CFA - Ethical and Professional Standards
An investment management firm has been hired by ETV Corporation to work on an additional public offering for the company. The firm's brokerage unit now has a "sell" recommendation on ETV, but the head of the investment banking department has asked the head of the brokerage unit to change the recommendation from "sell" to "buy." According to the Standards, the head of the brokerage unit would be permitted to: A. Increase the recommendation by no more than one increment (in this case, to a "hold" recommendation). B. Place the company on a restricted list and give only factual information about the company. C. Assign a new analyst to decide if the stock deserves a higher rating.
b
An investment management firm, Investco, Inc., was recently audited by the United States Securities and Exchange Commission (SEC). Investco included the following statement in its performance presentation report: "This report has been verified as GIPS compliant by Investco's Compliance Department and the United States Securities and Exchange Commission." Does this constitute acceptable verification under GIPS? A. No, only one party may perform GIPS verification. B. No, neither party involved in the audit constitutes an acceptable GIPS verification. C. Yes, because an audit was performed implicitly by the SEC and explicitly by the firm's audit team. Page
b
Which statement about a manager's use of client brokerage commissions violates the Code and Standards? A. A client may direct a manager to use that client's brokerage commissions to purchase goods and services for that client. B. Client brokerage commissions should be used to benefit the client and should be commensurate with the value of the brokerage and research services received. C. Client brokerage commissions may be directed to pay for the investment manager's operating expenses.
c
Which of the following statements is most accurate? - Increased regulations are the most useful means to reduce unethical behavior by market participants. - Regulators quickly design and implement laws and regulations to address practices that adversely affect the fairness and efficiency of markets. - New laws designed to reduce or eliminate conduct that adversely affects the markets can create opportunities for different, but similarly problematic, conduct.
c)
Which of the following statements is most accurate? - Large financial rewards, such as bonuses, are the most powerful situational influences. - When decision making focuses on short-term factors, the likelihood of ethical conduct increases. - Situational influences can motivate individuals to act in their short-term self-interests without recognizing the long-term risks or consequences for themselves and others.
c)
Which of the following statements is most accurate? A profession's code of ethics: -includes standards of conduct or specific benchmarks for behavior. - ensures that all members of a profession will act ethically at all times. - publicly communicates the shared principles and expected behaviors of a profession's members.
c)
Which of the following statements is most accurate? Ethics can be described as: a) a commitment to upholding the law. b) an individual's personal opinion about right and wrong. c) a set of moral principles that provide guidance for our behavior.
c)
Which of the following statements is most accurate? Standards of conduct: a) are a necessary component of any code of ethics. b) serve as a general guide regarding proper conduct by members of a group. c) serve as benchmarks for the minimally acceptable behavior required of members of a group.
c)
Claire Marlin, CFA, manages an investment fund specializing in foreign currency trading. Marlin writes a report to investors that describes the basic characteristics of her strategy, which is based on an expected appreciation of the euro relative to other major currencies. Marlin shows the projected returns from the strategy if the euro appreciates less than 50/0, between 50/0 and 100/0, or more than 100/0, while clearly stating that these forecasts are her opinion. Has Marlin violated the Standard related to communication with clients? A. Yes. B. No, because she disclosed the basic characteristics of the investment. C. No, because she distinguished fact from opinion and discussed how the strategy may perform under a range of scenarios.
a
Standards of professional conduct
- Professionalism - Integrity of capital markets - duties to clients - duties to employers - Investment analysis, recommnedations and actions - Conflicts of interest - Responsibilities as a CFA member
The code of Ethics
- Act with integrity, competence, diligence, and respect and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, - Place the integrity of the investment profession and the interests of clients above their own personal interests. - Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities. - Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession. - Promote the integrity and viability of the global capital markets for the ultimate benefit of society. - Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.
Which of the following statements about the Standard on misconduct is most accurate? A. Misconduct applies only to a member or candidate's professional activities. B. Neglecting to perform due diligence when required is an example of misconduct. C. A member or candidate commits misconduct by engaging in any illegal activity,
b
Carter works for Invest Today, a local asset management firm. A broker that provides Carter with proprietary research through client brokerage arrangements is offering a new trading service. The broker is offering low-fee, execution-only trades to complement its traditional full-service, execution-and-research trades. To entice Carter and other asset managers to send additional business its way, the broker will apply the commissions paid on the new service toward satisfying the brokerage commitment of the prior full-service arrangements. Carter has always been satisfied with the execution provided on the fullservice trades, and the new low-fee trades are comparable to the fees of other brokers currently used for the accounts that prohibit soft dollar arrangements. A. Carter can trade for his accounts that prohibit soft dollar arrangements under the new low-fee trading scheme. B. Carter cannot use the new trading scheme because the commissions are prohibited by the soft dollar restrictions of the accounts. C. Carter should trade only through the new low-fee scheme and should increase his trading volume to meet his required commission commitment.
a
A research report states: "Based on the fact that the South American utilities sector has seen rapid growth in new service orders, we expect that most companies in the sector will be able to convert the revenue increases into significant profits. We also believe the trend will continue for the next three to five years." The report goes on to describe the major risks of investing in this market. The author of this report: A. has not violated the Code and Standards. B. violated the Code and Standards by failing to properly distinguish factual information from opinions. C. violated the Code and Standards by failing to properly identify details related to the operations of South American utilities.
a
According to the Standard on independence and objectivity, members and candidates: A. may accept gifts or bonuses from clients. B. may not accept compensation from an issuer of securities in return for producing research on those securities. C. should consider credit ratings issued by recognized agencies to be objective measures of credit quality.
a
Albert and Tye, who recently started their own investment advisory business, have registered to take the Level III CFA examination. Albert's business card reads, "Judy Albert, CFA Level II." Tye has not put anything about the CFA designation on his business card, but promotional material that he designed for the business describes the CFA requirements and indicates that Tye participates in the CFA Program and has completed Levels I and II. According to the Standards: A. Albert has violated the Standards, but Tye has not. B. Tye has violated the Standards, but Albert has not. C. Both Albert and Tye have violated the Standards.
a
Anderb, a portfolio manager for XYZ Investment Management Company—a registered investment organization that advises investment firms and private accounts—was promoted to that position three years ago. Bates, her supervisor, is responsible for reviewing Anderb's portfolio account transactions and her required monthly reports of personal stock transactions. Anderb has been using Jonelli, a broker, almost exclusively for brokerage transactions for the portfolio account. For securities in which Jonelli's firm makes a market, Jonelli has been giving Anderb lower prices for personal purchases and higher prices for personal sales than Jonelli gives to Anderb's portfolio accounts and other investors. Anderb has been filing monthly reports with Bates only for those months in which she has no personal transactions, which is about every fourth month. Which of the following is most likely to be a violation of the Code and Standards? A. Anderb failed to disclose to her employer her personal transactions. B. Anderb owned the same securities as those of her clients. C. Bates allowed Anderb to use Jonelli as her broker for personal trades.
a
Benchmarks for minimally acceptable behaviors of community members are: a code of ethics. laws and regulations. standards of conduct.
a
Brown works for an investment counseling firm. Green, a new client of the firm, is meeting with Brown for the first time. Green used another counseling firm for financial advice for years, but she has switched her account to Brown's firm. After spending a few minutes getting acquainted, Brown explains to Green that she has discovered a highly undervalued stock that offers large potential gains. She recommends that Green purchase the stock. Brown has committed a violation of the Standards. What should she have done differently? A. Brown should have determined Green's needs, objectives, and tolerance for risk before making a recommendation of any type of security. B. Brown should have thoroughly explained the characteristics of the company to Green, including the characteristics of the industry in which the company operates. C. Brown should have explained her qualifications, including her education, training, and experience and the meaning of the CFA designation.
a
Cannan has been working from home on weekends and occasionally saves correspondence with clients and completed work on her home computer. Because of worsening market conditions, Cannan is one of several employees released by her firm. While Cannan is looking for a new job, she uses the files she saved at home to request letters of recommendation from former clients. She also provides to prospective clients some of the reports as examples of her abilities. A. Cannan violated the Code and Standards because she did not receive permission from her former employer to keep or use the files after her employment ended. B. Cannan did not violate the Code and Standards because the files were created and saved on her own time and computer. C. Cannan violated the Code and Standards because she is prohibited from saving files on her home computer.
a
During a round of golf, Rodriguez, chief financial officer of Mega Retail, mentions to Hart, a local investment adviser and long-time personal friend, that Mega is having an exceptional sales quarter. Rodriguez expects the results to be almost 10% above the current estimates. The next day, Hart initiates the purchase of a large stake in the local exchange-traded retail fund for her personal account. A. Hart violated the Code and Standards by investing in the exchange-traded fund that included Mega Retail. B. Hart did not violate the Code and Standards because she did not invest directly in securities of Mega Retail. C. Rodriguez did not violate the Code and Standards because the comments made to Hart were not intended to solicit an investment in Mega Retail.
a
Firms that claim to present investment performance in compliance with GIPS are required to: A. document the procedures and policies they use to ensure GIPS compliance. B. clearly disclose any calculations or other aspects of a presentation that are non-compliant with GIPS. C. calculate total firm assets as the fair value of all fee-paying discretionary portfolios managed by the firm.
a
Long has been asked to be the keynote speaker at an upcoming investment conference. The event is being hosted by one of the third-party investment managers currently used by his pension fund. The manager offers to cover all conference and travel costs for Long and make the conference registrations free for three additional members of his investment management team. To ensure that the conference obtains the best speakers, the host firm has arranged for an exclusive golf outing for the day following the conference on a local championship-caliber course. Which of the following is least likely to violate Standard I (B)? A. Long may accept only the offer to have his conference-related expenses paid by the host firm. B. Long may accept the offer to have his conference-related expenses paid and may attend the exclusive golf outing at the expense of the hosting firm. C. Long may accept the entire package of incentives offered to speak at this conference.
a
Neiman Investment Co. receives brokerage business from Pick Asset Management in exchange for referring prospective clients to Pick. Pick advises clients-in writing, before the relationship is established-of the nature of its arrangement with Neiman. With regard to this practice, Pick has: A. complied with the Code and Standards. B. violated the Code and Standards by failing to preserve the confidentiality of the agreement with Neiman. C. violated the Code and Standards by participating in an agreement that creates a conflict of interest.
a
Over the past two days, Lorraine Quigley, CFA, manager of a hedge fund, has been purchasing large quantities of Craeger Industrial Products' common stock while at the same time shorting put options on the same stock. Quigley did not notify her clients of the trades although they are aware of the fund's general strategy to generate returns. Which of the following statements is most likely correct? Quigley: A. did not violate the Code and Standards. B. violated the Code and Standards by manipulating the prices of publicly traded securities. C. violated the Code and Standards by failing to disclose the transactions to clients before they occurred.
a
Sally Albright, CFA, works full time for Frank & Company, an investment management firm, as a fixed income security analyst. Albright has been asked by a business contact at KDG Enterprises to accept some analytical work from KDG on a consulting basis. The work would entail investigating potential distressed debt securities in the small-cap market. Albright should most appropriately: A. accept the work as long as she obtains consent to all the terms of the engagement from Frank & Company. B. not accept the work as it violates the Code and Standards by creating a conflict of interest. C. accept the work as long as she obtains written consent from KDG and does it on her own time.
a
The Standard regarding suitability most likely requires that: A. an advisor must analyze an investment's suitability for the client prior to recommending or acting on the investment. B. a member or candidate must decline to carry out an unsolicited transaction that she believes is unsuitable for the client. C. when managing a fund to an index, a manager who is evaluating potential investments must consider their suitability for the fund's shareholders.
a
Townsend was recently appointed to the board of directors of a youth golf program that is the local chapter of a national not-for-profit organization. The program is beginning a new fund-raising campaign to expand the number of annual scholarships it provides. Townsend believes many of her clients make annual donations to charity. The next week in her regular newsletter to all clients, she includes a small section discussing the fundraising campaign and her position on the organization's board. A. Townsend did not violate the Code and Standards. B. Townsend violated the Code and Standards by soliciting donations from her clients through the newsletter. C. Townsend violated the Code and Standards by not getting approval of the organization before soliciting her clients.
a
Which of the following best identifies an internal trait that may lead to poor ethical decision making? Overconfidence Loyalty to employer Promise of money or prestige
a
Which of the following is a correct statement of a member's or candidate's duty under the Code and Standards? A. In the absence of specific applicable law or other regulatory requirements, the Code and Standards govern the member's or candidate's actions. B. A member or candidate is required to comply only with applicable local laws, rules, regulations, or customs, even though the Code and Standards may impose a higher degree of responsibility or a higher duty on the member or candidate. C. A member or candidate who trades securities in a securities market where no applicable local laws or stock exchange rules regulate the use of material nonpublic information may take investment action based on material nonpublic information.
a
Which of the following is most accurate? Ethical decision-making frameworks: - raise awareness of different perspectives. - focus attention on short-term consequences. - allocate more weight to those who will directly benefit from the decision.
a
Sarah Johnson, a portfolio manager, is offered a bonus directly by a client if Johnson meets certain performance goals. To comply with the Standard that governs additional compensation arrangements, Johnson should: A. decline to accept a bonus outside of her compensation from her employer. B. disclose this arrangement to her employer in writing and obtain her employer's permission. C. disclose this arrangement to her employer only if she actually meets the performance goals and receives the bonus.
b
Which of the following statements best describes how professionals use their specialized knowledge and skills? Professionals use their specialized knowledge and skills: - in service to others. - to advance their career. - for the exclusive benefit of their employers.
a)
20. Which of the following statements is correct under the Code and Standards? A. CFA Institute members and candidates are prohibited from undertaking independent practice in competition with their employer. B. Written consent from the employer is necessary to permit independent practice that could result in compensation or other benefits in competition with a member's or candidate's employer. C. Members and candidates are prohibited from making arrangements or preparations to go into a competitive business before terminating their relationship with their employer.
b
23. An investment banking department of a brokerage firm often receives material nonpublic information that could have considerable value if used in advising the firm's brokerage clients. In order to conform to the Code and Standards, which one of the following is the best policy for the brokerage firm? A. Permanently prohibit both "buy" and "sell" recommendations of the stocks of clients of the investment banking department. B. Establish physical and informational barriers within the firm to prevent the exchange of information between the investment banking and brokerage operations. C. Monitor the exchange of information between the investment banking department and the brokerage operation.
b
24. Stewart has been hired by Goodner Industries, Inc., to manage its pension fund. Stewart's duty of loyalty, prudence, and care is owed to: A. The management of Goodner. B. The participants and beneficiaries of Goodner's pension plan. C. The shareholders of Goodner.
b
25. Which of the following statements is a stated purpose of disclosure in Standard VI(C) -Referral Fees? A. Disclosure will allow the client to request discounted service fees. B. Disclosure will help the client evaluate any possible partiality shown in the recommendation of services. C. Disclosure means advising a prospective client about the referral arrangement once a formal client relationship has been established.
b
26. Rose, a portfolio manager for a local investment advisory firm, is planning to sell a portion of his personal investment portfolio to cover the costs of his child's academic tuition. Rose wants to sell a portion of his holdings in Household Products, but his firm recently upgraded the stock to "strong buy." Which of the following describes Rose's options under the Code and Standards? A. Based on his firm's "buy" recommendation, Rose cannot sell the shares because he would be improperly prospering from the inflated recommendation. B. Rose is free to sell his personal holdings once his firm is properly informed of his intentions. C. Rose can sell his personal holdings but only when a client of the firm places an order to buy shares of Household.
b
A member or candidate who has supervisory responsibility: A. should place particular emphasis on enforcing investment-related compliance policies. B. is responsible for instructing those to whom he has delegated authority about methods to detect and prevent violations of the law and the Code and Standards. C. has complied with the Standards if she reports employee violations to upper management and provides a written warning to the employee to cease such activities
b
After writing the Level I CPA exam, Cynthia White goes to internet discussion site CPA Haven to express her frustration. White writes, "CPA Institute is not doing a competent job of evaluating candidates because none of the questions in the June exam touched on Alternative Investments." White most likely violated the Standard related to conduct as a candidate in the CPA program by: A. publicly disputing CPA Institute policies and procedures. B. disclosing subject matter covered or not covered on a CPA exam. C. participating in an internet forum that is directed toward CPA Program • • participants.
b
Bronson provides investment advice to the board of trustees of a private university endowment fund. The trustees have provided Bronson with the fund's financial information, including planned expenditures. Bronson receives a phone call on Friday afternoon from Murdock, a prominent alumnus, requesting that Bronson fax him comprehensive financial information about the fund. According to Murdock, he has a potential contributor but needs the information that day to close the deal and cannot contact any of the trustees. Based on the CFA Institute Standards, Bronson should: A. Send Murdock the information because disclosure would benefit the client. B. Not send Murdock the information to preserve confidentiality. C. Send Murdock the information, provided Bronson promptly notifies the trustees.
b
Decision makers who use a compliance approach are most likely to: avoid situational influences. oversimplify decision making. consider more factors than when using an ethical decision-making approach.
b
Green Brothers, an emerging market fund manager, has two of its subsidiaries simultaneously buy and sell emerging market stocks. In its marketing literature, Green Brothers cites the overall emerging market volume as evidence of the market's liquidity. & a result of its actions, more investors participate in the emerging markets fund. Green Brothers most likely: A. did not violate the Code and Standards. B. violated the Standard regarding market manipulation. C. violated the Standard regarding performance presentation.
b
If regulations do not specify how long to retain the documents that support an analyst's conclusions, the Code and Standards recommend a period of at least: A. five years. B. seven years. C. ten years.
b
Karen Jones, CFA, is an outside director for Valley Manufacturing. At a director's meeting, Jones finds out that Valley Corp. has made several contributions to foreign politicians that she suspects were illegal. Jones checks with her firm's legal counsel and determines that the contributions were indeed illegal. At the next board meeting, Jones urges the board to disclose the contributions. The board, however, votes not to make a disclosure. Jones's most appropriate action would be to: A. protest the board's actions in writing to the executive officer of Valley. B. resign from the board and seek legal counsel as to her legal disclosure requIrements. C. inform her supervisor of her discovery and cease attending meetings until the matter is resolved.
b
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 managementnominated 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.
b
Paper was recently terminated as one of a team of five managers of an equity fund. The fund had two value-focused managers and terminated one of them to reduce costs. In a letter sent to prospective employers, Paper presents, with written permission of the firm, the performance history of the fund to demonstrate his past success. A. Paper did not violate the Code and Standards. B. Paper violated the Code and Standards by claiming the performance of the entire fund as his own. C. Paper violated the Code and Standards by including the historical results of his prior employer.
b
Pietro, president of Local Bank, has hired the bank's market maker, Vogt, to seek a merger partner. Local is currently not listed on a stock exchange and has not reported that it is seeking strategic alternatives. Vogt has discussed the possibility of a merger with several firms, but they have all decided to wait until after the next period's financial data are available. The potential buyers believe the results will be worse than the results of prior periods and will allow them to pay less for Local Bank. Pietro wants to increase the likelihood of structuring a merger deal quickly. Which of the following actions would most likely be a violation of the Code and Standards? A. Pietro could instruct Local Bank to issue a press release announcing that it has retained Vogt to find a merger partner. B. Pietro could place a buy order for 2,000 shares (or four times the average weekly volume) through Vogt for his personal account. C. After confirming with Local's chief financial officer, Pietro could instruct Local to issue a press release reaffirming the firm's prior announced earnings guidance for the full fiscal year.
b
Quinn sat for the Level III CFA exam this past weekend. He updates his resume with the following statement: "In finishing the CFA Program, I improved my skills related to researching investments and managing portfolios. I will be eligible for the CFA charter upon completion of the required work experience." A. Quinn violated the Code and Standards by claiming he improved his skills through the CFA Program. B. Quinn violated the Code and Standards by incorrectly stating that he is eligible for the CFA charter. C. Quinn did not violate the Code and Standards with his resume update.
b
Rule has worked as a portfolio manager for a large investment management firm for the past 10 years. Rule earned his CFA charter last year and has decided to open his own investment management firm. After leaving his current employer, Rule creates some marketing material for his new firm. He states in the material, "In earning the CFA charter, a highly regarded credential in the investment management industry, I further enhanced the portfolio management skills learned during my professional career. While completing the examination process in three consecutive years, I consistently received the highest possible scores on the topics of Ethics, Alternative Investments, and Portfolio Management." Has Rule violated Standard VII(B)-Reference to CFA Institute, the CFA Designation, and the CFA Program in his marketing material? A. Rule violated Standard VII(B) in stating that he completed the exams in three consecutive years. B. Rule violated Standard VII(B) in stating that he received the highest scores in the topics of Ethics, Alternative Investments, and Portfolio Management. C. Rule did not violate Standard VII(B).
b
Scott works for a regional brokerage firm. He estimates that Walkton Industries will increase its dividend by US$1.50 a share during the next year. He realizes that this increase is contingent on pending legislation that would, if enacted, give Walkton a substantial tax break. The US representative for Walkton's home district has told Scott that, although she is lobbying hard for the bill and prospects for its passage are favorable, concern of the US Congress over the federal deficit could cause the tax bill to be voted down. Walkton Industries has not made any statements about a change in dividend policy. Scott writes in his research report, "We expect Walkton's stock price to rise by at least US$8.00 a share by the end of the year because the dividend will increase by US$1.50 a share. Investors buying the stock at the current time should expect to realize a total return of at least 15% on the stock." According to the Standards: A. Scott violated the Standards because he used material inside information. B. Scott violated the Standards because he failed to separate opinion from fact. C. Scott violated the Standards by basing his research on uncertain predictions of future government action.
b
Situational influences in decision making will most likely be minimized if: strong compliance programs are in place. longer-term consequences are considered. individuals believe they are truthful and honest.
b
Smith is a financial analyst with XYZ Brokerage Firm. She is preparing a purchase recommendation on JNI Corporation. Which of the following situations is most likely to represent a conflict of interest for Smith that would have to be disclosed? A. Smith frequently purchases items produced by JNI. B. XYZ holds for its own account a substantial common stock position in JNI. C. Smith's brother-in-law is a supplier to JNI.
b
Smith, a research analyst with a brokerage firm, decides to change his recommendation for the common stock of Green Company, Inc., from a "buy" to a "sell." He mails this change in investment advice to all the firm's clients on Wednesday. The day after the mailing, a client calls with a buy order for 500 shares of Green Company. In this circumstance, Smith should: A. Accept the order. B. Advise the customer of the change in recommendation before accepting the order. C. Not accept the order because it is contrary to the firm's recommendation
b
Specialized knowledge and skills, a commitment to serve others, and a shared code of ethics best characterize a(n): vocation. profession. occupation.
b
The CFA Institute Professional Conduct Program (PCP) has begun an investigation into Chris Jones, a Level II CFA candidate, and a number of his CFA Charterholder colleagues. Jones has access to confidential client records that could be useful in clearing his name and wishes to share this information with the PCP. Which of the following most accurately describes Jones's duties with regard to preservation of confidentiality? A. Sharing the confidential information with the PCP would violate the Standards. B. The Standards encourage, but do not require, that Jones support the PCP investigation into his colleagues. C. Jones may share confidential information about former clients with the PCP but may not share confidential information about current clients.
b
The mosaic theory holds that an analyst: A. Violates the Code and Standards if the analyst fails to have knowledge of and comply with applicable laws. B. Can use material public information and nonmaterial nonpublic information in the analyst's analysis. C. Should use all available and relevant information in support of an investment recommendation.
b
Ward is scheduled to visit the corporate headquarters of Evans Industries. Ward expects to use the information he obtains there to complete his research report on Evans stock. Ward learns that Evans plans to pay all of Ward's expenses for the trip, including costs of meals, hotel room, and air transportation. Which of the following actions would be the best course for Ward to take under the Code and Standards? A. Accept the expense-paid trip and write an objective report. B. Pay for all travel expenses, including costs of meals and incidental items. C. Accept the expense-paid trip but disclose the value of the services accepted in the report.
b
Which is an example of an activity that may be legal but that CFA Institute considers unethical? Making legally required disclosures in marketing materials Trading while in possession of material nonpublic information Disclosure by an employee of his or her own company's dishonest activity
b
Which of the following actions is a required, rather than recommended, action under the Standard regarding diligence and a reasonable basis for a firm's research recommendations? A. Compensate analysts based on a measure of the quality of their research. B. Review the assumptions used and evaluate the objectivity of third-party research reports. C. Have a policy requiring that research reports and recommendations have a basis that can be substantiated as reasonable and adequate.
b
Which of the following actions is most likely a violation of the Standard on fair dealing? A. A portfolio manager allocates IPO shares to all client accounts, including her brother's fee-based retirement account. B. An investment firm routinely begins trading for its own account immediately after announcing recommendation changes to clients. C. After releasing a general recommendation to all clients, an analyst calls the firm's largest institutional clients to discuss the recommendation in more detail.
b
Which of the following definitions of a firm would violate GIPS? A. Investment firm that has been in existence for less than five years. B. Regional branch of an investment management firm marketed under the name of its parent. C. Entity registered with the national regulator that oversees its investment management actrvities.
b
Which of the following includes only sections of the Global Investment Performance Standards? A. Disclosure, Public Equity, Presentation and Reporting. B. Real Estate, Calculation Methodology, Fundamentals of Compliance. C. Input Data, Composite Construction, Wrap Fee/Speculative Margin Account (SMA) Portfolios
b
Which of the following policies is required to comply with GIPS? A. Compliance with GIPS must be verified by an independent third party. B. Restructuring of the firm's organization cannot be used as a basis to change the historical performance results of a composite. C. The definition of the firm must include the firm's offices in all countries and • regIons
b
Which of the following statements is most accurate? Investment professionals have a special responsibility to act ethically because: - the industry is heavily regulated. - they are entrusted to protect clients' assets. - the profession requires compliance with its code of ethics.
b
Willier is the research analyst responsible for following Company X. All the information he has accumulated and documented suggests that the outlook for the company's new products is poor, so the stock should be rated a weak "hold." During lunch, however, Willier overhears a financial analyst from another firm whom he respects offer opinions that conflict with Willier's forecasts and expectations. Upon returning to his office, Willier releases a strong "buy" recommendation to the public. Willier: A. Violated the Standards by failing to distinguish between facts and opinions in his recommendation. B. Violated the Standards because he did not have a reasonable and adequate basis for his recommendation. C. Was in full compliance with the Standards.
b
Which of the following statements is most accurate? - All legal behavior is ethical behavior. - Some ethical behavior may be illegal. - Legal standards represent the highest standard.
b)
A former hedge fund manager, Jackman, has decided to launch a new private wealth management firm. From his prior experiences, he believes the new firm needs to achieve US$1 million in assets under management in the first year. Jackman offers a $10,000 incentive to any adviser who joins his firm with the minimum of $200,000 in committed investments. Jackman places notice of the opening on several industry web portals and career search sites. Which of the following is correct according to the Code and Standards? A. A member or candidate is eligible for the new position and incentive if he or she can arrange for enough current clients to switch to the new firm and if the member or candidate discloses the incentive fee. B. A member or candidate may not accept employment with the new firm because Jackman's incentive offer violates the Code and Standards. C. A member or candidate is not eligible for the new position unless he or she is currently unemployed because soliciting the clients of the member's or candidate's current employer is prohibited.
c
ABC Investment Management acquires a new, very large account with two concentrated positions. The firm's current policy is to add new accounts for the purpose of performance calculation after the first full month of management. Cupp is responsible for calculating the firm's performance returns. Before the end of the initial month, Cupp notices that one of the significant holdings of the new accounts is acquired by another company, causing the value of the investment to double. Because of this holding, Cupp decides to account for the new portfolio as of the date of transfer, thereby allowing ABC Investment to reap the positive impact of that month's portfolio return. A. Cupp did not violate the Code and Standards because the GIPS standards allow composites to be updated on the date of large external cash flows. B. Cupp did not violate the Code and Standards because companies are allowed to determine when to incorporate new accounts into their composite calculation. C. Cupp violated the Code and Standards because the inclusion of the new account produces an inaccurate calculation of the monthly results according to the firm's stated policies.
c
After passing all three levels of the CPA exams on her first attempts and being awarded her CPA Charter, Paula Osgood is promoting her new money management firm by issuing an advertisement. Which of these statements would most likely violate the Standard related to use of the CPA designation? A. "To earn the right to use the CPA designation, Paula passed three exams covering ethics, financial statement analysis, asset valuation, and portfolio management. " B. "Paula passed three 6-hour exams on her first attempts and is a member of her local investment analyst society." C. "Because of her extensive training, Paula will be able to achieve better investment results than managers who have not been awarded the CPA designation. "
c
An ethical decision-making framework will most likely: include a pre-determined, uniform sequence. focus exclusively on confirmable facts and relationships. help avoid a decision that has unanticipated ethical consequences.
c
Andrews, a private wealth manager, is conducting interviews for a new research analyst for his firm. One of the candidates is Wright, an analyst with a local investment bank. During the interview, while Wright is describing his analytical skills, he mentions a current merger in which his firm is acting as the adviser. Andrews has heard rumors of a possible merger between the two companies, but no releases have been made by the companies concerned. Which of the following actions by Andrews is least likely a violation of the Code and Standards? A. Waiting until the next day before trading on the information to allow time for it to become public. B. Notifying all investment managers in his firm of the new information so none of their clients are disadvantaged. C. Placing the securities mentioned as part of the merger on the firm's restricted trading list.
c
Bill Cooper finds a table of historical bond yields on the website of the u.S. Treasury that supports the work he has done in his analysis and includes the table as part of his report without citing the source. Has Cooper violated the Code and Standards? A. Yes, because he did not cite the source of the table. B. Yes, because he did not verify the accuracy of the information. C. No, because the table is from a recognized source of financial or statistical data.
c
Connie Fletcher, CFA, works for a small money management firm that specializes in pension accounts. Recently, a friend asked her to act as an unpaid volunteer manager for the city's street sweep pension fund. As part of the position, the city would grant Fletcher a free parking space in front of her downtown office. Before Fletcher accepts, she should most appropriately: A. do nothing because this is a volunteer position. B. inform her current clients in writing and discuss the offer with her employer. C. disclose the details of the volunteer position to her employer and obtain written permission from her employer.
c
Which of the following will most likely determine whether an individual will behave unethically? - The person's character - The person's internal traits and intrinsic motivation - External factors, such as environmental or cultural elements
c
Daniel Lyons, CFA, is an analyst who covers several stocks including Horizon Company. Lyons's aunt owns 30,000 shares of Horizon. She informs Lyons that she has created a trust in his name into which she has placed 2,000 shares of Horizon. The trust is structured so that Lyons will not be able to sell the shares until his aunt dies, but may vote the shares. Lyons is due to update his research coverage of Horizon next week. Lyons should most appropriately: A. update the report as usual because he is not a beneficial owner of the stock. B. advise his superiors that he is no longer able to issue research recommendations on Horizon. C. disclose the situation to his employer and, if then asked to prepare a report, also disclose his beneficial ownership of the shares in his report.
c
For a composite to be constructed in compliance with GIPS, the portfolios included in the composite must: A. have been managed by the firm for the full performance reporting period. B. be selected immediately after the last business day of the period for which the composite's performance will be presented. C. include all fee-paying, discretionary portfolios that are managed according to the same strategy, mandate, or investment objective.
c
Frist Investments, Inc. has just hired Michael Pulin to manage institutional portfolios, most of which are pension related. Pulin has just taken the Level III CFA exam and is awaiting his results. Pulin has more than 15 years of investment management experience with individual clients but has never managed an institutional portfolio. Pulin joined the CFA Institute as an affiliate member two years ago and is in good standing with the organization. Which of the following statements would be most appropriate for Frist to use in advertising Pulin as a new member of the firm? Pulin: A. has many years of investment experience which, along with his participation in the CFA program, will allow him to deliver superior investment performance relative to other managers. B. is a CFA Level III and passed the first two exams on the first attempt. He is an affiliate member of the CFA Institute. We expect him to become a regular member if he passes the Level III examination. C. is a Level III CFA candidate and has many years of excellent performance in the investment management industry. Pulin is an affiliate member of the CFA Institute and will be eligible to become a CFA charterholder and regular member if he passes the Level III CFA Exam.
c
Grey recommends the purchase of a mutual fund that invests solely in long-term US Treasury bonds. He makes the following statements to his clients: I. "The payment of the bonds is guaranteed by the US government; therefore, the default risk of the bonds is virtually zero." II. "If you invest in the mutual fund, you will earn a 10% rate of return each year for the next several years based on historical performance of the market." Did Grey's statements violate the CFA Institute Code and Standards? A. Neither statement violated the Code and Standards. B. Only statement I violated the Code and Standards. C. Only statement II violated the Code and Standards.
c
Hern Investments provides monthly emerging market research to Baker Brokerage in exchange for prospective client referrals and European equity research from Baker. Clients and prospects of Hern are not made aware of the agreement, but clients unanimously rave about the high quality of the research provided by Baker. As a result of the research, many clients with nondiscretionary accounts have earned substantial returns on their portfolios. Managers at Hern have also used the research to earn outstanding returns for the firm's discretionary accounts. Hern has most likely: A. not violated the Code and Standards. B. violated the Code and Standards by using third-party research in discretionary accounts. C. violated the Code and Standards by failing to disclose the referral agreement with Baker.
c
If a country has regulations in place that conflict with GIPS, firms that wish to claim GIPS compliance: A. may not do so because GIPS do not permit exceptions or partial compliance. B. must establish a subsidiary in a location where local law does not conflict with GIPS. C. must comply with local regulations and disclose the nature of the conflict in the presentation.
c
Jamison is a junior research analyst with Howard & Howard, a brokerage and investment banking firm. Howard & Howard's mergers and acquisitions department has represented the Britland Company in all of its acquisitions for the past 20 years. Two of Howard & Howard's senior officers are directors of various Britland subsidiaries. Jamison has been asked to write a research report on Britland. What is the best course of action for her to follow? A. Jamison may write the report but must refrain from expressing any opinions because of the special relationships between the two companies. B. Jamison should not write the report because the two Howard & Howard officers serve as directors for subsidiaries of Britland. C. Jamison may write the report if she discloses the special relationships with the company in the report.
c
Josef Karloff, CFA, acts as liaison between Pinnacle Financial (an investment management firm) and Summit Inc. (an investment banking boutique specializing in penny stocks). When Summit underwrites an IPQ, Karloff routinely has Pinnacle issue vague statements implying that the firm has cash flows, financial resources, and growth prospects that are better than is the case in reality. This action is most likely a violation of the section of the Standards • concernIng: A. fair dealing. B. nonpublic information. C. misconduct.
c
Jurgen is a portfolio manager. One of her firm's clients has told Jurgen that he will compensate her beyond the compensation provided by her firm on the basis of the capital appreciation of his portfolio each year. Jurgen should: A. Turn down the additional compensation because it will result in conflicts with the interests of other clients' accounts. B. Turn down the additional compensation because it will create undue pressure on her to achieve strong short-term performance. C. Obtain permission from her employer prior to accepting the compensation arrangement.
c
Kate Wilson, CFA, is an equity analyst. Wilson enters two transactions for her personal account. Wilson sells 500 shares ofTibon, Inc., a stock on which her firm currently has a "Buy" recommendation. Wilson buys 200 shares of Hayfield Co. and the following day issues a research report on Hayfield with a "Buy" recommendation. Has Wilson violated the Code and Standards? A. No. B. Yes, both of her actions violate the Code and Standards. C. Yes, but only one of her actions violates the Code and Standards.
c
Which one of the following actions will help to ensure the fair treatment of brokerage firm clients when a new investment recommendation is made? A. Informing all people in the firm in advance that a recommendation is to be disseminated. B. Distributing recommendations to institutional clients prior to individual accounts. C. Minimizing the time between the decision and the dissemination of a recommendation.
c
Michelieu tells a prospective client, "I may not have a long-term track record yet, but I'm sure that you'll be very pleased with my recommendations and service. In the three years that I've been in the business, my equity-oriented clients have averaged a total return of more than 26% a year." The statement is true, but Michelieu only has a few clients, and one of his clients took a large position in a penny stock (against Michelieu's advice) and realized a huge gain. This large return caused the average of all of Michelieu's clients to exceed 26% a year. Without this one investment, the average gain would have been 8% a year. Has Michelieu violated the Standards? A. No, because Michelieu is not promising that he can earn a 26% return in the future. B. No, because the statement is a true and accurate description of Michelieu's track record. C. Yes, because the statement misrepresents Michelieu's track record.
c
Miller heads the research department of a large brokerage firm. The firm has many analysts, some of whom are subject to the Code and Standards. If Miller delegates some supervisory duties, which statement best describes her responsibilities under the Code and Standards? A. Miller's supervisory responsibilities do not apply to those subordinates who are not subject to the Code and Standards. B. Miller no longer has supervisory responsibility for those duties delegated to her subordinates. C. Miller retains supervisory responsibility for all subordinates despite her delegation of some duties.
c
Park is very frustrated after taking her Level II exam. While she was studying for the exam, to supplement the curriculum provided, she ordered and used study material from a third-party provider. Park believes the additional material focused her attention on specific topic areas that were not tested while ignoring other areas. She posts the following statement on the provider's discussion board: "I am very dissatisfied with your firm's CFA Program Level II material. I found the exam extremely difficult and myself unprepared for specific questions after using your product. How could your service provide such limited instructional resources on the analysis of inventories and taxes when the exam had multiple questions about them? I will not recommend your products to other candidates." A. Park violated the Code and Standards by purchasing third-party review material. B. Park violated the Code and Standards by providing her opinion on the difficulty of the exam. C. Park violated the Code and Standards by providing specific information on topics tested on the exam.
c
Robert Blair, CFA, Director of Research, has had an ongoing battle with his firm's management about the adequacy of its compliance system. Blair believes the firm's compliance procedures are inadequate in that they are not being monitored or carefully followed. Blair should most appropriately: A. resign from the firm unless the compliance system is strengthened and followed. B. send his superior a memo outlining the problem. C. decline in writing to continue to accept supervisory responsibility until reasonable compliance procedures are adopted.
c
Samantha Donovan, CFA, is an exam proctor for the Level II CFA exam. The day before the exam is to be administered, Donovan faxes a copy of one of the questions to two friends, James Smythe and Lynn Yeats, who are Level II candidates in the CFA program. Donovan, Smythe, and Yeats had planned the distribution of an exam question months in advance. Smythe used the fax to prepare for the exam. Yeats, however, had second thoughts and threw the fax away without looking at its contents. Which of the following statements is most likely correct? A. Smythe violated the Code and Standards, but Yeats did not. B. Donovan violated the Code and Standards, but Smythe did not. C. Donovan and Yeats both violated the Code and Standards.
c
Stafford is a portfolio manager for a specialized real estate mutual fund. Her firm clearly describes in the fund's prospectus its soft dollar policies. Stafford decides that entering the CFA Program will enhance her investment decision-making skill and decides to use the fund's soft dollar account to pay the registration and exam fees for the CFA Program. Which of the following statements is most likely correct? A. Stafford did not violate the Code and Standards because the prospectus informed investors of the fund's soft dollar policies. B. Stafford violated the Code and Standards because improving her investment skills is not a reasonable use of the soft dollar account. C. Stafford violated the Code and Standards because the CFA Program does not meet the definition of research allowed to be purchased with brokerage commissions.
c
Verification of compliance with GIPS: A. may be performed on single composites. B. is required for a firm to claim GIPS compliance. C. requires the verification report to be issued for the entire firm.
c
When unethical behavior erodes trust in an investment firm, that firm is more likely to experience: lower revenues only. higher expenses only. lower revenues and higher expenses.
c
Which of the following is most accurate? Ethical decision-making frameworks: - are not needed if behavior is legal. - identify who gains the most from a decision. - can help reduce unanticipated ethical lapses and unexpected consequences.
c
Which of the following is most likely a recommended procedure for complying with the Standard on performance presentation? A. Exclude terminated accounts from past performance history. B. Present the performance of a representative account to show how a composite has performed. C. Consider the level of financial knowledge of the audience to whom the performance is presented.
c
Which of the following statements clearly conflicts with the recommended procedures for compliance presented in the CFA Institute Standards of Practice Handbook? A. Firms should disclose to clients the personal investing policies and procedures established for their employees. B. Prior approval must be obtained for the personal investment transactions of all employees. C. For confidentiality reasons, personal transactions and holdings should not be reported to employers unless mandated by regulatory organizations.
c
Which of the following statements is most accurate? An ethical decision-making framework: - is only beneficial when a firm lacks a code of ethics. - is used to improve compliance with laws and regulations. - is a tool for analyzing the potential alternative actions and consequences of a decision.
c
Which of the following statements most accurately describes the parties that GIPS are intended to apply to and serve? GIPS apply to: A. consultants who serve their existing and prospective clients. B. firms that issue securities and serve investment management firms. C. investment management firms and serve their existing and prospective clients.
c