CFA Level 1 Ethics Q&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 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? A. Refuse to trade based on the information. B. Purchase the stock and call options for all clients. C. Trade only after analyzing the stock diligently and thoroughly.

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 non-public 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).

Justin Blake, CFA, a retired portfolio manager owns 20,000 shares of a small public company that he would like to sell. He posts messages on several Internet bulletin boards. The messages read, "This stock is going up once the pending patents are released so now is the time to buy. You would be crazy to sell anything below $3 in a few months from now. The stock is a buy at anything below $3. I have done some close research on these guys." According to the Standards of Practice Handbook, Blake most likely violated the Standard or Standards associated with: A. Integrity of Capital Markets and Conflicts of Interest. B. Integrity of Capital Markets, but not Conflicts of Interest. C. Neither Integrity of Capital Markets nor Conflicts of Interest.

A is correct because Blake violated the Standard regarding Conflicts of Interest because he did not disclose his ownership of shares in his message. He also violated the standard relating to Integrity of Capital Markets by engaging in a practice that is likely to artificially inflate trading volume. Standard II (B), Standard VI (A).

Hui Chen, CFA, develops marketing materials for an investment fund he founded three years ago. The materials show the 3-, 2- and 1-year returns for the fund. He includes a footnote that states in small print "Past performance does not guarantee future returns." He also includes a separate sheet showing the most recent semi-annual and quarterly returns, which notes they have been neither audited nor verified. Has Chen most likely violated any CFA Institute Standards of Professional Conduct? A. No. B. Yes, because he included un-audited and unverified results. C. Yes, because he did not adhere to the global investment performance standards.

A is correct because the Standards require members to make reasonable efforts to make sure performance information is fair, accurate, and complete. The Standards do not require compliance with Global Investment Performance Standards (GIPS), auditing, or verification requirements. Standard III (D)

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: A. makes full disclosure to both companies. B. receives written permission from the local company. C. signs confidentiality agreements with both companies.

Answer = A 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 Conflicts of Interest of the CFA Institute Code of Ethics and Standards of Professional Conduct.

During an onsite company visit, Marsha Ward, CFA, accidentally overheard the Chief Executive Officer (CEO) of Stargazer, Inc. discussing the company's tender offer to purchase Dynamica Enterprises, a retailer of Stargazer products. According to the CFA Institute Standards of Professional Conduct, Ward most likely can not use the information because: A. it relates to a tender offer. B. it was overheard and might be considered unreliable. C. she does not have a reasonable and adequate basis for taking investment action.

Answer: A A is correct because trading on the information is restricted as it relates to a tender offer; it is clearly material, nonpublic information. Standard II (A).

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

B B is correct because there is nothing to suggest that Wong does not have a reasonable basis for his conclusion related to Nolvec. Standard V (A).

Several years ago, Leo Peek, CFA, co-founded an investment club. The club is fully invested but has not actively traded its account for at least a year and does not plan to resume active trading of the account. Peek's employer requires an annual disclosure of employee stock ownership. Peek discloses all of his personal trading accounts, but does not disclose his holdings in the investment club. Peek's actions are least likely to be a violation of which of the CFA Institute Standards of Professional Conduct? A. Misrepresentation. B. Transaction priority. C. Conflicts of interest.

B is correct as there is no indication that the investment club is trading ahead of clients. Standard I (C).

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, towards 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? A. No. B. Yes, because he failed to reasonably supervise Chetch. C. 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.

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: A. fire-walls. B. watch lists. C. selective disclosure.

C C 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).

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: A. press releases only. B. research report only. C. both the press release and the research report.

C 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).

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

C is correct because clients should be treated fairly and impartially. Standard III (B). In addition, the flexible trading terms allow the hedge fund manager to enrich themselves and is a violation of Standard II A, concerning trading on material nonpublic information. This is also a conflict of interest, Standard VI (A), Disclosure of Conflicts.

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

C is correct because if a member cannot fulfill supervisory responsibilities because of the absence of a compliance system or because of an inadequate compliance system, the member should decline in writing to accept supervisory responsibility until the firm adopts reasonable procedures to allow the member to adequately exercise such responsibility. Standard IV (C).

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

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

The Global Investment Performance Standards (GIPS) least likely requires: A. non-discretionary portfolios to be included in composites. B. non fee-paying portfolios to be excluded in the returns of appropriate composites. C. composites to be defined according to similar investment objectives and/or strategies.

Composites (Standard IV - Composites) must be defined according to similar investment objectives and/or strategies. Terminated portfolios must be included in the historical returns of appropriate composites while only fee paying portfolios are to be included in composites.

Oni Erobo, CFA, is the General Partner in a real estate development project and is responsible for completing the project within an 18-month period and within budget. Erobo is expected to receive equity of 20% if the project comes within budget. Concerned that project costs would escalate, the Limited Partners require Erobo to cap expenses at 15% above budget. Costs were within expectation up until the last month of construction when costs of imported lighting fixtures (accounting for roughly 5% of total costs) escalated by more than 50%. As a result, the overall return declined below the partners expected 35% ROI. Erobo did not inform the Limited Partners about the increased costs. Did Erobo violate the CFA Code of Ethics and Standards of Professional Conduct? A. No. B. Yes, because returns are lower than expected by the Partners. C. Yes, because he did not disclose the increased costs to his Partners.

A No violation took place. Erobo was not required to inform the Limited Partners regarding the increase in lighting fixtures as the increase in cost would not cause the overall project cost to escalate higher than the 15% budget variance contingency agreed within the partnership.

Ross Nelson, CFA, manages accounts for high net worth clients including his own family's account. He has no beneficial ownership in his family's account. Because Nelson is concerned about the appearance of improper behavior in managing his family's account, when his firm purchases a block of securities, Nelson allocates to his family's account only those shares that remain after his other client accounts have their orders filled. The fee for managing his family's account is based on his firm's normal fee structure. According to the Standards of Practice Handbook, Nelson's best course of action with regard to management of his family's account would be to: A. treat the account like other client accounts. B. arrange for the account to be transferred to another firm. C. transfer the account to another investment manager in his firm.

A is correct as Nelson has breached his duty to his family by treating them differently from other clients. They are entitled to the same treatment as any other client of the firm. Nelson should treat his family's account like any other client account. Standard VI (B) related to Priority of Transactions.

Gabrielle Gabbe, CFA has been accused of professional misconduct by one of her competitors. The allegations concern Gabbe's personal bankruptcy filing ten years ago when she was a college student and had a large amount of medical bills she could not pay. By not disclosing the bankruptcy filing to her clients, did Gabbe most likely violate any CFA Institute Standards of Professional Conduct? A. No. B. Yes, related to Misconduct. C. Yes, related to Misrepresentation.

Answer = A A is correct as a personal bankruptcy does not necessarily constitute a violation of Standard I (D). If the circumstances of the bankruptcy involved fraudulent or deceitful business conduct then failing to disclose it may constitute a violation of the Standards.

Meshack Bradovic, CFA, was recently hired as a credit analyst at a credit rating agency whose major clients include publicly listed companies on the local stock exchange. One of the clients is currently preparing to issue a new bond to finance a major factory project. Analysts are speculating that without the new factory the company will not survive the onslaught of competition from increasing imports; therefore, the company is counting on an upgraded credit rating to enhance the subscription level of the issue. Bradovic's research suggests the creditworthiness of the company has severely deteriorated over the last year due to negative operating cash flows. Without conducting extensive research, Bradovic's boss puts pressure on him to upgrade the credit rating to an investment grade rating. What course of action is most appropriate for Bradovic to prevent any violation of the CFA Code or Standards? A. Quit his position with the firm. B. Upgrade the rating but note his objections in writing. C. Disassociate with the credit rating report, the bond issue and the client.

Answer = A A is correct as the boss' insistence that all credit ratings be given an investment grade rating irrespective of the analysis undertaken indicates a systemic disregard for due diligence, reasonable basis and true representation. This shows a total disregard for the CFA Standards. Bradovic's best course of action consequently is to resign, as the company's current practice of giving false credit ratings is likely to continue.

Diana Fairbanks, CFA is married to an auditor who is employed at a large accounting firm. When her husband mentions a computer firm he audits will receive a qualified opinion she thinks nothing of it. Later that week when she reviews a new client account she notices there are substantial holdings of this computer firm. When she does a thorough Internet search for news on the company, she does not find anything about its most recent audit or any other adverse information. Which of the following actions concerning the computer stock should Fairbanks most likely take to avoid violating the CFA Institute Standards of Professional Conduct? A. Take no investment action. B. Complete a thorough and diligent analysis of the company and then sell the stock. C. Sell the stock immediately as she has a reasonable basis for taking this investment action.

Answer = A A is correct as the information concerning the qualified opinion is non-public and if it is material she would be in violation of Standard II(A) if she took investment action based on the information. She should also make reasonable efforts to achieve public dissemination of the information.

Alexandra Zagoreos, CFA, is the head of a government pension plan. Whenever Zagoreos hires a money management firm to work with the pension plan, she finalizes the deal over dinner at a nice restaurant. At these meals, Zagoreos also arranges for the money manager to provide her payments equal to 10% of the management fee the manager receives from the pension plan. Zagoreos keeps half of the payments for her own use and distributes the remainder as cash incentives to a handful of her most trusted staff. Zagoreos least likely violated which of the following CFA Institute Code of Ethics and Standards of Professional Conduct? A. Referral fees. B. Loyalty, Prudence and Care. C. Additional Compensation Arrangements.

Answer = A A is correct as the money should not be accepted without receiving written consent from all parties involved, therefore Zagoreos is in violation of Standard IV (B) Additional Compensation Arrangements. However, there is no indication that the member has received compensation, consideration, or benefit received from, or paid to, others for the recommendation of products or services and therefore has not violated Standard VI (6) related to referral fees.

Tammi Holmberg is enrolled to take the Level I CFA examination. While taking the CFA examination, the candidate on Holmberg's immediate right takes a stretch break and a piece of paper from his pocket falls onto Holmberg's desk. Holmberg glances at the paper and realizes there is information written on the paper, which includes a formula Holmberg needs for the question she is working on. Holmberg had not memorized this formula and could not complete the question without this information. Holmberg pushes the paper off her desk and uses the formula to complete the question. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, Holmberg most likely: A. compromised her exam. B. was free to act on the information that fell on her desk. C. is responsible for notifying exam proctors of her neighbor's violation.

Answer = A A is correct because Holmberg's conduct compromised the validity of her exam and violated Standard VII (A). Her conduct was also a violation of the rules and regulations of the CFA Program, the Candidate pledge, and the CFA Institute Code and Standards.

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, nor has she 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? A. No B. Yes, she did not disclose her potential conflicts of interest to either client. C. Yes, she profited on the real estate to the detriment of her financially stressed client.

Answer = A 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).

James Simone, CFA, the CFO of a publicly listed company, seeks to improve the quality of his company's communication with institutional fund managers. He holds an investor briefing with this group the evening before the company earnings are announced. The company's quarterly earnings are broadcast in a press release the next day before the market opens. The earnings information in the investor briefing is identical to that in the press release. Did Simone most likely violate the CFA Institute Standards of Professional Conduct? A. Yes B. No, because investor briefing and press release information are identical C. No, because the company releases information while the market is closed

Answer = A A is correct because Simone violated Standard II (A) Material Nonpublic Information by giving institutional fund managers access to material nonpublic information prior to public dissemination (i.e., the press release). By releasing earnings results to a select group of institutional fund managers prior to a public press release, Simone allows the institutional fund managers a time advantage over other investors not invited to the investor briefing.

Preeta Singh, a CFA Candidate, is an asset manager employed by a fund management company managing very large segregated pension funds. In her spare time outside of working hours, Singh likes to provide management-consulting services to small companies to help grow their businesses, focusing on strategic planning. Singh is paid for the consulting services and has also provided her employer information about these outside activities. Does Singh most likely violate the CFA Code of Ethics with regard to Duties to Employers? A. No. B. Yes, with regard to loyalty. C. Yes, with regard to additional compensation arrangements.

Answer = A A is correct because Singh does not violate any Standard relating to Duties to Employers. She conducts unrelated non-competitive services to clients outside of business hours and thus does not deprive her employer of the advantage of her skills and abilities, nor is there any indication she divulges confidential information or otherwise causes harm to her employer. She has informed her employers about her outside activities.

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

Answer = A A is correct because by failing to adhere to the non-compete clause he agreed to abide by when signing his employment contract, Hasina shows a lack of professional integrity toward his employer. This behavior reflects poorly on the good reputation of members and is a violation of the Code of Ethics, which states that members and candidates must act with integrity, and Standard I (D) Misconduct, which states that members and candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence. The Code of Ethics at times requires a member or candidate to uphold a higher standard than that required by law, rule, or regulation, or in this case the strict application of the employment agreement.

Chan Liu, CFA, is the new research manager at the Pacific MicroCap Fund. Liu observed the following activities after she published a research report on a thinly traded micro cap stock that included a "buy" recommendation: • Pacific traders purchased the stock for Pacific's proprietary account and then purchased the same stock for all client accounts; and • Pacific marketing department employees disseminated positive, but false, information about this stock in widely read Internet forums. Liu notes the stock's price increased more than 50% within a period of two days and was then sold for Pacific's account. Which of the following steps is most appropriate for Liu to take to avoid violating the CFA Institute Code of Ethics and Standards of Professional Conduct? A. Report the observed activities to her employer. B. Remove her name from the micro cap stock research report. C. Publicly refute the false information posted on Internet forums.

Answer = A A is correct because certain staff at Liu's employer appear to be engaged in front running, a violation of Standard VI (B) Priority of Transactions, and market manipulation, a violation of Standard II (B) Market Manipulation. If Liu observes these violations without taking steps to notify her employer, she will be in violation of Standard I (A) Knowledge of the Law. Liu should know that the conduct observed is likely a violation of applicable laws, rules, and regulations and is a violation of the CFA Institute Code and Standards. Her first step, therefore, should be to attempt to stop the behavior by bringing it to the attention of the employer through a supervisor or the firm's compliance department. Inaction may be construed as participation or assistance in the illegal or unethical conduct.

Carolina Ochoa, CFA, is the chief financial officer at Pantagonia Computing. Ochoa is currently the subject of an inquiry by Pantagonia's corporate investigations department. The inquiry is the result of an anonymous complaint accusing Ochoa of falsifying travel expenses for senior management related to a government contract. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, it is most appropriate for Ochoa to disclose the allegations: A. on her Professional Conduct Statement. B. to CFA Institute when the investigation concludes. C. to CFA Institute if the allegations are proven correct.

Answer = A A is correct because members and candidates must self-disclose on the annual Professional Conduct Statement all matters that question their professional conduct, such as involvement in civil litigation or criminal investigations or being the subject of a written complaint.

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 least likely to be in violation of the CFA Institute Standards of Professional Conduct? A. Selling stock short B. Trading on information from lobbyists C. Disclosing information about target companies

Answer = A A is correct because selling stock short is a management strategy and does not necessarily violate any aspect of the Code and Standards.

Which of the following distinct entities can least likely claim compliance with the Global Investment Performance Standards (GIPS)? A. A multi-national financial services holding company B. An investment management division of a regional commercial bank C. A locally incorporated subsidiary undertaking investment management services

Answer = A A is correct because the Global Investment Performance Standards require that firms be defined as an investment firm, subsidiary, or division held out to clients or prospective clients as a distinct business entity (0.A.12). A multi-national financial services holding company is unlikely to be solely operating as an investment firm, and the scope of the business could also make it more difficult to claim compliance on a firm-wide basis.

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 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? A. Fair Dealing B. Communication with Clients C. Diligence and Reasonable Basis

Answer = A 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.

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

Answer = A A is correct because the client only approved the purchase of one below investment grade bond while the portfolio manager has purchased several additional bonds below investment grade without client approval in violation of Standard III (C).

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 U.S. 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: A. diversification. B. communication with clients. C. investments outside his mandate.

Answer = A 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 U.S. 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 U.S. government securities, a violation of Standard III (C) Suitability.

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

Answer = A A is correct because the prospective supervisor's first step should be to not take the position. Accepting the position with inadequate procedures in place or improper marketing material would leave Inkster at risk of incurring a violation of the Code and Standards—Standard IV (C) Responsibilities of Supervisors. She could agree to be hired as an interim consultant with the bank in order to implement adequate procedures before taking on any supervisory role.

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

Answer = A A is correct because the utility is not a suitable investment for a fund that only invests in companies with good environmental records. Continuing to hold this investment, therefore, was a violation of Standard III (C) Suitability.

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? A. Suitability B. Conflicts of Interest C. Client Communication

Answer = A A is correct because there is no indication the investment is unsuitable for investors and in violation of Standard III (C) Suitability.

Eileen Fisher, CFA has been a supervisory analyst at SL Advisors for the past ten years. Recently, one of her analysts was found to be in violation of the CFA Institute Standards of Professional Conduct. Fisher has placed limits on the analyst's activities and is now monitoring all of his investment activities. Although SL did not have any compliance procedures up to this point, to avoid future violations, Fischer has put in place procedures exceeding industry standards. Did Fisher most likely violate any CFA Institute Standards of Professional Conduct? A. Yes. B. No, because she has taken steps to ensure the violations will not be repeated by the analyst. C. No, because she is taking steps to implement compliance procedures that are more than adequate.

Answer = A A is correct because under standard IV(C) a member should exercise reasonable supervision by establishing and implementing compliance procedures in place prior to the possibility of any violation occurring, which has not been done in this case.

Margie Germainne, CFA, is a risk management consultant who has been asked by a small investment bank to recommend policies to prevent bank employees from front running client orders. These clients generally invest in one or more of the bank's large cap equity unit trusts. To ensure compliance with the CFA Institute Standards of Professional Conduct, Germainne should least likely recommend which of the following? Employees should be restricted from trading: A. equity related securities. B. without prior permission. C. during established time periods.

Answer = A A is correct because while Standard VI (B) Priority of Transactions is designed to prevent any potential conflict of interest or the appearance of a conflict of interest with respect to personal transactions, it does not ban employees from trading securities. A ban on all equity related securities could be excessively restrictive to employees and unnecessary if appropriate personal transaction policies and procedures are in place.

Tibor Figeczky, CFA, is an equity trader at Global Investment Bank (GB). Figeczky traded the bank's investment portfolio profitably for the past three years and earned significant bonuses for his efforts. Subsequently, internal auditors of GB formally accused Figeczky of exceeding his trading authority and engaging in unauthorized trades. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, Figeczky should most likely: A. disclose the complaint to the CFA Institute. B. refuse further bonuses until the issue is resolved. C. request a temporary suspension of his CFA Institute membership.

Answer = A A is correct, as members and candidates must self-disclose on the annual Professional Conduct Statement all matters that question their professional conduct, such as involvement in civil litigation or a criminal investigation or being the subject of a written complaint.

Bryan Barrett, CFA has an investment advisory service providing advice on gold and other commodities to several large retail banks. Barrett advertises his services in widely read publications to broaden his business to include retail clients. Because the client base for the institutions that Barrett serves is large, he is comfortable stating in the ads that thousands of his clients have benefited from his advice. Does Barrett's advertisement most likely violate any CFA Institute Standards of Professional Conduct? A. No. B. Yes, related to Misrepresentation. C. Yes, related to Communication with Clients.

Answer = B B is correct because Barrett's client base is made up of a small number of large institutions so stating in the advertisement that his client base is a larger number is a misrepresentation and a violation of Standard I(C). In addition, since the advertisement focuses only on the benefits and does not mention the potential risks of these investments it is also potentially misleading to clients.

Christy Pasley, CFA, is the Chief Investment Officer for Risen Investment Funds (RIF) a mutual fund organization. At a meeting between Homeland Builders (HB), a publicly traded company, Pasley learns HB sales are much slower than expected. In fact, HB sales declined more than 20% in the last quarter, but this information has not yet been widely disseminated. Immediately after meeting with HB, Pasley purchases put options on HB stock. Subsequently, HB issues a press release with their most recent sales figures. Has Pasley most likely violated the CFA Institute Standards of Professional Conduct? A. Yes. B. No, because the securities purchased were options. C. No, because the information was obtained directly from the company.

Answer = A A is correct, as members and candidates who possess material nonpublic information that could affect the value of an investment must not act or cause others to act on the information. Even though the information is disclosed in a meeting with the mutual fund, this has not made the information public and it should not be used until it is more widely disseminated. It does not matter that the securities purchased are options rather than stocks.

Yao Tsang, CFA has a large percentage of his net worth invested in the Australian mining company, Outback Mines, which he has held for many years. Tsang is in the process of moving to a new employer where he is responsible for initiating research on mining companies. Shortly after his move, Tsang is asked to complete a research report on Outback. In order to meet the CFA Institute Standards of Professional Conduct concerning his stock holding, which of the following actions is most appropriate for Tsang to take? A. Disclose his stock holding to his employer and to clients. B. Sell his stock holdings to eliminate any potential conflict of interest. C. Refuse to write the report and ask his employer to assign another analyst to complete the analysis.

Answer = A A is correct. Even though the best practice is to avoid conflicts, when conflicts cannot be reasonably avoided, full disclosure should be made as required by Standard VI (A). As the stock in question has been held for many years it may not be practical to sell it due to things like tax consequences. Since the analyst has been hired to initiate coverage of mining companies it is unlikely that another analyst at that firm would be as competent in completing a research report on mining companies.

Joyce La Valle, CFA is a portfolio manager at a global bank. La Valle has been told she should use a specific vendor for equity investment research that has been approved by the bank's headquarters. Because La Valle is located in a different country than the bank's headquarters, she is uncomfortable with the validity of the research provided by this vendor when it applies to her country and would like to use a local vendor on whom she has already conducted due diligence. Which of the following actions concerning the research vendor should La Valle most likely take to avoid violating the CFA Institute Standards of Professional Conduct? A. Use the local research vendor. B. Use the bank-approved research vendor. C. Use both the local and the bank-approved research vendors.

Answer = A A is correct. When a member has reason to suspect that either secondary or third-party research or information comes from a source that lacks a sound basis, the member must not rely on that information as indicated by Standard V(A) Diligence and Reasonable Basis.

Sherry Buckner, CFA manages equity accounts for government entities whose portfolios are conservative and risk averse. Since the objective of her clients is to maximize returns with the lowest possible risk, Buckner considers adding to their holdings a new, thinly-traded, leveraged derivative product which she believes has the potential for high returns. To make her investment decision, Buckner relies upon comprehensive research from an investment bank that has a solid reputation for top quality research. After her review of that research, Buckner positions her accounts so that each has a 10% allocation to the derivative product. Did Buckner most likely violate any CFA Institute Standards of Professional Conduct by purchasing the derivative for her clients? A. No. B. Yes, related to Suitability. C. Yes, related to Loyalty, Prudence and Care.

Answer = B B is correct as Buckner is in violation of Standard III (C) since she did not consider issues such as the limited liquidity or any potential leverage of this new product when she invested a substantial percentage of her client's portfolios in these instruments.

While at a bar in the financial district after work, Ellen Miffitt, CFA overhears several employees of a competitor discuss how they will manipulate down the price of a thinly traded micro cap stock's price over the next few days. Miffitt's clients have large positions of this stock so when she arrives at work the next day she immediately sells all of these holdings. Because she has determined that the micro cap stock was suitable for all of her accounts at its previously higher price, Miffitt buys back her client's original exposure at the end of the week at the new, lower price. Which CFA Institute Standards of Professional Conduct did Miffitt least likely violate? A. Market Manipulation B. Preservation of Confidentiality C. Material Non Public Information

Answer = B B is correct as Miffitt has not violated the confidentiality Standard which involves information about former, current, and prospective clients.

Holly Baker, CFA is explaining the CFA Institute Code of Ethics to a client. Which of the following statements could Baker make to most likely reflect disciplinary sanctions the CFA Institute may impose? Sanctions include: A. fines for violations. B. revocation of membership. C. banishment from the industry.

Answer = B B is correct as the CFA Institute may revoke membership for violations of the Institute Code of Ethics.

Stian Klun, CFA is preparing a brochure to advertise his firm. The brochure includes the following disclosures: "I am a CFA so I am a member of the CFA Institute which I believe constitutes the most elite group of professionals within the investment management business. In order to become a CFA charterholder I had to complete a comprehensive program of study in the investment management field." Klun is least likely to have violated the CFA Institute Standards of Professional Conduct related to referencing the: A. CFA Institute. B. CFA Program. C. CFA Designation.

Answer = B B is correct as the CFA program has been properly referenced while the CFA Institute and CFA Designation have been improperly referenced in violation of Standard VII (B). CFA should be an adjective rather than a noun.

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

Answer = B B is correct because GIPS standards (0.A.9) state "firms must make every reasonable effort to provide a compliant presentation to all prospective clients. As long as a prospective client has received a compliant presentation within the previous 12 months, the firm has met this requirement. It is a GIPS recommendation, not a requirement, that all clients receive a compliant presentation on an annual basis (0.B.4).

Sato Kashingaki, CFA, is a financial advisor who practices in multiple jurisdictions. In his resident country, Country A, he is not required by law to hold a financial advisors license but he is required to uphold a fiduciary duty to his clients. In Country B, authorities require him to hold a financial advisors license but he is not expected to uphold a fiduciary duty to his clients. In Country C, authorities require both a financial advisors license and an asset management license in addition to upholding a fiduciary responsibility towards clients. In which of the three countries does Kashangaki have the duty to adhere to the CFA Code and Standards over local laws? A. Country A. B. Country B. C. Country C.

Answer = B B is correct because Standard I - Professionalism requires CFA Members and Candidates to comply with the more strict law, rule or regulation in the event of conflicts of any applicable laws, rules and regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct). Country B does not require a financial advisor to uphold a fiduciary duty (as is required by Country A and C); i.e. put the client's interest before their own, therefore the CFA Code of Ethics and Standards of Professional Conduct (Duty to Clients) would be applicable as it is the stricter of the two.

Wang Dazong, CFA, is a sole proprietor investment advisor. Dazong believes in putting his money at risk along with his clients and trades the same securities as his clients. In order to ensure fair treatment of all accounts, he rotates trade allocations so that each account has an equal likelihood of receiving a fill on their orders. This allocation procedure also applies to Dazong's own account. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, the allocation procedure used by Dazong: A. complies with the Standards. B. requires revision to ensure client trades take precedence. C. should be disclosed and written approval received from clients.

Answer = B B is correct because Standard VI (B) requires client transactions to be given precedence over transactions made on behalf of the members or candidate's firm or personal transactions. Because the advisor trades alongside his clients and allocates trades on a rotating basis, there are times when the advisor's trades will receive priority over his clients in violation of the Code and Standards. A member or candidate having the same investment positions or being co-invested with clients does not always create a conflict. Some clients in certain investment situations require members or candidates to have aligned interests. Personal investment positions or transactions of members or candidates or their firms should never, however, adversely affect client investments.

Ken Kawasaki, CFA shares a building with a number of other professionals who are also involved in the investment management business. Kawasaki makes arrangements with several of these professionals, including accountants and lawyers, to refer clients to each other. There is an expectation that an informal score is kept so that the referrals will equal out over time, so there are no cash payments. Kawasaki never mentions this arrangement to clients or prospective clients. Does Kawasaki's agreement with the other building occupants most likely violate any CFA Institute Standards of Professional Conduct? A. No. B. Yes, related to referral fees. C. Yes, related to communication with clients.

Answer = B B is correct because Standard VI(C) requires disclosure of any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services. Even without cash changing hands the arrangement provides for a quid pro quo referral of clients and should be disclosed.

Fundamental Asset Managers claims compliance with the CFA Institute Global Investment Performance Standards (GIPS®) and manages both discretionary and non-discretionary accounts. When constructing a single composite for Fundamental, Juma Dzuya includes all discretionary, fee-paying accounts with both value and growth strategies. Does the composite constructed by Dzuya most likely meet GIPS criteria? A. Yes B. No, because of non-similar investment strategies C. No, because non-discretionary accounts are not included

Answer = B B is correct because a composite must include all actual, fee-paying, discretionary portfolios managed in accordance with the same investment mandate, objective, or strategy (Standards IV Composites). By including both value and growth portfolios, the composite is made up of portfolios with different investment mandates or strategies.

Oliver Rae, CFA, is an individual investment adviser specializing in commercial real estate. Rae recently packaged a real estate limited partnership (RELP), which he sold in a private placement to his existing advisory clients. The partnership has purchased four properties in which Rae held a 5% minority interest. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, Rae should: A. manage the partnership separately from his advisory business. B. disclose conflicts related to the real estate he sold to the partnership. C. return all profits earned from his minority interest to the limited partners.

Answer = B B is correct because according to Standard VI Members and Candidates must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to clients.

Who is most likely responsible for claiming and maintaining compliance with the CFA Institute Global Investment Performance Standards (GIPS®)? A. Independent verification firms B. The firm claiming compliance C. The performance measurement department

Answer = B B is correct because firms that claim compliance with the GIPS standards are responsible for their claim of compliance and for maintaining that compliance.

Pia Nilsson is a sole proprietor investment advisor. The 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? A. Nonpayment of CFA Institute membership dues B. Attributing her superior returns to participation in the CFA Program C. Indicating that being a CFA charterholder has enhanced her portfolio management skills

Answer = B B is correct because it is a violation of Standard VII (B) Responsibilities as a CFA Institute Member or CFA Candidate to claim the CFA charter helped her to achieve superior returns.

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

Answer = B B is correct because the CFA Code of Ethics requires Chandarana to uphold the rules governing financial advisors. However, he failed to do so because he did not obtain a financial advisors license. The CFA Standards of Professional Conduct (I(A) - Professionalism - Knowledge of the Law) states that when rules or regulations are in conflict, Members must comply with the more strict law, in this case the requirement for financial advisors to be licensed.

Hezi Cohen, a CFA candidate, is a heavy user of social networking sites on the Internet. His favorite site only allows a limited number of characters for each entry so he has learned to abbreviate everything, including CFA trademarks. Cohen also enjoys professional networking sites and contributes regularly to blogs that discuss the broad topical areas covered within the CFA Exam Program. In addition, he posts to these blogs pieces he has written in his area of expertise: retirement planning. By claiming to be an expert on retirement planning, he believes his stature within the investment community increases and he can gain more clients. Which Internet activity can Cohen most likely continue to be in compliance with the CFA Standards of Professional Conduct? A. Use of abbreviations. B. Claiming retirement planning expertise. C. Blogging about broad topical areas within the CFA Exam Program.

Answer = B B is correct because the CFA Standards do not prevent a person from claiming to be an expert in their area of specialty as long it is not a misrepresentation and/or an exaggeration of their skill and expertise.

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

Answer = B B is correct because the Priority of Transactions standard has not been violated as it relates to investment transactions for clients and employers having priority over Member or Candidate transactions. There is no indication in this case that transactions have occurred as a result of the report being issued by the economist. Although it is reasonable to expect there will be transactions, it is only when these happen that a violation will have occurred.

Zhao Xuan, CFA, is a sell side investment analyst. While at a software industry conference, Zhao hears rumors that Green Run Software may have falsified its financial results. When she returns to her office, Zhao conducts a thorough analysis of Green Run. Based on her research, including discussions with some of Green Run's customers, Zhao is convinced that Green Run's reported 50% increase in net income during recent quarters is completely fictitious. So far, however, Zhao is the only analyst suspicious about Green Run's reported earnings. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, the least appropriate action for Zhao is to: A. report her suspicions to Green Run's management. B. do nothing, until other analysts support her analysis. C. recommend her clients sell their Green Run shares immediately.

Answer = B B is correct because the analyst has conducted thorough research that indicates the company falsified its financial results, and she should request the company address this issue publicly as recommended by Standard II (A) Material Nonpublic Information. If a member or candidate determines that information is material, the member or candidate should make reasonable efforts to achieve public dissemination of the information. This effort usually entails encouraging the issuer company to make the information public. If public dissemination is not possible, the member or candidate must communicate the information only to the designated supervisory and compliance personnel within the member's or candidate's firm and must not take investment action on the basis of the information.

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: A. research. B. intellectual property. C. prospective client disclosure.

Answer = B 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.

Noor Mawar, CFA, manages a trust fund with the beneficiary being an orphaned 18-year-old student. The investment policy dictates that trust assets are expected to provide the student with a stable low risk source of income until she reaches the age of 30 years. Based on information from an internet blog, the student asks Mawar to invest in a new business venture she expects will provide high returns over the next 5 years. Mawar ignores the request, instead securing conservative investments to provide sufficient income. Did Mawar most likely violate the CFA Institute Code of Ethics and Standards of Professional Conduct? A. Yes B. No, because the client's objectives were met C. No, because the investment time frame does not match the investment horizon

Answer = B B is correct because the client is the trust/trustees, not the beneficiary. Mawar followed Standard III (C) Suitability by managing the trust assets in a way that would likely result in a stable source of income while keeping the risk profile low, thereby complying with the investment objectives of the trust.

Belen Zapata, CFA, is the owner of Kawah Investments. Kawah promises investors returns of up to 12% per year and claims to achieve this by investing in non-investment-grade bonds and other fixed income instruments. Over the next 12 months, bond market yields reach unprecedented lows and Zapata finds it impossible to achieve the returns she expected. No investments are ever made by Kawah, and clients are completely paid back all of their original investment. Zapata most likely violated the CFA Institute Standards of Professional Conduct because of the: A. return of capital. B. promised returns. C. investment mandate.

Answer = B B is correct because the member has misrepresented the returns she could realistically achieve for her clients, violating Standard I (C), which prohibits members and candidates from guaranteeing clients any specific return on volatile investments.

Raymond Ortiz, CFA, provides investment advice to high-net-worth investors. Ortiz has just completed an analysis of Continental Wheat, a manufacturer of wheat-based food products. He rated the company a long-term hold for investors seeking growth and income. Ortiz's analysis included a review of the company's management team, financial data, pro forma financial positions, dividends and dividend policy, and a comparison of Continental with its competitors. Although he does not tell anyone, five years ago, Ortiz worked for and managed the commodities derivatives trading unit of Continental. As part of his compensation at Continental, he received stock, which he still owns. Based upon his research, Ortiz recommends Continental to clients who have a moderate risk tolerance. Two weeks later Continental announces its quarterly earnings are 30% less than a year ago. Consequently, shares of Continental drop by 50%. Ortiz most likely violated the CFA Institute Code of Ethics and Standards of Professional Conduct related to his stock: A. research. B. ownership. C. recommendation.

Answer = B B is correct because there is a violation of Standard VI (A) Disclosure of Conflicts; the analyst worked for Continental and still has ties to the company in the form of his stock ownership.

In countries where new local laws relating to calculation and presentation of investment performance conflict with GIPS standards, firms who have claimed GIPS compliance should most likely: A. stop claiming GIPS compliance. B. follow local laws, continue to claim GIPS compliance, and disclose conflicts. C. continue to claim GIPS compliance, disclosing non-compliance with new laws.

Answer = B B is correct because where local laws and regulations regarding calculation and presentation conflict with GIPS standards, firms must abide by the local laws and regulations. They are still allowed to claim GIPS compliance but must disclose areas where the local requirements conflict with those of the GIPS standards.

Colin Gifford, CFA is finalizing a monthly newsletter to his clients, who are primarily individual investors. Many of the clients' accounts hold the common stock of Capricorn Technologies. In the newsletter, Gifford writes, "Based upon the next six months earnings of $1.50 per share and a 10% increase in the dividend, the price of Capricorn's stock will be $22 per share by the end of the year." Regarding his stock analysis, the least appropriate action Gifford should take to avoid violating any CFA Institute Standards of Professional Conduct would be to: A. separate fact from opinion. B. include earnings estimates. C. identify limitations of the analysis.

Answer = B B is correct because while pro forma analysis may be standard industry practice, it is not required by the Standards. Earnings estimates are opinions and must be clearly identified as such.

Kam Bergeron, CFA, is an equity portfolio manager who often takes time off in the afternoon to play golf with important clients. Today, Bergeron is on the golf course when his game is interrupted by a phone call from his office. The call is from Bergeron's assistant, who notifies him of a steep and accelerating market decline. Bergeron, eager to get back to his golf game, tells his assistant to raise cash by selling 15% of all clients' holdings. Bergeron instructs his assistant to first sell the most liquid stocks in each client's portfolio and then do the same for his personal account. Bergeron is least likely to be in violation of which of the CFA Institute Standards of Professional Conduct? A. Suitability B. Priority of transactions C. Diligence and reasonable basis

Answer = B B is correct, as there is no indication a violation of Standard VI (B) Priority of Transactions occurred. The Standard concerns transactions for clients having priority over employees' transactions and is not applicable in this case because the manager gives instructions to sell his personal holdings after those of his clients.

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

Answer = C C is correct as Standard VI (B) requires that investment transactions for clients and employers have priority over transactions in which members have beneficial ownership. By executing her own accounts transactions with those of the hedge fund the analyst has violated this Standard. Micro cap securities can be thinly traded and easily influenced by changes in the volume of activity so that the analyst may benefit when she combines her transactions with the hedge funds and she should let the fund execute its orders before she makes changes to her account.

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

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

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 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? A. No B. Yes, she improperly used the CFA Institute Code and Standards to defend herself. C. Yes, she did not report the allegation on her annual Professional Conduct Statement.

Answer = C 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.

Noor Hussein, CFA, runs a financial advisory business, specializing in retirement planning and investments. One of her clients asks her to advise the firm's pension fund trustees on available investments in the market including Islamic products. On the day prior to the meeting, Hussein spends an hour familiarizing herself with Islamic investment products and getting updates on local market conditions. The next day she recommends Islamic investment products to the trustees based on her research and her expertise in retirement planning and investments. The trustees subsequently incorporate Islamic products into their investment allocation. Did Hussein's basis for the recommendation most likely comply with the CFA Code of Ethics? A. Yes. B. No, with regard to Misconduct. C. No, with regard to Diligence and Reasonable Basis.

Answer = C C is correct because Hussein did not likely act with competence and diligence as required by the CFA Institute Code of Ethics [Standard V(A)]. An hour of preparation with regard to Islamic investment products would not likely be considered sufficient to give investment advice to pension plan trustees.

Yip Wai Yin, a CFA Candidate, is an independent mutual fund sales agent. For every front-end load product she promotes, Yip receives a portion of the front-end fee as commission, at the time of sale. For every back-end load fund she sells, Yip receives a smaller commission paid at the end of the year. Yip always informs her clients she is paid a commission as an agent, but does not provide details of the compensation structure. When pitching her favored front-end load product line she tells clients 20% of her commission is always invested in the same fund as proof of her confidence in the fund she recommends. Which CFA Code of Standards with regard to Conflicts of Interest does Yip least likely violate? A. Referral Fees. B. Disclosure of Conflicts. C. Priority of Transactions.

Answer = C C is correct because Yip's investments do not adversely affect the interest of the clients and therefore do not violate the Priority of Transactions requirement. A Candidate having the same investment positions does not always create a conflict of interest and in some instances, having an aligned investment portfolio can be beneficial to the client.

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: A. only Musa. B. only Kassim. C. both Musa and Kassim.

Answer = C 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 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.

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

Answer = C C is correct because compliance with the GIPS standards does not eliminate the need for in-depth due diligence on the part of the investor.

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

Answer = C C is correct because for periods beginning on or after 1 January 2011, total firm assets must include the aggregate fair value of all discretionary and non-discretionary assets managed by the firm. This includes both fee-paying and non-fee-paying portfolios (0.A.13).

Sisse Brimberg, CFA is responsible for performance presentations at her investment firm. The presentation that Sisse uses states her firm: 1. deducts all fees and taxes; 2. uses actual and simulated performance results; 3. bases the performance on a representative individual account. Based on the above information, which of the following is the most appropriate recommendation to help Brimberg meet the CFA Institute Standards of Professional Conduct in her performance presentations? She should present performance based on: A. a gross of fee basis. B. actual not simulated results. C. a weighted composite for all similar portfolios.

Answer = C C is correct because in order to meet their obligations under Standard III (D), members should present the performance of the weighted composite of similar portfolios rather than using a single representative or all accounts, so this is the best selection of the options provided.

Oliver Opdyke, CFA, works for an independent research organization that does not manage any client money. In the course of his analysis of Red Ribbon Mining he hears rumors the president of Red Ribbon, Richard Leisberg, has recently been diagnosed with late stage Alzheimer's disease, a fact not publicly known. The final stage of Alzheimer's is when individuals lose the ability to respond to their environment, the ability to speak, and, ultimately, the ability to control movement. Leisberg is the charismatic founder of Red Ribbon, and under his leadership the company grew to become one of the largest in the industry. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, the most appropriate action for Opdyke is to: A. immediately publish a sell recommendation for Red Ribbon Mining. B. confirm the president's diagnosis before publishing his research report. C. encourage Red Ribbon Mining management to disclose the president's medical condition.

Answer = C C is correct because members and candidates should make reasonable efforts to achieve public dissemination of information that is material and nonpublic, as required by Standard II (A) Material Nonpublic Information. This effort usually entails encouraging the issuer company to make the information public. In this case, if the diagnosis is fact and not rumor, then this information is material and should be disclosed.

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

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

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? A. Prohibit employees from becoming directors or advisors B. Require employees to declare all income sources annually C. Require employees to declare all outside business interests

Answer = C C is correct because the Standards require the disclosure of conflicts (Standard VI (A)). 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.

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

Answer = C C is correct because the analyst does not violate any of the Standards of Professional Conduct by having long-standing client relationships and generally is not required to disclose such relationships. However, the analyst is not treating all clients fairly as required by Standard III (B) Fair Dealing when disseminating investment recommendations; disclosure of the relationship with long-standing clients is not the issue. The analyst has advantaged some clients over others by providing advance information, and all clients do not have a fair opportunity to act on the information within the draft report. Members and candidates may differentiate their services to clients, but different levels of service must not disadvantage or negatively affect clients.

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: A. trading software. B. non-solicitation agreement. C. investment performance history.

Answer = C 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, 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.

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

Answer = C C is correct because the recommendation is based on a reasonable and adequate research process, so the analyst could follow the research team's opinion, as required by Standard V (A) Diligence and Reasonable Basis.

Which of the following least likely reflects the two primary principles of the CFA Institute Rules of Procedure for Proceedings Related to Professional Conduct? A. Confidentiality of proceedings B. Fair process to the member and candidate C. Public disclosure of disciplinary sanctions

Answer = C C is correct because the two principles of the Rules of Procedure for Proceedings Related to Professional Conduct are confidentiality of proceedings and fair process to the member and candidate.

Vishal Chandarana, an unemployed research analyst, recently registered for the CFA Level I exam. After two months of intense interviewing, he accepts a job with a stock brokerage company in a different region of the country. Chandarana posts on a social media blog how being a CFA candidate really helped him get a job. He also notes how relieved he was when his new employer didn't ask him about being fired from his former employer. Which CFA Institute Code of Ethics or Standards of Professional Conduct did Chandarana least likely violate? A. Misconduct B. Loyalty to Employers C. Reference to the CFA Program

Answer = C C is correct because there is no evidence Chandarana violated Standard VII (B) with regard to his being a CFA candidate. Specifically, Chandarana does not overstate his competency or imply he will achieve superior performance as a result of his CFA designation. It does appear Chandarana did not act with integrity when he hid information that could potentially harm his new employer's reputation, thus violating Standard I (D) Professionalism (Misconduct) and Standard IV (A) Duty to Employers (Loyalty).

Sergio Morales, CFA believes he has found evidence his supervisor is engaged in fraudulent activity concerning a client's account. When Morales confronts his supervisor, he is told the client is fully aware of the issue. Later that day, Morales contacts the client and upon disclosing his evidence, is told he should mind his own business. Concerned his job is at risk, Morales provides his evidence, along with copies of the client's most recent account statements, to a government whistle blower program. Morales is least likely to have violated which of the following CFA Institute Standards of Professional Conduct? A. Duties to Clients B. Duties to Employers C. Communication with Clients

Answer = C C is correct because this Standard has not been violated. Even though he talked to the client, the communication did not relate to the investment process. He has violated his duties to clients by disclosing confidential information to the government whistle blower program. He has also violated a duty to his employer as contradicting employer instructions are not permitted unless the member is acting to protect the integrity of capital markets and the interests of clients.

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 commodities would increase in value and recommended investors hold at least 10% of their portfolio assets in commodities based on consistent increases in their values over the previous two years. Without doing any additional research, Zuelekha recommends to all her clients an immediate allocation of 5% of their portfolio into commodities. Over the next few weeks, Zuelekha moves her own portfolio to a 10% commodity allocation. Which of the CFA Standards did Zuelekha most likely violate? A. Priority of Transactions. B. Independence and Objectivity. C. Diligence and a Reasonable Basis.

Answer = C C is correct, as Standard (V) 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 Standard with regard to Diligence and a Reasonable Basis.

Which of the following least likely forms the basic structure for enforcement of the CFA Institute Professional Conduct Program? A. Bylaws B. Rules of Procedure C. Board of Governors

Answer = C C is correct. Although the Board of Governors maintains oversight and responsibility for the Professional Conduct Program, the Institute's Bylaws and Rules of Procedure form the basic structure for enforcement of the Code and Standards.

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

Answer = C C is correct. In order to avoid violating Standard III (E) Staal should determine if applicable securities regulations require disclosing the records before she provides the confidential information concerning her client's investments.

Joan Tasha, CFA, a supervisor at Olympia Advisors (OA), wrote and implemented compliance policies at her firm. A long time OA employee, Derek Longtree, recently changed the asset allocation of a client, which is inconsistent with her financial needs and objectives and with OA's policies. Until now Longtree has never violated OA's policies. Tasha discusses the issue with Longtree but takes no further action. Do Tasha's actions concerning Longtree most likely violate any CFA Institute Standards of Professional Conduct? A. No. B. Yes, because she failed to detect Longtree's actions. C. Yes, because she did not take steps to ensure that the violation will not be repeated.

Answer = C C is correct.. Once a supervisor learns that an employee has violated or may have violated the law or the Code and Standards, the supervisor must promptly initiate an investigation to ascertain the extent of the wrongdoing. Relying on an employee's statements about the extent of the violation or assurances that the wrongdoing will not recur is not enough. Reporting the misconduct up the chain of command and warning the employee to cease the activity are also not enough. Pending the outcome of the investigation, a supervisor should take steps to ensure that the violation will not be repeated, such as placing limits on the employee's activities or increasing the monitoring of the employee's activities.

Umi Grabbo, CFA, is a highly regarded portfolio manager for Atlantic Advisors (AA), a mid-sized mutual fund firm investing in domestic securities. She has watched the hedge fund boom and on numerous occasions suggested her firm create such a fund. Senior management has refused to commit resources to the area. Attracted by potential higher fees associated with hedge funds, Grabbo and several other employees organize a hedge fund to invest in international securities. Grabbo is careful to work on the fund development only on her own time. Because AA 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? A. Disclosure of Conflicts. B. Priority of Transactions. C. Additional Compensation Arrangements.

Answer: A According to Standard VI (A) Disclosure of Conflicts, Grabbo should disclose to her employer the fact she is developing a hedge fund that could possibly interfere with her responsibilities at AA. In setting up a new fund, Grabbo was not acting for the benefit of her employer. She should have informed AA that she wanted to organize a hedge fund and come to some mutual agreement on how this would occur.

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 violate any CFA Institute Standards of Professional Conduct? A. No. B. Yes, because he misappropriated property now belonging to Branch. C. Yes, because he failed to inform his new employer the model was the same one used by his previous employer.

Answer: A 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.

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

Answer: A Members are in compliance with CFA Institute's Standard V (A) Diligence and Reasonable Basis, if they rely on the research of another party who exercised diligence and thoroughness. Because Bishop's opinion did not agree with the final report, disassociating her from the report is one way to handle this difference between the analysts.

David Donnigan enrolled to take the Level II CFA examination in the current year, however he did not take the exam. Donnigan advised his employer he passed Level II. Subsequently, he registered to take the Level II exam the next year. Which CFA Institute Standard of Professional Conduct did Donnigan least likely violate? A. Duty to employer. B. Professional misconduct. C. Referencing Candidacy in the CFA Program.

Answer: A Members should not engage in conduct involving dishonesty, fraud, deceit, or misrepresentation (Standard I (D)). The candidate's dishonesty is not addressed in the Standard relating to Duty to Employer, however. As he registered to take the exam in the next year he still qualifies to state he is a candidate (Standard VII (B)) but he lied to his employer about passing the examination, which is a professional misconduct violation.

Albert Nyakenda, CFA, was driving to a client's office where he was expected to close a multi-million dollar deal, when he was pulled over by a traffic policeman When Nyakenda, realized the policeman planned to wrongly ticket him for speeding, he offered to buy him "lunch" so that he could quickly get to his client's office. The alternative was to go to the police station and file a complaint of being wrongly accused that would also involve going to court the next day to present his case. The lunch would cost significantly more than the ticket. Did Nyakenda violate the CFA Code of Ethics? A. Yes. B. No, because he was wrongly accused. C. No, because the cost of lunch is more than the ticket.

Answer: A Nyakenda was effectively trying to bribe the policeman so that he would not issue a speeding ticket. This action violates the Code of Ethics. Despite feeling he was wrongly accused, it is only his opinion, and may not based on fact or in a court of law. Nyakenda has a responsibility to act with integrity and in an ethical manual.

Rebecca Wong is enrolled to take the Level I CFA examination. Her friend William Leung had purchased Level I study materials from a well-known CFA review program the previous year. Leung made a photocopy of the previous year's copyrighted materials and sold it to Wong to help her study. Who violated the CFA Institute Code of Ethics or any Standards of Professional Conduct? A. Both violated. B. Neither violated. C. Only Leung violated.

Answer: A Photocopying copyrighted material, regardless of the year of publication, is a violation of the CFA Institute Standards (Standard I (A)) as copyrighted materials are protected by law. Candidates and members must comply with all applicable laws, rules, and regulations and must not knowingly participate or assist in a violation of laws.

Francesca Ndenda, CFA and Grace Rutabingwa work for New Age Managers where Rutabingwa reports to Ndenda on a daily basis, working in the same department. It has come to the attention of Ndenda that Rutabingwa received a Notice of Enquiry from the Professional Conduct Program at the CFA Institute regarding a potential cheating violation when he sat for the CFA exam in June. As Rutabingwa's supervisor, Ndenda is afraid the behavior of Rutabingwa will be seen as a violation of the CFA Code and Standards. Does Ndenda have cause for concern? A. Yes. B. No, because her responsibilities do not apply. C. No, not until Rutabingwa is found guilty of cheating.

Answer: B A supervisor's responsibilities relate to detecting and preventing violations by anyone subject to their supervision or authority regarding activities they supervise. Ndenda had no way of detecting and/or preventing Rutabingwa from cheating during the CFA exam, an event she did not attend.

A Central Bank fines a commercial bank for not following statutory regulations with regard to making specific non-performing loan provisions on three loans. Louis Marie Buffet, CFA, sits on the Board of Directors of the Commercial Bank as a non-executive director, representing minority shareholders. He also chairs the internal audit committee of the bank that determines the provisioning policy of the bank. Mercy Gatabaki, CFA is the bank's external auditor and follows international auditing standards whereby she tests the loan portfolio by randomly selecting loans to check for compliance in all aspects of Central Bank regulations. Which Charterholder is most likely in violation of the Code and Standard? A. Both. B. Buffet. C. Gatabaki.

Answer: B Buffet sat on the audit committee that determined the bank's provisioning provisions that were contrary to the statutory regulations of the Central Bank. As a result he most likely violated Standard I - Professionalism by not abiding by regulations of a regulatory body. Gatabaki did not violate Standard I - Professionalism as it is not apparent she knowingly facilitated the incorrect provisioning policy or even followed it. Auditors in the course of their audit sample files. As a result, it is possible Gatabaki did not even come across the files which were treated in a manner by the bank that was contrary to the Central Bank regulations.

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

Answer: B Despite Bosno undertaking a quick and simple analysis to determine the investment would be too risky for the Sovereign Wealth Fund doesn't necessarily mean he was not diligent and did not have a reasonable basis for making that determination.

Delaney O'Keefe, a CFA candidate, is a portfolio manager at Bahati Management Company. The company is considering investing offshore for the first time, particularly in North America, on behalf of their clientele, whom are all high net worth individuals. O'Keefe does not have experience in offshore investments so she hires Mark Carlson, CFA of Carlson Consulting on the basis of his CFA Charter, to undertake due diligence exercises on the top ten portfolio managers in North America, ranked by Assets under Management (AUM). To avoid violating any Code and Standards, O'Keefe should most likely undertake: A. a sampling of the suitability of North America for clients. B. a due diligence exercise on Mark Carlson and Carlson Consulting. C. the due diligence exercise on the top ten asset managers herself.

Answer: B O'Keefe can delegate a due diligence exercise to a third party but must ensure the person or company hired to do so is competent with the skills necessary to undertake a thorough and appropriate analysis. Just because a person has a CFA Charter does not necessarily mean he is appropriate for the assignment.

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 and a very young labor force with an investment time horizon of 25 - 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? A. Assess the risk tolerance of the Fund. B. Analyze the expected returns of private equity in the market. C. Determine if the Investment Policy Statement allows for alternative investments.

Answer: B 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.

Nicholas Bennett, CFA, is a trader at a stock exchange. Another trader approached Bennett on the floor of the exchange and verbally harassed him about a poorly executed trade. Bennett in response pushed the trader and knocked him to the ground. The exchange, after investigation, cleared Bennett from any wrongdoing. Which of the following best describes Bennett's conduct in relation to the CFA Institute Code of Ethics or Standards of Professional Conduct? Bennett: A. did not violate any Code or Standard. B. violated the Professional Misconduct Standard. C. violated both Misconduct and Integrity of Capital Markets Standards.

Answer: B The CFA Institute Code of Ethics requires members to act with integrity, competence, diligence, respect and in an ethical and professional manner; while the Standards of Professional Conduct relating to Professional Misconduct state members and candidates must not commit any act reflecting adversely on their professional reputation, integrity, or competence. Bennett's actions violated the Code of Ethics and the Standard relating to Professionalism but not the Standard relating to Integrity of Capital Markets.

Alexander Newton, CFA, is the chief compliance officer for Mills Investment Limited. Newton institutes a new policy requiring the pro rata distribution of new security issues to all established discretionary accounts for which the new issues are appropriate. The policy also provides for the distribution of new issues to newly established discretionary accounts where appropriate after their one-month anniversary date. This policy is disclosed to all existing and potential clients. Did Newton violate any CFA Institute Standards of Professional Conduct? A. No. B. Yes, because the distribution policy should treat all discretionary accounts equally. C. Yes, because disclosure of inequitable allocation methods does not fulfill the duty for fair and equitable trade allocation procedures.

Answer: C Standard III (B) Fair Dealing requires when making investments in new offerings, advance indications of interest should be obtained as well as, providing for a method for calculating allocations. Additionally, disclosure of inequitable allocation methods does not relieve a member from this obligation.

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

Answer: C In order to comply with the Code and Standards, a member or candidate cannot use material non-public information when making investment recommendations. The information overheard would not be considered material only if the staff likely to be terminated were not considered to be in influential positions such that any public announcement of their removal would be unlikely to move the share price of the bank, nor would the regional expansion substantially impact the value of the bank.

Jiro Sato, CFA, deputy treasurer for May College, manages the Student Scholarship Trust. Sato issued a Request for Proposal (RFP) for domestic equity managers. Pamela Peters, CFA, a good friend of Sato, introduces him to representatives from Capital Investments, who submitted a proposal. Sato selected Capital as a manager based on the firm's excellent performance record. Shortly after the selection, Peters, who had outstanding performance as an equity manager with another firm, accepted a lucrative job with Capital. Which of the CFA Charterholders violated CFA Institute Standards of Professional Conduct? A. Both violated Standards. B. Peters violated Standards. C. Neither violated Standards.

Answer: C Members should use reasonable care and judgment to maintain independence and objectivity (Standard I (B)). There is no indication of inappropriate behavior in selection of the equity manager or in the acceptance of employment with that manager; both decisions were based on the excellent performance records of the manager and the member, respectively.

Jeffrey Jones passed the Level I CFA examination in 1997 and the Level II examination in 2009. He is not currently enrolled for the Level III examination. According to the CFA Institute Standards of Professional Conduct, which of the following is the most appropriate way for Jones to refer to his participation in the CFA Program? A. Jeffrey Jones, CFA (expected 2011). B. Candidate in the CFA Institute CFA Program. C. Passed Level II of the CFA examination in 2009.

Answer: C No designation exists for someone who has passed Level I, Level II, or Level III of the CFA exam (Standard VII (B)). Persons who have passed a certain level of the exam may state that they have completed that level. A person can only state he is a Candidate if he is currently enrolled in the CFA Program. It is also an improper reference to use "expected" a part of the designation.

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

Answer: C Schlumberger has plagiarized the information he obtained from the websites of the World Bank and the various Central Banks by not quoting the sources within the research reports. This is a violation of Standard I - Professionalism (C) Misrepresentation.

The eight major provisions of the Global Investment Performance Standards (GIPS) include all of the following except: A. Input Data, Calculation Methodology, and Real Estate. B. Fundamentals of Compliance, Composite Construction, and Disclosures. C. Calculation Methodology, Composite Construction, and Alternative Assets.

C is correct because Alternative Assets is not among the eight major provisions or sections of the Global Investment Performance Standards which include: Fundamentals of Compliance, Input Data, Calculation Methodology, Composite Construction, Disclosures, Presentation and Reporting, Real Estate, and Private Equity. Standard II, Provisions of The Global Investment Performance Standards.

Miranda Grafton, CFA, purchased at varying prices during the trading session a large block of stock on behalf of specific accounts she managed. The stock realized a significant gain in value before the close of the trading day, so Grafton reviewed her purchase prices to determine what prices should be assigned to each specific account. According to the Standards of Practice Handbook, Grafton's most appropriate action is to allocate the execution prices: A. by giving longer-term clients more favorable prices. B. to all clients within the block trade at the same execution price. C. on a weighted basis according to the size of the clients' accounts.

Members have a responsibility to deal with all clients fairly according to Standard III (B). All clients participating in the block trade should receive the same execution price and be charged the same commission.

According to the Global Investment Performance Standards (GIPS), which of the following is not a part of the verification process? Testing whether the: A. firm has complied with all the composite construction requirements. B. verification is undertaken by the compliance department in the absence of a third party. C. firm's processes and procedures are designed to calculate results in compliance with GIPS standards.

Verification tests (Standard V) whether the investment firm has complied with all the composite construction requirements of GIPS on a firm-wide basis, and whether the firm's processes and procedures are designed to calculate and present performance results in compliance with the GIPS Standards. Verification must be performed by an independent third party. A firm cannot perform its own verification.