. For Meir to understand what potential conflicts of interest employees may have with the firm and with their clients, he would need to know the outside interests of each staff member. The staff members themselves may not know enough about the company and its clients to disclose those interests that would present a potential conflict. Therefore, it may be best to have all employees declare their outside business interests on an annual basis so Meir can make the determination as to what outside business interests need to be disclosed to clients. A is incorrect because the Standards do not prohibit employees from becoming directors, advisors, or having other outside interest. The concern is to ensure that employees' activities do not create conflicts or potential conflicts of interests with their clients and or firms. B is incorrect because the Standards do not require the reporting of all income, only referral fees [Standard VI(C)] and additional compensation [Standard IV(B)] that would be sourced from activities that would likely compete with the employer. Even if the employees do not know the client list of the company they could likely determine if any income they receive is in competition with their firm's as they would know the general sources of the firm's income.
Mariam Musa, CFA, head of compliance at Dunfield Brokers, questions her colleague Omar Kassim, a CFA candidate and a research analyst, about his purchase of shares in a company for his own account immediately before he publishes a "buy" recommendation. He defends his actions by stating he has done nothing wrong because Dunfield does not have any personal trading policies in place. The CFA Institute Code of Ethics and Standards of Professional Conduct were most likely violated by: only Musa. only Kassim. both Musa and Kassim.
C is correct because both Musa and Kassim violated the Standards of Professional Conduct. Musa violated Standard IV(C)-Responsibilities of Supervisors by not ensuring that policies were in place to prevent violations of the Code and Standards (in this case Standard VI(B)-Priority of Transactions) by someone subject to her supervision. As the head of compliance, Musa supervised Kassim and must meet her supervisory responsibilities outlined in the Standards of Professional Conduct. Kassim violated Standard VI(B)-Priority of Transactions in that he did not give sufficient priority to Dunfield's clients before trading on his recommendation. A is incorrect because Kassim also violated the Standards (Priority of Transactions) in that he did not give sufficient priority to Dunfield's clients before trading on his recommendation. B is incorrect because Musa also violated the Standards (Responsibilities of Supervisors) by not ensuring that policies were in place to prevent violations of the Code and Standards (in this case Standard VI(B)-Priority of Transactions) by someone subject to her supervision.
Ian O'Sullivan, CFA, is the owner and sole employee of two companies, a public relations firm and a financial research firm. The public relations firm entered into a contract with Mallory Enterprises to provide public relations services, with O'Sullivan receiving 40,000 shares of Mallory stock in payment for his services. Over the next 10 days, the public relations firm issued several press releases that discussed Mallory's excellent growth prospects. O'Sullivan, through his financial research firm, also published a research report recommending Mallory stock as a "buy." According to the CFA Institute Standards of Professional Conduct, O'Sullivan is most likely required to disclose his ownership of Mallory stock in the: press releases only. research report only. both the press release and the research report.
C is correct because members should disclose all matters that reasonably could be expected to impair the member's objectivity [Standard I(B), Standard VI(A)]. A is incorrect because both the press release and the research report should disclose any potential conflict of interest. B is incorrect because both the press release and the research report should disclose any potential conflict of interest.
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? Priority of Transactions. Independence and Objectivity. 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.
Jimmy Lan, CFA, is a technology analyst at Pacific Securities, Inc., and is a leading authority on Japanese technology companies. Lan's clients include many leading Japanese equity managers. While still employed at Pacific, Lan makes plans during weekends to start a new company, JL Consulting. His plans consist of contracting office space, interviewing potential employees, and purchasing office equipment. Once he feels ready to launch his new firm, Lan provides Pacific with his resignation notice. After leaving, Lan constructs earnings models of the technology companies he previously covered, using the knowledge and experience gained while at Pacific. He then contacts former clients by using public sources and encourages them to become clients of his new firm. Are Lan's actions in compliance with the Code and Standards? Yes, assuming he is not in breach of any non-compete agreement signed while at Pacific Securities. No, because he is prohibited from engaging in activities related to starting his new business while still employed by Pacific Securities. No, because the names of former clients, modeling skills and experience gained by Lan are confidential information of Pacific Securities.
FOCUS ON THE QUESTION : PUBLIC SOURCE. A is correct because Lan's actions do not violate Standard IV(A)-Duties to Employers. Lan does not use company time to make arrangements for his new venture, nor does he misappropriate any information (financial models or client contacts) from his former employer. All of the actions performed by Lan are permissible under Standard IV(A). B in incorrect because members and candidates are not prohibited from making arrangements for a new venture while still employed providing they do so on their own time and do not inappropriately use company property. C is incorrect because general skills and experience gained while employed are not considered confidential or privileged information. Likewise, simple knowledge of the names and existence of former clients is generally not considered confidential information under Standard IV(A).
Darden Crux, CFA, a portfolio manager at SWIFT Asset Management Ltd. (SWIFT), calls a friend to join him for dinner. The friend, a financial analyst at Cyber Kinetics (CK) declines the invitation and explains she is performing due diligence on Orca Electronics, a company CK is about to acquire. After the phone call, Crux searches the Internet for any news of the acquisition but finds nothing. Upon verifying that Orca is on SWIFT's approved stock list, Crux purchases Orca's common stock and call options for selective SWIFT clients. Two weeks later, CK announces its intention to acquire Orca. The next day, Crux sells all of the Orca securities, giving the fund a profit of $3 million. What action should Crux most likely take to avoid violating any CFA Institute Standards of Professional Conduct? Refuse to trade based on the information. Purchase the stock and call options for all clients. Trade only after analyzing the stock diligently and thoroughly.
Solution A is correct as members/candidates who possess material nonpublic information that could affect the value of an investment should not act or cause others to act on the information. Crux traded on the material information that Orca is about to be acquired by Cyber Kinetics. The information is nonpublic because it is not publicly available, which was verified when Crux researched Orca on the Internet and found nothing about the acquisition [Standard II(A)]. B is incorrect because the information is material and nonpublic and should not be traded. C is incorrect because the information is material and nonpublic and should not be traded.
Umi Grabbo, CFA, is a highly regarded portfolio manager for Atlantic Advisors, a mid-sized mutual fund firm investing in domestic securities. She has watched the hedge fund boom and on numerous occasions suggested that her firm create such a fund. Senior management has refused to commit resources to hedge funds. Attracted by potential higher fees associated with hedge funds, Grabbo and several other employees begin development of their own hedge fund to invest in international securities. Grabbo and her colleagues are careful to work on the fund development only on their own time. Because Atlantic management thinks hedge funds are a fad, she does not inform her supervisor about the hedge fund creation. According to the Standards of Practice Handbook, Grabbo should most likely address which of the Standards immediately? Disclosure of Conflicts Priority of Transactions Additional Compensation Arrangements
Solution A is correct because according to Standard VI(A)-Disclosure of Conflicts, Grabbo should disclose to her employer her hedge fund development as this activity could possibly interfere with her responsibilities at Atlantic. In setting up a hedge fund, Grabbo was not acting for the benefit of her employer. She should have informed Atlantic that she wanted to organize the hedge fund and come to some mutual agreement on how this would occur. B is incorrect as the hedge fund will trade in international securities while Atlantic trades in domestic securities so it is unlikely their investments will conflict with each other. Additionally, policies and procedures needed to address Standard VI(B)-Priority of Transactions will be required in the future, but are not needed at the present time, as the fund is not trading. C is incorrect as the hedge fund will likely provide Grabbo additional compensation in the future [Standard IV(B)], but currently she is not receiving additional compensation as the fund is still in development. This will, however, need to be addressed in the future.
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 likely violate any CFA Institute Standards of Professional Conduct? No. Yes, because he misappropriated property now belonging to Branch. Yes, because he failed to inform his new employer the model was the same one used by his previous employer.
Solution 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. 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.
Li Chen, is a CFA candidate and an equity research analyst at an independent research firm. Chen is contacted by Granite Technologies, Inc., to write an issuer-paid research report on the firm to increase awareness of Granite's stock amongst the investment community. Which statement best represents how Chen should respond to this assignment request? Chen should: negotiate a flat fee and disclose this relationship in her report. decline to write the report as it will compromise her independence. accept long-term warrants on Granite's stock in lieu of any cash compensation.
Solution A is correct because by negotiating a flat fee, her independence and objectivity would not be questioned as her fee would not be based on the results of her research. In addition, by fully disclosing the relationship in her report she allows the reader to determine if her judgment is compromised. As a result, Chen is maintaining compliance with Standard I(B)-Independence and Objectivity. B is incorrect because although it needs to be appropriately disclosed, members and candidates are not prohibited from engaging in issuer-paid research. C is incorrect because accepting long-term warrants tied to Granite's stock price would increase the risk that Chen is compromising her ability to write an objective research report.
Who most likely determines whether a violation of the CFA Institute Code and Standards or testing policies has occurred and what sanction should be imposed? The: Professional Conduct Staff and the Disciplinary Review Committee Professional Conduct Staff Disciplinary Review Committee
Solution A is correct. Both the Professional Conduct Staff and the Disciplinary Review Committee are responsible for determining whether a violation of the Code and Standards or testing policies has occurred and if so what sanction should be imposed. Following their investigation, the Professional Conduct Staff may conclude the inquiry with no disciplinary sanction, issue a cautionary letter, or continue proceedings to discipline the member or candidate which include the charges and a proposed sanction. If that proposal is rejected by the member or candidate, the matter is referred to a panel composed of DRC Members. The panel's task is to determine whether a violation of the Code and Standards or testing policies occurred and if so what sanction should be imposed. B is incorrect. Both the Professional Conduct Staff and the Disciplinary Review Committee are responsible for determining whether a violation of the Code and Standards or testing policies has occurred and if so what sanction should be imposed. C is incorrect. Both the Professional Conduct Staff and the Disciplinary Review Committee are responsible for determining whether a violation of the Code and Standards or testing policies has occurred and if so what sanction should be imposed.
According to the GIPS standards, firms must do all of the following except: Provide investors with a comprehensive view of their performance only in terms of returns. Comply with all requirements of the standards, such as updates, Guidance Statements, and clarifications. Adhere to certain calculation methodologies and make specific disclosures along with their performance.
Solution A is correct. Firms must provide investors with a comprehensive view of their performance in terms of risk and returns, not just returns. B is incorrect. Complying with all requirements of the standards, such as updates, Guidance Statements, and clarifications is a key feature of the GIPS standards. C is incorrect. Adhering to certain calculation methodologies and making specific disclosures along with their performance is a key feature of GIPS standards.
In order to provide investors with a more comprehensive view of a firm's performance, the current GIPS standards includes new provisions related to: various measures of risk. all aspects of performance measurement. the unique characteristics of each asset class.
Solution A is correct. Historically, the GIPS standards focused primarily on returns. In the spirit of fair representation and full disclosure, and in order to provide investors with a more comprehensive view of a firm's performance, the current GIPS standards includes new provisions related to risk. B is incorrect, the GIPS standards do not address all aspects of performance measurement. C is incorrect, the GIPS standards do no cover the unique characteristics of each asset class.
PNW Bank publishes Investment Monthly magazine, which highlights a specific stock in each issue. Publication of the magazine invariably causes the highlighted stocks to rise significantly in value. Rachel Coursing, CFA, manager of PNW's marketing department, often trades in the securities mentioned in the Investment Monthly articles prior to publication of the magazine. Coursing has access to the recommendations prior to the magazine's publication because the magazine is created in her department and edited by her. PNW's Code of Ethics restricts trading by all of the bank's analysts and portfolio managers and requires their trades to be pre-cleared by the Compliance Department. Coursing least likely violated which of the following CFA Institute Standards of Professional Conduct? Priority of Transactions Diligence and Reasonable Basis Material Nonpublic Information
Solution B is correct because Coursing has not violated Standard V-Investment Analysis, Recommendations, and Actions, as she is not analyzing investments, making investment recommendations, or taking investment actions for clients. Coursing has violated Standard VI(B)-Priority of Transactions as clients of the bank have not been given priority over investment transactions in which a member or candidate is the beneficial owner. In addition, Coursing violated Standard II(A)-Material Nonpublic Information by trading on material nonpublic information. The Investment Monthly article written by PNW is considered nonpublic until the magazine is widely distributed, and publication of the magazine will materially impact the market price of stocks highlighted. Even though Coursing is not required by her bank to pre-clear her trades, she is restricted from trading by Standard II(A). A is incorrect because Coursing has violated Standard VI(B)-Priority of Transactions as clients have not been given priority over investment transactions in which a member or candidate is the beneficial owner. C is incorrect because Coursing violated Standard II(A)-Material Nonpublic Information by trading on material nonpublic information. The Investment Monthly article written by PNW is considered nonpublic until the magazine is widely distributed, and publication of the magazine will materially impact the market price of stocks highlighted. Even though Coursing is not required by her bank to pre-clear her trades, she is restricted from trading by Standard II(A).
Dorian Solot, CFA, is responsible for a team of research analysts at Apac Bank, located in a country with strict laws prohibiting intellectual property transfers. Solot believes the work of one of her analysts, Blaine Paddock, CFA, is not completed as carefully and thoroughly as it should be. Solot completely reviews all of Paddock's research and confirms her suspicions. Solot then confronts Paddock about his poor quality research and tells him he can leave Apac voluntarily or be fired. Paddock chooses to leave the bank, walking out with his personal papers and research notes that were created prior to his joining Apac. Subsequently, Paddock uses this intellectual property to help establish a high-net-worth investment advisory firm. When a prospective client asks Paddock if he left Apac because of questions on the quality of his work, Paddock says it was to start his own business. Paddock least likely violated the CFA Institute Standards of Professional Conduct concerning his: research. intellectual property. prospective client disclosure.
Solution B is correct because the analyst has not violated Standard I(A)-Knowledge of the Law related to intellectual property because there is no indication the analyst was ignorant of, or has violated, any law related to intellectual property. Taking his personal papers and research notes would not be a violation of strict local laws on intellectual property transference because these documents were created by the analyst prior to his employment at Apac. A is incorrect because the analyst violated Standard (V)-Diligence and Reasonable Basis as his supervisor reviewed his work and found it to be incomplete. C is incorrect because the analyst has violated Standard I(C)-Misrepresentation which requires that members and candidates must not knowingly make any misrepresentation relating to investment analysis. In this case, Paddock has misled the prospective client about the nature of his departure from Apac, which is directly related to the poor quality of his research, information likely to impact a decision to hire Paddock to manage money.
Jan Loots, CFA, quit his job as a portfolio manager at an investment firm with whom he had a non-solicitation agreement he signed several years ago. Loots received permission to take his investment performance history with him and also took a copy of the firm's software-trading platform. Subsequently, Loots sent out messages on social media sites announcing he was looking for clients for his new investment management firm. Access to Loots' social media sites is restricted to friends, family, and former clients. Loots least likely violated the CFA Institute Standards of Professional Conduct concerning his: trading software. non-solicitation agreement. investment performance history.
Solution C is correct because the portfolio manager received permission to use his investment performance history from his prior employer. The member violated his non-solicitation agreement by indicating his availability to new clients on several social media sites accessible by clients of his former employer. This is a violation of Standard IV(A)-Loyalty because he did not act for the benefit of his former employer. In this case, the member may cause harm to his former employer if his weekend messages result in clients moving to his new business from his former employer. The member also violated this standard by taking his employer's property, trading software. A is incorrect because the portfolio manager took property of his former employer, proprietary trading software, and violated Standard IV(A)-Loyalty. Although the manager created the software himself, it was during a period of time when the large money manager employed him and the software is not his property to take. B is incorrect because the member violated Standard IV(A)-Loyalty as he did not act for the benefit of his former employer. In this case, the member may cause harm to his former employer if his weekend messages result in clients moving to his new business.
Richard Cardinal, CFA, is the founder of Volcano Capital Research, an investment management firm whose sole activity is short selling. Cardinal seeks out companies whose stocks have had large price increases. Cardinal also pays several lobbying firms to update him immediately on any legislative or regulatory changes that may impact his target companies. Cardinal sells short those target companies he estimates are near the peak of their sales and earnings and that his sources identify as facing legal or regulatory challenges. Immediately after he sells a stock, Cardinal conducts a public relations campaign to disclose all of the negative information he has gathered on the company, even if the information is not yet public. Which of Cardinal's following actions is most likely to be in violation of the CFA Institute Standards of Professional Conduct? Selling stock short Trading on information from lobbyists Disclosing information about target companies
Solution C is correct, as Cardinal's actions related to the public relations campaign and class action lawsuits are specifically intended to manipulate share prices lower and to advantage the manager. Cardinal has made deliberate attempts to create artificial price volatility designed to have a material impact on the price of an issuer's stock, in violation of Standard II(B)-Market Manipulation. A is incorrect because selling stock short is a management strategy and does not necessarily violate any aspect of the Code and Standards. B is incorrect, as it appears a reasonable and diligent effort has been made as required by Standard V(A)-Diligence and Reasonable Basis to determine the investment action is sound and suitable for his clients. Information gathering is an integral part of investment analysis and the methods described do not necessarily violate any aspect of the CFA Code and Standards.
A research analyst is facing a moral dilemma and decides to use an ethical decision-making framework. After looking at the facts at hand and identifying the situational influences, he still cannot make a decision on the best course of action. His least appropriate next step is to:
decide, act, monitor, and reflect. Solution B is correct. The least appropriate action would be for the decision maker to go ahead and make a decision based on insufficient information. By doing so, the decision maker could cause harm and make the situation worse. The ethical decision-making framework is iterative, and users can move between phases rather than undertaking them in any one order. If a decision maker is not yet ready to make a decision, the most appropriate course of action would be to ask someone else to give guidance and determine what additional information is needed to clarify the situation. A is incorrect. If a decision maker is not yet ready to make a decision the most appropriate course of action would be to ask someone else to give guidance and determine what additional information is needed to clarify the situation. C is incorrect. If a decision maker is not yet ready to make a decision the most appropriate course of action would be to ask someone else to give guidance and determine what additional information is needed to clarify the situation.
