Ethical and Professional Standards

G&F Advisors claims compliance with the Global Investment Performance Standards (GIPS) in its marketing materials. The compliant presentation includes a footnote which indicates that the firm has been verified by an independent third party. An additional note states that G&F is in compliance with the GIPS standards except for its private equity investments. It is likely that G&F violated the GIPS standards? A) No, because the footnotes meet the requirements of the Standards. B) No, because the provisions do not apply to the private equity investments. C) Yes, because they cannot claim compliance unless all requirements of the Standard are met.

C (Firms must meet all the requirements set forth in the GIPS standards and cannot claim partial compliance.)

Park is very frustrated after taking her Level II exam. While she was studying for the exam, to supplement the curriculum provided, she ordered and used study material from a third-party provider. Park believes the additional material focused her attention on specific topic areas that were not tested while ignoring other areas. She posts the following statement on the provider's discussion board: "I am very dissatisfied with your firm's CFA Program Level II material. I found the exam extremely difficult and myself unprepared for specific questions after using your product. How could your service provide such limited instructional resources on the analysis of inventories and taxes when the exam had multiple questions about them? I will not recommend your products to other candidates." A) Park violated the Code and Standards by purchasing third-party review material. B) Park violated the Code and Standards by providing her opinion on the difficulty of the exam. C) Park violated the Code and Standards by providing specific information on topics tested on the exam.

C (Standard VII(A)-Conduct as Members and Candidates in the CFA Program prohibits providing information to candidates or the public that is considered confidential to the CFA Program. In revealing that questions related to the analysis of inventories and analysis of taxes were on the exam, Park has violated this standard. Answer B is incorrect because the guidance for the standard explicitly acknowledges that members and candidates are allowed to offer their opinions about the CFA Program. Answer A is incorrect because candidates are not prohibited from using outside resources.)

After passing all three levels of the CFA exams on her first attempts and being awarded her CFA Charter, Paula Osgood is promoting her new money management firm by issuing an advertisement. Which of these statements would most likely violate the Standard related to use of the CFA designation? A) "To earn the right to use the CFA designation, Paula passed three exams covering ethics, financial statement analysis, asset valuation, and portfolio management." B) "Paula passed three 6-hour exams on her first attempts and is a member of her local investment analyst society." C) "Because of her extensive training, Paula will be able to achieve better investment results than managers who have not been awarded the CFA designation."

C (Standard VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program prohibits members and candidates from implying superior performance as a result of being a CFA charterholder. Concise factual descriptions of the requirements to obtain the CFA Charter are acceptable. Osgood's statement that she passed the exams on her first attempts is acceptable because it states a fact.)

Andrews, a private wealth manager, is conducting interviews for a new research analyst for his firm. One of the candidates is Wright, an analyst with a local investment bank. During the interview, while Wright is describing his analytical skills, he mentions a current merger in which his firm is acting as the adviser. Andrews has heard rumors of a possible merger between the two companies, but no releases have been made by the companies concerned. Which of the following actions by Andrews is least likely a violation of the Code and Standards? A) Waiting until the next day before trading on the information to allow time for it to become public. B) Notifying all investment managers in his firm of the new information so none of their clients are disadvantaged. C) Placing the securities mentioned as part of the merger on the firm's restricted trading list.

C (The guidance to Standard II(A)-Material Nonpublic Information recommends adding securities to the firm's restricted list when the firm has or may have material nonpublic information. By adding these securities to this list, Andrews would uphold this standard. Because waiting until the next day will not ensure that news of the merger is made public, answer A is incorrect. Negotiations may take much longer between the two companies, and the merger may never happen. Andrews must wait until the information is disseminated to the market before he trades on that information. Answer B is incorrect because Andrews should not disclose the information to other managers; no trading is allowed on material nonpublic information.)

For a composite to be constructed in compliance with GIPS, the portfolios included in the composite must: A) have been managed by the firm for the full performance reporting period. C) be selected immediately after the last business day of the period for which the composite's performance will be presented. C) include all fee-paying, discretionary portfolios that are managed according to the same strategy, mandate, or investment objective.

C (To comply with GIPS, a composite must include all fee-paying, discretionary portfolios managed according to the same investment objective, strategy, or mandate. The composite or composites in which a portfolio will be included must be determined on an ex-ante basis (i.e., before the period for which the composite's performance will be calculated). A GIPS-compliant composite must include terminated accounts.)

Cannan has been working from home on weekends and occasionally saves correspondence with clients and completed work on her home computer. Because of worsening market conditions, Cannan is one of several employees released by her firm. While Cannan is looking for a new job, she uses the files she saved at home to request letters of recommendation from former clients. She also provides to prospective clients some of the reports as examples of her abilities. A) Cannan violated the Code and Standards because she did not receive permission from her former employer to keep or use the files after her employment ended. B) Cannan did not violate the Code and Standards because the files were created and saved on her own time and computer. C) Cannan violated the Code and Standards because she is prohibited from saving files on her home computer.

A (According to Standard V(C)-Record Retention, Cannan needed the permission of her employer to maintain the files at home after her employment ended. Without that permission, she should have deleted the files. All files created as part of a member's or candidate's professional activity are the property of the firm, even those created outside normal work hours. Thus, answer B is incorrect. Answer C is incorrect because the Code and Standards do not prohibit using one's personal computer to complete work for one's employer.)

During a round of golf, Rodriguez, chief financial officer of Mega Retail, mentions to Hart, a local investment adviser and long-time personal friend, that Mega is having an exceptional sales quarter. Rodriguez expects the results to be almost 10% above the current estimates. The next day, Hart initiates the purchase of a large stake in the local exchange-traded retail fund for her personal account. A) Hart violated the Code and Standards by investing in the exchange-traded fund that included Mega Retail. B) Hart did not violate the Code and Standards because she did not invest directly in securities of Mega Retail. C) Rodriguez did not violate the Code and Standards because the comments made to Hart were not intended to solicit an investment in Mega Retail.

A (Hart's decision to invest in the retail fund appears directly correlated with Rodriguez's statement about the successful quarter of Mega Retail and thus violates Standard II(A)-Material Nonpublic Information. Rodriguez's information would be considered material because it would influence the share price of Mega Retail and probably influence the price of the entire exchange-traded retail fund. Thus, answer B is incorrect. Answer C is also incorrect because Rodriguez shared information that was both material and nonpublic. Company officers regularly have such knowledge about their firms, which is not a violation. The sharing of such information, however, even in a conversation between friends, does violate Standard II(A).)

With respect to the Global Investment Performance Standards, which of the following is one of the nine sections containing investment performance provisions? A) Real Estate. B) Derivatives. C) Legal and Ethical Considerations.

A (Real Estate is one of the nine sections in the 2010 edition of the GIPS standards. Derivatives and Legal and Ethical Considerations are not sections of the Standards.)

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

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

Townsend was recently appointed to the board of directors of a youth golf program that is the local chapter of a national not-for-profit organization. The program is beginning a new fund-raising campaign to expand the number of annual scholarships it provides. Townsend believes many of her clients make annual donations to charity. The next week in her regular newsletter to all clients, she includes a small section discussing the fund-raising campaign and her position on the organization's board. A) Townsend did not violate the Code and Standards. B) Townsend violated the Code and Standards by soliciting donations from her clients through the newsletter. C) Townsend violated the Code and Standards by not getting approval of the organization before soliciting her clients.

A (Townsend has not provided any information about her clients to the leaders or managers of the golf program; thus, she has not violated Standard III(E)-Preservation of Confidentiality. Providing contact information about her clients for a direct-mail solicitation would have been a violation. Answer B is incorrect because the notice in the newsletter does not violate Standard III(E). Answer C is incorrect because the golf program's fund-raising campaign had already begun, so discussing the opportunity to donate was appropriate.)

Pietro, president of Local Bank, has hired the bank's market maker, Vogt, to seek a merger partner. Local is currently not listed on a stock exchange and has not reported that it is seeking strategic alternatives. Vogt has discussed the possibility of a merger with several firms, but they have all decided to wait until after the next period's financial data are available. The potential buyers believe the results will be worse than the results of prior periods and will allow them to pay less for Local Bank. Pietro wants to increase the likelihood of structuring a merger deal quickly. Which of the following actions would most likely be a violation of the Code and Standards? A) Pietro could instruct Local Bank to issue a press release announcing that it has retained Vogt to find a merger partner. B) Pietro could place a buy order for 2,000 shares (or four times the average weekly volume) through Vogt for his personal account. C) After confirming with Local's chief financial officer, Pietro could instruct Local to issue a press release reaffirming the firm's prior announced earnings guidance for the full fiscal year.

B ( Through placing a personal purchase order that is significantly greater than the average volume, Pietro is violating Standard IIB-Market Manipulation. He is attempting to manipulate an increase in the share price and thus bring a buyer to the negotiating table. The news of a possible merger and confirmation of the firm's earnings guidance may also have positive effects on the price of Local Bank, but Pietro's actions in instructing the release of the information does not represent a violation through market manipulation. Announcements of this nature are common and practical to keep investors informed. Thus, answers A and C are incorrect.)

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

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

The mosaic theory holds that an analyst: A) Violates the Code and Standards if the analyst fails to have knowledge of and comply with applicable laws. B) Can use material public information and nonmaterial nonpublic information in the analyst's analysis. C) Should use all available and relevant information in support of an investment recommendation.

B (The correct answer is B. This question deals with Standard II(A)-Material Nonpublic Information. The mosaic theory states that an analyst may use material public information and nonmaterial nonpublic information in creating a larger picture than shown by any individual piece of information and the conclusions the analyst reaches become material only after the pieces are assembled. Answers A and C are accurate statements relating to the Code and Standards but do not describe the mosaic theory.)

Hern Investments provides monthly emerging market research to Baker Brokerage in exchange for prospective client referrals and European equity research from Baker. Clients and prospects of Hern are not made aware of the agreement, but clients unanimously rave about the high quality of the research provided by Baker. As a result of the research, many clients with non-discretionary accounts have earned substantial returns on their portfolios. Managers at Hern have also used the research to earn outstanding returns for the firm's discretionary accounts. Hern has most likely: A) not violated the Code and Standards. B) violated the Code and Standards by using third-party research in discretionary accounts. C) violated the Code and Standards by failing to disclose the referral agreement with Baker.

C (According to Standard VI(C) Referral Fees, Hern must disclose the referral arrangement between itself and Baker so that potential clients can judge the true cost of Hern's services and assess whether there is any partiality inherent in the recommendation of services.)

Mason Smith is trying to decide which of the following composite definitions, submitted by his junior analysts, would be considered an acceptable composite according to GIPS. An acceptable composite can include all: A) accounts that are managed directly from the firm's Hong Kong office. B) actively managed portfolios, but exclude passively managed portfolios. C) portfolios that are managed to provide a return approximately equal to that of the S&P 500 Index.

C (Composites are groups of portfolios that represent a similar investment strategy, objective, or mandate. Clearly, grouping all portfolios managed to mirror the S&P 500 Index return constitutes a composite according to this definition. Organizing composites by office or by a generic active management category is not acceptable as these categories do not reflect any sort of strategy, objective, or mandate.)

ABC Investment Management acquires a new, very large account with two concentrated positions. The firm's current policy is to add new accounts for the purpose of performance calculation after the first full month of management. Cupp is responsible for calculating the firm's performance returns. Before the end of the initial month, Cupp notices that one of the significant holdings of the new accounts is acquired by another company, causing the value of the investment to double. Because of this holding, Cupp decides to account for the new portfolio as of the date of transfer, thereby allowing ABC Investment to reap the positive impact of that month's portfolio return. A) Cupp did not violate the Code and Standards because the GIPS standards allow composites to be updated on the date of large external cash flows. B) Cupp did not violate the Code and Standards because companies are allowed to determine when to incorporate new accounts into their composite calculation. C) Cupp violated the Code and Standards because the inclusion of the new account produces an inaccurate calculation of the monthly results according to the firm's stated policies.

C (Cupp violated Standard III(D)-Performance Presentations when he deviated from the firm's stated policies solely to capture the gain from the holding being acquired. Answer A is incorrect because the firm does not claim GIPS compliance and the GIPS standards require external cash flows to be treated in a consistent manner with the firm's documented policies. Answer B is incorrect because the firm does not state that it is updating its composite policies. If such a change were to occur, all cash flows for the month would have to be reviewed to ensure their consistent treatment under the new policy.)

Which of the following will most likely determine whether an individual will behave unethically? A) The person's character B) The person's internal traits and intrinsic motivation C) External factors, such as environmental or cultural elements

C (Social psychologists have shown that even good people may behave unethically in difficult situations. Situational influences, which are external factors (e.g., environmental or cultural elements), can shape our thinking, decision making, and behavior and are more likely to lead to unethical behavior than internal traits or character.)

Paper was recently terminated as one of a team of five managers of an equity fund. The fund had two value-focused managers and terminated one of them to reduce costs. In a letter sent to prospective employers, Paper presents, with written permission of the firm, the performance history of the fund to demonstrate his past success. A) Paper did not violate the Code and Standards. B) Paper violated the Code and Standards by claiming the performance of the entire fund as his own. C) Paper violated the Code and Standards by including the historical results of his prior employer.

B (Paper has violated Standard III(D)-Performance Presentation by not disclosing that he was part of a team of managers that achieved the results shown. If he had also included the return of the portion he directly managed, he would not have violated the standard. Thus, answer A is incorrect. Answer C is incorrect because Paper received written permission from his prior employer to include the results.)

Bill Cooper finds a table of historical bond yields on the website of the U.S. Treasury that supports the work he has done in his analysis and includes the table as part of his report without citing the source. Has Cooper violated the Code and Standards? A) Yes, because he did not cite the source of the table. B) Yes, because he did not verify the accuracy of the information. C) No, because the table is from a recognized source of financial or statistical data.

C (According to Standard I(C) Misrepresentation, members and candidates must cite the sources of the information they use in their analysis, unless the information is factual data (as opposed to analysis or opinion) from a recognized financial or statistical reporting service. The U.S. Treasury is one example of a recognized source of factual data.)

A code of ethics: A) is a personal view of acceptable behavior. B) encompasses current "best practices." C) specifies a minimum level of acceptable conduct.

C (A code of ethics specifies a minimum level of acceptable conduct for a group or organization, whereas "best practices" are suggested behavior, not a minimum acceptable level.)

Which of the following policies is required to comply with GIPS? A) Compliance with GIPS must be verified by an independent third party. B) Restructuring of the firm's organization cannot be used as a basis to change the historical performance results of a composite. C) The definition of the firm must include the firm's offices in all countries and regions.

B (Firms cannot alter historical performance records of composites simply because of a reorganization of the firm. This is required by GIPS Standard 0.A.15. Third-party verification of GIPS compliance and including all geographical offices in the definition of the firm are recommended, but not required.)

Cobb, Inc., has hired Jude Kasten, CFA, to manage its pension fund. The client(s) to whom Kasten owes a duty of loyalty are: A) Cobb's management. B) the shareholders of Cobb, Inc. C) the beneficiaries of the pension fund.

C (Standard III(A) Loyalty, Prudence, and Care specifies that for the manager of a pension or trust, the duty of loyalty is owed to the beneficiaries, not to the individuals who hired the manager.)

If regulations do not specify how long to retain the documents that support an analyst's conclusions, the Code and Standards recommend a period of at least: A) five years. B) seven years. C) ten years.

B (When no other regulatory guidance applies, Standard V(C) Record Retention recommends that records be maintained for a minimum of seven years.)

Which of the following statements is most accurate? Ethics can be described as: A) a commitment to upholding the law. B) an individual's personal opinion about right and wrong. C) a set of moral principles that provide guidance for our behavior.

C (Ethics can be described as a set of moral principles that provide guidance for our behavior; these may be moral principles shared by a community or societal group.)

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

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

A professional code of conduct: a) can increase public trust in the profession. B) guarantees that members will adhere to a minimum level of ethical conduct. C) includes standards that provide guidance for specific behaviors.

A (A professional code of conduct communicates to the public that members have promised to uphold a minimum level of ethical conduct when acting for clients. This is no guarantee that all members will follow the code at all times. A code of conduct may include specific standards of behavior or only state principles of conduct without specific standards or guidance.)

Which of the following is a correct statement of a member's or candidate's duty under the Code and Standards? A) In the absence of specific applicable law or other regulatory requirements, the Code and Standards govern the member's or candidate's actions. B) A member or candidate is required to comply only with applicable local laws, rules, regulations, or customs, even though the Code and Standards may impose a higher degree of responsibility or a higher duty on the member or candidate. C) A member or candidate who trades securities in a securities market where no applicable local laws or stock exchange rules regulate the use of material nonpublic information may take investment action based on material nonpublic information.

A (because this question relates to Standard I(A)-Knowledge of the Law—specifically, global application of the Code and Standards. Members and candidates who practice in multiple jurisdictions may be subject to various securities laws and regulations. If applicable law is more strict than the requirements of the Code and Standards, members and candidates must adhere to applicable law; otherwise, members and candidates must adhere to the Code and Standards. Therefore, answer A is correct. Answer B is incorrect because members and candidates must adhere to the higher standard set by the Code and Standards if local applicable law is less strict. Answer C is incorrect because when no applicable law exists, members and candidates are required to adhere to the Code and Standards, and the Code and Standards prohibit the use of material nonpublic information.)

Stafford is a portfolio manager for a specialized real estate mutual fund. Her firm clearly describes in the fund's prospectus its soft dollar policies. Stafford decides that entering the CFA Program will enhance her investment decision-making skill and decides to use the fund's soft dollar account to pay the registration and exam fees for the CFA Program. Which of the following statements is most likely correct? A) Stafford did not violate the Code and Standards because the prospectus informed investors of the fund's soft dollar policies. B) Stafford violated the Code and Standards because improving her investment skills is not a reasonable use of the soft dollar account. C) Stafford violated the Code and Standards because the CFA Program does not meet the definition of research allowed to be purchased with brokerage commissions.

C (According to Standard III(A)-Loyalty, Prudence, and Care, the CFA Program would be considered a personal or firm expense and should not be paid for with the fund's brokerage commissions. Soft dollar accounts should be used only to purchase research services that directly assist the investment manager in the investment decision-making process, not to assist the management of the firm or to further education. Thus, answer A is incorrect. Answer B is incorrect because the reasonableness of how the money is used is not an issue; the issue is that educational expense is not research.)

Which of the following statements most accurately describes the parties that GIPS are intended to apply to and serve? GIPS apply to: A) consultants who serve their existing and prospective clients. B) firms that issue securities and serve investment management firms. C) investment management firms and serve their existing and prospective clients.

C (GIPS apply to investment management firms. They are intended to serve prospective and existing clients of investment firms and consultants who advise these clients.)

Which one of the following actions will help to ensure the fair treatment of brokerage firm clients when a new investment recommendation is made? A) Informing all people in the firm in advance that a recommendation is to be disseminated. B) Distributing recommendations to institutional clients prior to individual accounts. C) Minimizing the time between the decision and the dissemination of a recommendation.

C (This question, which relates to Standard III(B)-Fair Dealing, tests the knowledge of the procedures that will assist members and candidates in treating clients fairly when making investment recommendations. The step listed in C will help ensure the fair treatment of clients. Answer A may have negative effects on the fair treatment of clients. The more people who know about a pending change, the greater the chance that someone will inform some clients before the information's release. The firm should establish policies that limit the number of people who are aware in advance that a recommendation is to be disseminated. Answer B, distributing recommendations to institutional clients before distributing them to individual accounts, discriminates among clients on the basis of size and class of assets and is a violation of Standard III(B).)

In situations where the laws of a member or candidate's country of residence, the local laws of regions where the member or candidate does business, and the Code and Standards specify different requirements, the member or candidate must abide by: A) local law or the Code and Standards, whichever is stricter. B) the Code and Standards or his country's laws, whichever are stricter. C) the strictest of local law, his country's laws, or the Code and Standards.

C (To comply with Standard I(A) Knowledge of the Law, a member must always abide by the strictest applicable law, regulation, or standard.)

Sally Albright, CFA, works full time for Frank & Company, an investment management firm, as a fixed income security analyst. Albright has been asked by a business contact at KDG Enterprises to accept some analytical work from KDG on a consulting basis. The work would entail investigating potential distressed debt securities in the small-cap market. Albright should most appropriately: A) accept the work as long as she obtains consent to all the terms of the engagement from Frank & Company. B) not accept the work as it violates the Code and Standards by creating a conflict of interest. C) accept the work as long as she obtains written consent from KDG and does it on her own time.

A (Albright may accept work for which she receives outside compensation and which may compete with her employer only if she obtains her employer's consent. Under Standard IV(A) Loyalty, such consent must be obtained from her employer prior to beginning the work.)

Beth Anderson, CFA, is a portfolio manager for several wealthy clients including Reuben Carlyle. Anderson manages Carlyle's personal portfolio of stock and bond investments. Carlyle recently told Anderson that he is under investigation by the IRS for tax evasion related to his business, Carlyle Concrete. After learning about the investigation, Anderson informs a friend at a local investment bank so that they may withdraw their proposal to take Carlyle Concrete public. Anderson has most likely: A) violated the Code and Standards by failing to maintain the confidentiality of her client's information. B) violated the Code and Standards by failing to detect and report the tax evasion to the proper authorities. C) not violated the Code and Standards since the information she conveyed pertained to illegal activities on the part of her client.

A (Anderson must maintain the confidentiality of client information according to Standard III(E) Preservation of Confidentiality. Confidentiality may be broken in instances involving illegal activities on the part of the client, but the client's information may only be relayed to proper authorities. Anderson did not have the right to inform the investment bank of her client's investigation.)

A financial adviser has been saving a portion of his salary to purchase a new vehicle. He is on track to have enough saved within the next three months. His employer has offered a special bonus for this quarter, which will go to the team that attracts the most new investors into the firm's investment funds. In addition to the potential bonus, the firm pays a 5% commission to employees who sell shares in the firm's investment funds. Several of the funds are highly rated, including one designed to provide steady income to investors. The financial adviser has added only a few new investors to the firm's funds, but his teammates have been very successful in their efforts. The end of the quarter is one week away, and his team is competing closely with another team for the bonus. One of his teammates informs the financial adviser that he really needs the bonus so his elderly mother can receive medical treatment. Later that day, the financial adviser meets with an elderly client on a limited income who is seeking more income from his investment portfolio. The client is 89 years old and in poor health. According to the client's will, the client's investment portfolio will go to his favorite charity upon his death. Which of the following is most accurate? Ethical decision-making frameworks: A) raise awareness of different perspectives. B) focus attention on short-term consequences. C) allocate more weight to those who will directly benefit from the decision.

A (Ethical decision-making frameworks raise awareness of different perspectives.)

Firms that claim to present investment performance in compliance with GIPS are required to: A) document the procedures and policies they use to ensure GIPS compliance. B) clearly disclose any calculations or other aspects of a presentation that are non-compliant with GIPS. C) calculate total firm assets as the fair value of all fee-paying discretionary portfolios managed by the firm.

A (GIPS Section 0, "Fundamentals of Compliance," states that firms must document their procedures for remaining in compliance with GIPS. Firms which state that they are in compliance with GIPS must comply fully and may not claim partial compliance. GIPS defines total firm assets as the fair value of all portfolios managed by the firm, including discretionary and non-discretionary, fee-paying and non-fee-paying portfolios.)

According to the Standard on independence and objectivity, members and candidates: A) may accept gifts or bonuses from clients. B) may not accept compensation from an issuer of securities in return for producing research on those securities. C) should consider credit ratings issued by recognized agencies to be objective measures of credit quality.

A (Gifts from clients are acceptable under Standard I(B) Independence and Objectivity, but the Standard requires members and candidates to disclose such gifts to their employers. Standard I(B) allows issuer-paid research as long as the analysis is thorough, independent, unbiased, and has a reasonable and adequate basis for its conclusions, and the compensation from the issuer is disclosed. Members and candidates should consider the potential for conflicts of interest inherent in credit ratings and may need to do independent research to evaluate the soundness of these ratings.)

The Standard regarding suitability most likely requires that: A) an advisor must analyze an investment's suitability for the client prior to recommending or acting on the investment. B) a member or candidate must decline to carry out an unsolicited transaction that she believes is unsuitable for the client. C) when managing a fund to an index, a manager who is evaluating potential investments must consider their suitability for the fund's shareholders.

A (According to Standard III(C) Suitability, a member or candidate who is in an advisory relationship with a client is responsible for analyzing the suitability of an investment for the client before taking investment action or making a recommendation. If a member or candidate believes an unsolicited trade is unsuitable for a client, the appropriate action is to discuss the trade with the client. The advisor may follow her firm's policies for obtaining client approval if the requested trade would not affect the risk and return of the client's portfolio materially. If the trade would have a material effect, the advisor should discuss with the client whether the IPS needs to be updated. When managing a fund to an index or stated mandate, the manager is responsible for ensuring that potential investments are consistent with the fund's mandate. Suitability for individuals would be a concern for an advisor who recommends the fund to clients, but not for the manager of the fund.)

Miller heads the research department of a large brokerage firm. The firm has many analysts, some of whom are subject to the Code and Standards. If Miller delegates some supervisory duties, which statement best describes her responsibilities under the Code and Standards? A) Miller's supervisory responsibilities do not apply to those subordinates who are not subject to the Code and Standards. B) Miller no longer has supervisory responsibility for those duties delegated to her subordinates. C) Miller retains supervisory responsibility for all subordinates despite her delegation of some duties.

C (Under Standard IV(C)-Responsibilities of Supervisors, members and candidates may delegate supervisory duties to subordinates but such delegation does not relieve members or candidates of their supervisory responsibilities. As a result, answer B is incorrect. Moreover, whether or not Miller's subordinates are subject to the Code and Standards is irrelevant to her supervisory responsibilities. Therefore, answer A is incorrect. )

Verification of compliance with GIPS: A) may be performed on single composites. B) is required for a firm to claim GIPS compliance. C) requires the verification report to be issued for the entire firm.

C (Verification of GIPS compliance is optional, but if a firm chooses to seek third-party verification, the report must be issued with respect to the whole firm. GIPS verification cannot be carried out for a single composite.)

A research report states: "Based on the fact that the South American utilities sector has seen rapid growth in new service orders, we expect that most companies in the sector will be able to convert the revenue increases into significant profits. We also believe the trend will continue for the next three to five years." The report goes on to describe the major risks of investing in this market. The author of this report: A) has not violated the Code and Standards. B) violated the Code and Standards by failing to properly distinguish factual information from opinions. C) violated the Code and Standards by failing to properly identify details related to the operations of South American utilities.

A (Historical growth can be cited as a fact. The report states that the firm expects further growth and profitability, which phrases the statement as an opinion. Under Standard V(B) Communication with Clients and Prospective Clients, it is not necessary to include every detail about a potential investment in a report. Members and candidates are expected to use their judgment and identify the most important factors to include.)

Brown works for an investment counseling firm. Green, a new client of the firm, is meeting with Brown for the first time. Green used another counseling firm for financial advice for years, but she has switched her account to Brown's firm. After spending a few minutes getting acquainted, Brown explains to Green that she has discovered a highly undervalued stock that offers large potential gains. She recommends that Green purchase the stock. Brown has committed a violation of the Standards. What should she have done differently? A) Brown should have determined Green's needs, objectives, and tolerance for risk before making a recommendation of any type of security. B) Brown should have thoroughly explained the characteristics of the company to Green, including the characteristics of the industry in which the company operates. C) Brown should have explained her qualifications, including her education, training, and experience and the meaning of the CFA designation.

A (In this question, Brown is providing investment recommendations before making inquiries about the client's financial situation, investment experience, or investment objectives. Brown is thus violating Standard III(C)-Suitability. Answers B and C provide examples of information members and candidates should discuss with their clients at the outset of the relationship, but these answers do not constitute a complete list of those factors. Answer A is the best answer.)

Neiman Investment Co. receives brokerage business from Pick Asset Management in exchange for referring prospective clients to Pick. Pick advises clients-in writing, before the relationship is established-of the nature of its arrangement with Neiman. With regard to this practice, Pick has: A) complied with the Code and Standards. B) violated the Code and Standards by failing to preserve the confidentiality of the agreement with Neiman. C) violated the Code and Standards by participating in an agreement that creates a conflict of interest.

A (Pick has not violated the Standards. The referral arrangement is fully disclosed to clients before they agree to do business with Pick. Therefore, clients can fully assess the effect of the agreement on the referral and how the agreement may affect their accounts before hiring Pick as their asset manager.)

Which of the following statements best describes how professionals use their specialized knowledge and skills? Professionals use their specialized knowledge and skills: A) in service to others. B) to advance their career. C) for the exclusive benefit of their employers.

A (Professionals use specialized knowledge and skills in service to others. Their career and employer may benefit, but those results are not the primary focus of a professional's use of his or her specialized knowledge and skills.)

Which of the following statements is most accurate? A profession's code of ethics: A) includes standards of conduct or specific benchmarks for behavior. B) ensures that all members of a profession will act ethically at all times. C) publicly communicates the shared principles and expected behaviors of a profession's members.

A (Professionals use specialized knowledge and skills in service to others. Their career and employer may benefit, but those results are not the primary focus of a professional's use of his or her specialized knowledge and skills.)

Over the past two days, Lorraine Quigley, CFA, manager of a hedge fund, has been purchasing large quantities of Craeger Industrial Products' common stock while at the same time shorting put options on the same stock. Quigley did not notify her clients of the trades although they are aware of the fund's general strategy to generate returns. Which of the following statements is most likely correct? Quigley: A) did not violate the Code and Standards. B) violated the Code and Standards by manipulating the prices of publicly traded securities. C) violated the Code and Standards by failing to disclose the transactions to clients before they occurred.

A (Quigley's trades are most likely an attempt to take advantage of an arbitrage opportunity that exists between Craeger's common stock and its put options. She is not manipulating the prices of securities in an attempt to mislead market participants, which would violate Standard II(B) Market Manipulation. She is pursuing a legitimate investment strategy. Participants in her hedge fund are aware of the fund's investment strategy, and thus Quigley did not violate the Code and Standards by not disclosing this specific set of trades in advance of trading.)

Long has been asked to be the keynote speaker at an upcoming investment conference. The event is being hosted by one of the third-party investment managers currently used by his pension fund. The manager offers to cover all conference and travel costs for Long and make the conference registrations free for three additional members of his investment management team. To ensure that the conference obtains the best speakers, the host firm has arranged for an exclusive golf outing for the day following the conference on a local championship-caliber course. Which of the following is least likely to violate Standard I(B)? A) Long may accept only the offer to have his conference-related expenses paid by the host firm. B) Long may accept the offer to have his conference-related expenses paid and may attend the exclusive golf outing at the expense of the hosting firm. C) Long may accept the entire package of incentives offered to speak at this conference.

A (Standard I(B)-Independence and Objectivity emphasizes the need for members and candidates to maintain their independence and objectivity. Best practices dictate that firms adopt a strict policy not to accept compensation for travel arrangements. At times, however, accepting paid travel would not compromise one's independence and objectivity. Answers B and C are incorrect because the added benefits—free conference admission for additional staff members and an exclusive golf retreat for the speaker—could be viewed as inducements related to the firm's working arrangements and not solely related to the speaking engagement. Should Long wish to bring other team members or participate in the golf outing, he or his firm should be responsible for the associated fees.)

Claire Marlin, CFA, manages an investment fund specializing in foreign currency trading. Marlin writes a report to investors that describes the basic characteristics of her strategy, which is based on an expected appreciation of the euro relative to other major currencies. Marlin shows the projected returns from the strategy if the euro appreciates less than 5%, between 5% and 10%, or more than 10%, while clearly stating that these forecasts are her opinion. Has Marlin violated the Standard related to communication with clients? A) Yes. B) No, because she disclosed the basic characteristics of the investment. C) No, because she distinguished fact from opinion and discussed how the strategy may perform under a range of scenarios.

A (Standard V(B) Communication with Clients and Prospective Clients requires that members and candidates communicate the risk associated with the investment strategy used and how the strategy is expected to perform in a range of scenarios. These scenarios should include those different from the current trend. Marlin should have discussed how her strategy would perform if the euro depreciates instead of appreciating as she expects.)

Albert and Tye, who recently started their own investment advisory business, have registered to take the Level III CFA examination. Albert's business card reads, "Judy Albert, CFA Level II." Tye has not put anything about the CFA designation on his business card, but promotional material that he designed for the business describes the CFA requirements and indicates that Tye participates in the CFA Program and has completed Levels I and II. According to the Standards: A) Albert has violated the Standards, but Tye has not. B) Tye has violated the Standards, but Albert has not. C) Both Albert and Tye have violated the Standards.

A (Standard VII(B)-Reference to CFA Institute, the CFA Designation, and the CFA Program is the subject of this question. The reference on Albert's business card implies that there is a "CFA Level II" designation; Tye merely indicates in promotional material that he is participating in the CFA Program and has completed Levels I and II. Candidates may not imply that there is some sort of partial designation earned after passing a level of the CFA exam. Therefore, Albert has violated Standard VII(B). Candidates may communicate that they are participating in the CFA Program, however, and may state the levels that they have completed. Therefore, Tye has not violated Standard VII(B).)

Carter works for Invest Today, a local asset management firm. A broker that provides Carter with proprietary research through client brokerage arrangements is offering a new trading service. The broker is offering low-fee, execution-only trades to complement its traditional full-service, execution-and-research trades. To entice Carter and other asset managers to send additional business its way, the broker will apply the commissions paid on the new service toward satisfying the brokerage commitment of the prior full-service arrangements. Carter has always been satisfied with the execution provided on the full-service trades, and the new low-fee trades are comparable to the fees of other brokers currently used for the accounts that prohibit soft dollar arrangements. A) Carter can trade for his accounts that prohibit soft dollar arrangements under the new low-fee trading scheme. B) Carter cannot use the new trading scheme because the commissions are prohibited by the soft dollar restrictions of the accounts. C) Carter should trade only through the new low-fee scheme and should increase his trading volume to meet his required commission commitment.

A (The question relates to Standard III(A)-Loyalty, Prudence, and Care. Carter believes the broker offers effective execution at a fee that is comparable with those of other brokers, so he is free to use the broker for all accounts. Answer B is incorrect because the accounts that prohibit soft dollar arrangements do not want to fund the purchase of research by Carter. The new trading scheme does not incur additional commissions from clients, so it would not go against the prohibitions. Answer C is incorrect because Carter should not incur unnecessary or excessive "churning" of the portfolios (excessive trading) for the purpose of meeting the brokerage commitments of soft dollar arrangements.)

Ed Ingus, CFA, visits the headquarters and main plant of Bullitt Company and observes that inventories of unsold goods appear unusually large. From the CFO, he learns that a recent increase in returned items may result in earnings for the current quarter that are below analysts' estimates. Based on his visit, Ingus changes his recommendation on Bullitt to "Sell." Has Ingus violated the Standard concerning material nonpublic information? A) Yes. B) No, because the information he used is not material. C) No, because his actions are consistent with the mosaic theory.

A (The statement from the CFO about the current quarter's earnings is material nonpublic information. Ingus violated Standard II(A) Material Nonpublic Information by acting or causing others to act on it.)

Anderb, a portfolio manager for XYZ Investment Management Company—a registered investment organization that advises investment firms and private accounts—was promoted to that position three years ago. Bates, her supervisor, is responsible for reviewing Anderb's portfolio account transactions and her required monthly reports of personal stock transactions. Anderb has been using Jonelli, a broker, almost exclusively for brokerage transactions for the portfolio account. For securities in which Jonelli's firm makes a market, Jonelli has been giving Anderb lower prices for personal purchases and higher prices for personal sales than Jonelli gives to Anderb's portfolio accounts and other investors. Anderb has been filing monthly reports with Bates only for those months in which she has no personal transactions, which is about every fourth month. Which of the following is most likely to be a violation of the Code and Standards? A) Anderb failed to disclose to her employer her personal transactions. B) Anderb owned the same securities as those of her clients. C) Bates allowed Anderb to use Jonelli as her broker for personal trades.

A (This question involves three of the Standards. Anderb, the portfolio manager, has been obtaining more favorable prices for her personal securities transactions than she gets for her clients, which is a breach of Standard III(A)-Loyalty, Prudence, and Care. In addition, she violated Standard I(D)-Misconduct by failing to adhere to company policy and by hiding her personal transactions from her firm. Anderb's supervisor, Bates, violated Standard IV(C)-Responsibilities of Supervisors; although the company had requirements for reporting personal trading, Bates failed to adequately enforce those requirements. Answer B does not represent a violation because Standard VI(B)-Priority of Transactions requires that personal trading in a security be conducted after the trading in that security of clients and the employer. The Code and Standards do not prohibit owning such investments, although firms may establish policies that limit the investment opportunities of members and candidates. Answer C does not represent a violation because the Code and Standards do not contain a prohibition against employees using the same broker for their personal accounts that they use for their client accounts. This arrangement should be disclosed to the employer so that the employer may determine whether a conflict of interest exists.)

A financial adviser has been saving a portion of his salary to purchase a new vehicle. He is on track to have enough saved within the next three months. His employer has offered a special bonus for this quarter, which will go to the team that attracts the most new investors into the firm's investment funds. In addition to the potential bonus, the firm pays a 5% commission to employees who sell shares in the firm's investment funds. Several of the funds are highly rated, including one designed to provide steady income to investors. The financial adviser has added only a few new investors to the firm's funds, but his teammates have been very successful in their efforts. The end of the quarter is one week away, and his team is competing closely with another team for the bonus. One of his teammates informs the financial adviser that he really needs the bonus so his elderly mother can receive medical treatment. Later that day, the financial adviser meets with an elderly client on a limited income who is seeking more income from his investment portfolio. The client is 89 years old and in poor health. According to the client's will, the client's investment portfolio will go to his favorite charity upon his death. Using an ethical decision-making framework, which of the following duties would most likely take precedence in the scenario described? The financial adviser's duty to his: A) client. B) employer. C) colleagues.

A (Using an ethical decision-making framework, the financial adviser's relationship with his client would most likely take precedence in this scenario. The adviser should put his client's interests first. The exception to client interests taking precedence occurs when market integrity effects take precedence.)

Compared to complying with laws and regulations, complying with a code of ethics: A) is considered a lower standard. B) often involves more judgment. C) includes compliance with all laws and regulations.

B (A code of ethics is considered a higher standard of behavior as it goes beyond simply legality of behavior. Compliance with the ethical principles of a code of ethics often requires judgment in balancing the interests of various stakeholders and consideration of short-term effects with longer-term effects of decisions. Some behavior that is illegal, such as civil disobedience or "whistle-blowing," is considered to be ethical behavior by many.)

Karen Jones, CFA, is an outside director for Valley Manufacturing. At a director's meeting, Jones finds out that Valley Corp. has made several contributions to foreign politicians that she suspects were illegal. Jones checks with her firm's legal counsel and determines that the contributions were indeed illegal. At the next board meeting, Jones urges the board to disclose the contributions. The board, however, votes not to make a disclosure. Jones's most appropriate action would be to: A) protest the board's actions in writing to the executive officer of Valley. B) resign from the board and seek legal counsel as to her legal disclosure requirements. C) inform her supervisor of her discovery and cease attending meetings until the matter is resolved.

B (According to Standard I(A) Knowledge of the Law, since she has taken steps to stop the illegal activities and the board has ignored her, Jones must dissociate from the board and seek legal advice as to what other actions would be appropriate in this instance. She may need to inform legal or regulatory authorities of the illegal activities.)

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

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

Ethics is least likely: a) the study of acceptable and unacceptable behavior. b) the careful following of all laws and regulations. c) a set of moral principles to guide behavior.

B (Simply following all laws and regulations is not as high a standard as ethical behavior. Ethical principles typically involve more judgment than laws or regulations.)

Zanuatu, an island nation, does not have any regulations precluding the use of nonpublic information. Alfredo Romero has a friend and fellow CFA charterholder there, Donna Gordon, with whom he has shared nonpublic information regarding firms outside his industry. The information concerns several firms' internal earnings and cash flow projections. Gordon may: A) trade on the information under the laws of Zanuatu, which govern her behavior. B) not trade on the information under CFA Institute Standards, which govern her behavior. C) trade on the information under CFA Institute Standards since the firms concerned are outside Romero's industry.

B (Even though the laws of Zanuatu would not preclude trading on the information, as a CFA Charterholder, Gordon is bound by the CFA Institute Code and Standards. Standard II(A) prohibits the use of material nonpublic information, and Gordon may not trade the stocks about which she has such information under any circumstances.)

Which of the following statements about the Standard on misconduct is most accurate? A) Misconduct applies only to a member or candidate's professional activities. B) Neglecting to perform due diligence when required is an example of misconduct. C) A member or candidate commits misconduct by engaging in any illegal activity.

B (Failing to act when required by one's professional obligations, such as neglecting to perform due diligence related to an investment recommendation, violates Standard I(D) Misconduct. Acts a member commits outside his professional capacity are misconduct if they reflect poorly on the member or candidate's honesty, integrity, or competence (e.g., theft or fraud).Violations of the law that do not reflect on the member or candidate's honesty, integrity, or competence (e.g., an act related to civil disobedience) are not necessarily regarded as misconduct.)

An investment management firm, Investco, Inc., was recently audited by the United States Securities and Exchange Commission (SEC). Investco included the following statement in its performance presentation report: "This report has been verified as GIPS compliant by Investco's Compliance Department and the United States Securities and Exchange Commission." Does this constitute acceptable verification under GIPS? A) No, only one party may perform GIPS verification. B) No, neither party involved in the audit constitutes an acceptable GIPS verification. C) Yes, because an audit was performed implicitly by the SEC and explicitly by the firm's audit team.

B (GIPS verification must be performed by an independent third party. The SEC audit does not constitute a GIPS verification.)

Which of the following statements is most accurate? Investment professionals have a special responsibility to act ethically because: A) the industry is heavily regulated. B) they are entrusted to protect clients' assets. C) the profession requires compliance with its code of ethics.

B (Investment professionals have a special responsibility because clients entrust them to protect the clients' assets.)

Sarah Johnson, a portfolio manager, is offered a bonus directly by a client if Johnson meets certain performance goals. To comply with the Standard that governs additional compensation arrangements, Johnson should: A) decline to accept a bonus outside of her compensation from her employer. B) disclose this arrangement to her employer in writing and obtain her employer's permission. C) disclose this arrangement to her employer only if she actually meets the performance goals and receives the bonus.

B (Johnson should disclose her additional compensation arrangement in writing to her employer and obtain her employer's written consent before accepting this offer, in accordance with Standard IV(B) Additional Compensation Arrangements.)

The CFA Institute Professional Conduct Program (PCP) has begun an investigation into Chris Jones, a Level II CFA candidate, and a number of his CFA Charterholder colleagues. Jones has access to confidential client records that could be useful in clearing his name and wishes to share this information with the PCP. Which of the following most accurately describes Jones's duties with regard to preservation of confidentiality? A) Sharing the confidential information with the PCP would violate the Standards. B) The Standards encourage, but do not require, that Jones support the PCP investigation into his colleagues. C) Jones may share confidential information about former clients with the PCP but may not share confidential information about current clients.

B (Members and candidates are required to cooperate with PCP investigations into their own conduct and encouraged to cooperate with PCP investigations into the conduct of others. Sharing confidential information with the PCP is not a violation of Standard III(E) Preservation of Confidentiality. Any client information shared with the PCP will be kept in strict confidence. Standard III(E) states that members and candidates are required to maintain confidentiality of client records even after the end of the client relationship.)

A member or candidate who has supervisory responsibility: A) should place particular emphasis on enforcing investment-related compliance policies. B) is responsible for instructing those to whom he has delegated authority about methods to detect and prevent violations of the law and the Code and Standards. C) has complied with the Standards if she reports employee violations to upper management and provides a written warning to the employee to cease such activities.

B (Members or candidates may delegate supervisory duties to subordinates but remain responsible for instructing them about how to detect and prevent violations. Reporting the violation and warning the employee are not sufficient to comply with Standard IV(C) Responsibilities of Supervisors. The supervisor must also take steps to prevent further violations while she conducts an investigation, such as limiting the employee's activity or increasing her monitoring of the employee. Supervisors should enforce investment-related and non-investment related policies equally.)

Will Hunter, CFA, is a portfolio manager at NV Asset Managers. An investment banker asks Hunter to purchase shares in a new IPO to support the price long enough for insiders to liquidate their holdings. Hunter realizes that the price of the shares will almost certainly fall dramatically after his buying support ceases. NV management "strongly suggests" that Hunter honor the investment banker's request since NV has had a longstanding relationship with the investment bank. If Hunter agrees to make the purchases, he will: A) not violate the Code and Standards. B) violate the Standard concerning market manipulation. C) violate the Standard concerning priority of transactions.

B (NV management is asking Hunter to violate Standard II(B) Market Manipulation, which prohibits actions that are designed to distort prices or artificially increase trading volume. The intent is to mislead market participants and allow corporate insiders to take advantage of artificially high prices.)

Which of the following statements is most accurate? A) All legal behavior is ethical behavior. B) Some ethical behavior may be illegal. C) Legal standards represent the highest standard.

B (Some ethical behavior may be illegal. Civil disobedience is an example of what may be illegal behavior that some consider to be ethical. Legal and ethical behavior often coincide but not always. Standards of conduct based on ethical principles may represent a higher standard of behavior than the behavior required by law.)

Melvin Byrne, CFA, manages a portfolio for James Martin, a wealthy client. Martin's portfolio is well diversified with a slight tilt toward capital appreciation. Martin requires very little income from the portfolio. Recently, Martin's brother, Cliff, has become a client of Byrne. Byrne proceeds to invest Cliff 's portfolio in a similar manner to James's portfolio based on the fact that both brothers have a similar lifestyle and are only two years apart in age. Which of the following statements is most likely correct? Byrne: A) violated the Code and Standards by knowingly creating a conflict of interest between James's and Cliff 's portfolios. B) violated the Code and Standards by failing to determine Cliff 's objectives and constraints prior to investing his portfolio. C) did not violate the Code and Standards.

B (Standard III(C) Suitability requires that before taking investment action, members and candidates must make a reasonable inquiry into a client's or prospect's investment objectives and constraints as well as their prior investment experience. Byrne cannot assume that because the brothers have similar lifestyles and are close in age that they should have similarly managed portfolios. Byrne should have interviewed Cliff directly before investing his portfolio.)

Which of the following actions is a required, rather than recommended, action under the Standard regarding diligence and a reasonable basis for a firm's research recommendations? A) Compensate analysts based on a measure of the quality of their research. B) Review the assumptions used and evaluate the objectivity of third-party research reports. C) Have a policy requiring that research reports and recommendations have a basis that can be substantiated as reasonable and adequate.

B (Standard V(A) Diligence and Reasonable Basis requires analysts who use third-party research to review its assumptions and evaluate the independence and objectivity of the research. The other choices are recommended procedures for compliance with the Standard.)

Ralph Salley, a Level I candidate in the CFA Program, is explaining Standard VI(B) Priority of Transactions, to his supervisor. Salley states, "The Standard recommends, but does not require, that members and candidates should not participate in initial public offerings. The Standard also recommends that trades for accounts of family members be made after those for other clients, but before those for the account of the members and candidates responsible for executing the transactions." Salley's explanation of the Standard is: A) correct. B) incorrect, because the Standard does not recommend that trades for family members be made after those for other clients. C) incorrect, because the Standard requires that members and candidates not participate in initial public offerings.

B (Standard VI(B) Priority of Transactions recommends that members and candidates avoid the appearance of conflict of interest by not participating in IPOs. If a family member is a fee-paying client, the member or candidate should treat them like any other client, not giving any advantage or disadvantage to their accounts.)

Rose, a portfolio manager for a local investment advisory firm, is planning to sell a portion of his personal investment portfolio to cover the costs of his child's academic tuition. Rose wants to sell a portion of his holdings in Household Products, but his firm recently upgraded the stock to "strong buy." Which of the following describes Rose's options under the Code and Standards? A) Based on his firm's "buy" recommendation, Rose cannot sell the shares because he would be improperly prospering from the inflated recommendation. B) Rose is free to sell his personal holdings once his firm is properly informed of his intentions. C) Rose can sell his personal holdings but only when a client of the firm places an order to buy shares of Household.

B (Standard VI(B)-Priority of Transactions does not limit transactions of company employees that differ from current recommendations as long as the sale does not disadvantage current clients. Thus, answer A is incorrect. Answer C is incorrect because the Standard does not require the matching of personal and client trades.)

After writing the Level I CFA exam, Cynthia White goes to internet discussion site CFA Haven to express her frustration. White writes, "CFA Institute is not doing a competent job of evaluating candidates because none of the questions in the June exam touched on Alternative Investments." White most likely violated the Standard related to conduct as a candidate in the CFA program by: A) publicly disputing CFA Institute policies and procedures. B) disclosing subject matter covered or not covered on a CFA exam. C) participating in an internet forum that is directed toward CFA Program participants.

B (Standard VII(A) Conduct as Participants in CFA Institute Programs prohibits candidates from revealing which portions of the Candidate Body of Knowledge were or were not covered on an exam. Members and candidates are free to disagree with the policies, procedures, or positions taken by the CFA Institute. The Standard does not prohibit participating in CFA Program-related internet blogs, forums, or social networks)

Ward is scheduled to visit the corporate headquarters of Evans Industries. Ward expects to use the information he obtains there to complete his research report on Evans stock. Ward learns that Evans plans to pay all of Ward's expenses for the trip, including costs of meals, hotel room, and air transportation. Which of the following actions would be the best course for Ward to take under the Code and Standards? A) Accept the expense-paid trip and write an objective report. B) Pay for all travel expenses, including costs of meals and incidental items. C) Accept the expense-paid trip but disclose the value of the services accepted in the report.

B (The best course of action under Standard I(B)-Independence and Objectivity is to avoid a conflict of interest whenever possible. Therefore, for Ward to pay for all his expenses is the correct answer. Answer C details a course of action in which the conflict would be disclosed, but the solution is not as appropriate as avoiding the conflict of interest. Answer A would not be the best course because it would not remove the appearance of a conflict of interest; even though the report would not be affected by the reimbursement of expenses, it could appear to be.)

Situational factors that influence ethical behavior are least likely to include: A) social pressure. B) large financial rewards. C) a lack of ethical principles.

C (Situational factors are those external to the decision makers, such as financial rewards and desire to please co-workers or others. Researchers have found that external factors are often more likely than a lack of personal ethics to lead to poor ethical decisions.)

An investment banking department of a brokerage firm often receives material nonpublic information that could have considerable value if used in advising the firm's brokerage clients. In order to conform to the Code and Standards, which one of the following is the best policy for the brokerage firm? A) Permanently prohibit both "buy" and "sell" recommendations of the stocks of clients of the investment banking department. B) Establish physical and informational barriers within the firm to prevent the exchange of information between the investment banking and brokerage operations. C) Monitor the exchange of information between the investment banking department and the brokerage operation.

B (The best policy to prevent violation of Standard II(A)-Material Nonpublic Information is the establishment of firewalls in a firm to prevent exchange of insider information. The physical and informational barrier of a firewall between the investment banking department and the brokerage operation prevents the investment banking department from providing information to analysts on the brokerage side who may be writing recommendations on a company stock. Prohibiting recommendations of the stock of companies that are clients of the investment banking department is an alternative, but answer A states that this prohibition would be permanent, which is not the best answer. Once an offering is complete and the material nonpublic information obtained by the investment banking department becomes public, resuming publishing recommendations on the stock is not a violation of the Code and Standards because the information of the investment banking department no longer gives the brokerage operation an advantage in writing the report. Answer C is incorrect because no exchange of information should be occurring between the investment banking department and the brokerage operation, so monitoring of such exchanges is not an effective compliance procedure for preventing the use of material nonpublic information.)

Which of the following definitions of a firm would violate GIPS? A) Investment firm that has been in existence for less than five years. B) Regional branch of an investment management firm marketed under the name of its parent. C) Entity registered with the national regulator that oversees its investment management activities.

B (The definition of a firm for GIPS-compliant performance presentation should include all geographical offices marketed under the same name brand.)

Which of the following actions is most likely a violation of the Standard on fair dealing? A) A portfolio manager allocates IPO shares to all client accounts, including her brother's fee-based retirement account. B) An investment firm routinely begins trading for its own account immediately after announcing recommendation changes to clients. C) After releasing a general recommendation to all clients, an analyst calls the firm's largest institutional clients to discuss the recommendation in more detail.

B (The firm must give its clients an opportunity to act on recommendation changes. Firms can offer different levels of service to clients as long as this is disclosed to all clients. The largest institutional clients would likely be paying higher fees for a greater level of service. The portfolio manager's brother's account should be treated the same as any other client account.)

Green Brothers, an emerging market fund manager, has two of its subsidiaries simultaneously buy and sell emerging market stocks. In its marketing literature, Green Brothers cites the overall emerging market volume as evidence of the market's liquidity. As a result of its actions, more investors participate in the emerging markets fund. Green Brothers most likely: A) did not violate the Code and Standards. B) violated the Standard regarding market manipulation. C)violated the Standard regarding performance presentation.

B (The intent of Green Brothers' actions is to manipulate the appearance of market liquidity in order to attract investment to its own funds. The increased trading activity was not based on market fundamentals or an actual trading strategy to benefit investors. It was merely an attempt to mislead market participants in order to increase assets under Green Brothers' management. The action violates Standard II(B) Market Manipulation.)

Which of the following includes only sections of the Global Investment Performance Standards? A) Disclosure, Public Equity, Presentation and Reporting. B) Real Estate, Calculation Methodology, Fundamentals of Compliance. C) Input Data, Composite Construction, Wrap Fee/Speculative Margin Account (SMA) Portfolios.

B (The nine major sections of GIPS are (0) Fundamentals of Compliance; (1) Input Data; (2) Calculation Methodology; (3) Composite Construction; (4) Disclosure; (5) Presentation and Reporting; (6) Real Estate; (7) Private Equity; and (8) Wrap Fee/Separately Managed Account (SMA) Portfolios. The incorrect choices misstate at least one of these sections. Neither "Public Equity" nor "Speculative Margin Account" is a section of GIPS.)

Smith, a research analyst with a brokerage firm, decides to change his recommendation for the common stock of Green Company, Inc., from a "buy" to a "sell." He mails this change in investment advice to all the firm's clients on Wednesday. The day after the mailing, a client calls with a buy order for 500 shares of Green Company. In this circumstance, Smith should: A) Accept the order. B) Advise the customer of the change in recommendation before accepting the order. C) Not accept the order because it is contrary to the firm's recommendation.

B (This question involves Standard III(B)-Fair Dealing. Smith disseminated a change in the stock recommendation to his clients but then received a request contrary to that recommendation from a client who probably had not yet received the recommendation. Prior to executing the order, Smith should take additional steps to ensure that the customer has received the change of recommendation. Answer A is incorrect because the client placed the order prior to receiving the recommendation and, therefore, does not have the benefit of Smith's most recent recommendation. Answer C is also incorrect; simply because the client request is contrary to the firm's recommendation does not mean a member can override a direct request by a client. After Smith contacts the client to ensure that the client has received the changed recommendation, if the client still wants to place a buy order for the shares, Smith is obligated to comply with the client's directive.)

Smith is a financial analyst with XYZ Brokerage Firm. She is preparing a purchase recommendation on JNI Corporation. Which of the following situations is most likely to represent a conflict of interest for Smith that would have to be disclosed? A) Smith frequently purchases items produced by JNI. B) XYZ holds for its own account a substantial common stock position in JNI. C) Smith's brother-in-law is a supplier to JNI.

B (This question involves Standard VI(A)-Disclosure of Conflicts—specifically, the holdings of an analyst's employer in company stock. Answers A and C do not describe conflicts of interest that Smith would have to disclose. Answer A describes the use of a firm's products, which would not be a required disclosure. In answer C, the relationship between the analyst and the company through a relative is so tangential that it does not create a conflict of interest necessitating disclosure.)

An investment management firm has been hired by ETV Corporation to work on an additional public offering for the company. The firm's brokerage unit now has a "sell" recommendation on ETV, but the head of the investment banking department has asked the head of the brokerage unit to change the recommendation from "sell" to "buy." According to the Standards, the head of the brokerage unit would be permitted to: A) Increase the recommendation by no more than one increment (in this case, to a "hold" recommendation). B) Place the company on a restricted list and give only factual information about the company. C) Assign a new analyst to decide if the stock deserves a higher rating.

B (This question relates to Standard I(B)-Independence and Objectivity. When asked to change a recommendation on a company stock to gain business for the firm, the head of the brokerage unit must refuse in order to maintain his independence and objectivity in making recommendations. He must not yield to pressure by the firm's investment banking department. To avoid the appearance of a conflict of interest, the firm should discontinue issuing recommendations about the company. Answer A is incorrect; changing the recommendation in any manner that is contrary to the analyst's opinion violates the duty to maintain independence and objectivity. Answer C is incorrect because merely assigning a new analyst to decide whether the stock deserves a higher rating will not address the conflict of interest. )

Bronson provides investment advice to the board of trustees of a private university endowment fund. The trustees have provided Bronson with the fund's financial information, including planned expenditures. Bronson receives a phone call on Friday afternoon from Murdock, a prominent alumnus, requesting that Bronson fax him comprehensive financial information about the fund. According to Murdock, he has a potential contributor but needs the information that day to close the deal and cannot contact any of the trustees. Based on the CFA Institute Standards, Bronson should: A) Send Murdock the information because disclosure would benefit the client. B) Not send Murdock the information to preserve confidentiality. C) Send Murdock the information, provided Bronson promptly notifies the trustees.

B (This question relates to Standard III(A)-Loyalty, Prudence, and Care and Standard III(E)-Preservation of Confidentiality. In this case, the member manages funds of a private endowment. Clients, who are, in this case, the trustees of the fund, must place some trust in members and candidates. Bronson cannot disclose confidential financial information to anyone without the permission of the fund, regardless of whether the disclosure may benefit the fund. Therefore, answer A is incorrect. Answer C is incorrect because Bronson must notify the fund and obtain the fund's permission before publicizing the information.)

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

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

Willier is the research analyst responsible for following Company X. All the information he has accumulated and documented suggests that the outlook for the company's new products is poor, so the stock should be rated a weak "hold." During lunch, however, Willier overhears a financial analyst from another firm whom he respects offer opinions that conflict with Willier's forecasts and expectations. Upon returning to his office, Willier releases a strong "buy" recommendation to the public. Willier: A) Violated the Standards by failing to distinguish between facts and opinions in his recommendation. B) Violated the Standards because he did not have a reasonable and adequate basis for his recommendation. C) Was in full compliance with the Standards.

B (This question relates to Standard V(A)-Diligence and Reasonable Basis. The opinion of another financial analyst is not an adequate basis for Willier's action in changing the recommendation. Answer C is thus incorrect. So is answer A because, although it is true that members and candidates must distinguish between facts and opinions in recommendations, the question does not illustrate a violation of that nature. If the opinion overheard by Willier had sparked him to conduct additional research and investigation that justified a change of opinion, then a changed recommendation would be appropriate.)

Scott works for a regional brokerage firm. He estimates that Walkton Industries will increase its dividend by US$1.50 a share during the next year. He realizes that this increase is contingent on pending legislation that would, if enacted, give Walkton a substantial tax break. The US representative for Walkton's home district has told Scott that, although she is lobbying hard for the bill and prospects for its passage are favorable, concern of the US Congress over the federal deficit could cause the tax bill to be voted down. Walkton Industries has not made any statements about a change in dividend policy. Scott writes in his research report, "We expect Walkton's stock price to rise by at least US$8.00 a share by the end of the year because the dividend will increase by US$1.50 a share. Investors buying the stock at the current time should expect to realize a total return of at least 15% on the stock." According to the Standards: A) Scott violated the Standards because he used material inside information. B) Scott violated the Standards because he failed to separate opinion from fact. C) Scott violated the Standards by basing his research on uncertain predictions of future government action.

B (This question relates to Standard V(B)-Communication with Clients and Prospective Clients. Scott has issued a research report stating that he expects the price of Walkton Industries stock to rise by US$8 a share "because the dividend will increase" by US$1.50 per share. He has made this statement knowing that the dividend will increase only if Congress enacts certain legislation, an uncertain prospect. By stating that the dividend will increase, Scott failed to separate fact from opinion.The information regarding passage of legislation is not material nonpublic information because it is conjecture, and the question does not state whether the US representative gave Scott her opinion on the passage of the legislation in confidence. She could have been offering this opinion to anyone who asked. Therefore, statement A is incorrect. It may be acceptable to base a recommendation, in part, on an expectation of future events, even though they may be uncertain. Therefore, answer C is incorrect. )

Stewart has been hired by Goodner Industries, Inc., to manage its pension fund. Stewart's duty of loyalty, prudence, and care is owed to: A) The management of Goodner. B) The participants and beneficiaries of Goodner's pension plan. C) The shareholders of Goodner.

B (Under Standard III(A)-Loyalty, Prudence, and Care, members and candidates who manage a company's pension fund owe these duties to the participants and beneficiaries of the pension plan, not the management of the company or the company's shareholders.)

A financial adviser has been saving a portion of his salary to purchase a new vehicle. He is on track to have enough saved within the next three months. His employer has offered a special bonus for this quarter, which will go to the team that attracts the most new investors into the firm's investment funds. In addition to the potential bonus, the firm pays a 5% commission to employees who sell shares in the firm's investment funds. Several of the funds are highly rated, including one designed to provide steady income to investors. The financial adviser has added only a few new investors to the firm's funds, but his teammates have been very successful in their efforts. The end of the quarter is one week away, and his team is competing closely with another team for the bonus. One of his teammates informs the financial adviser that he really needs the bonus so his elderly mother can receive medical treatment. Later that day, the financial adviser meets with an elderly client on a limited income who is seeking more income from his investment portfolio. The client is 89 years old and in poor health. According to the client's will, the client's investment portfolio will go to his favorite charity upon his death. Using an ethical decision-making framework, the financial adviser would most likely: A) recommend that the elderly client invest at least some of his assets in the highly rated fund. B) research other investments that can provide steady income before making a recommendation to his elderly client. C) disclose the commission he would earn before recommending that the elderly client invest at least some of his assets in the highly rated fund.

B (Using an ethical decision-making framework, the financial adviser would identify the relevant facts, stakeholders, duties owed, and potential conflicts. In this scenario, the financial adviser owes a duty to his client as well as his employer. His client's interests take precedence over all other interests. The bonus and his colleague's desire to help his mother are situational influences. To navigate this situation, the financial adviser should seek additional information; he should research the risk and return parameters and fee structures of other investments that can provide steady income before making a recommendation to his client.)

Rule has worked as a portfolio manager for a large investment management firm for the past 10 years. Rule earned his CFA charter last year and has decided to open his own investment management firm. After leaving his current employer, Rule creates some marketing material for his new firm. He states in the material, "In earning the CFA charter, a highly regarded credential in the investment management industry, I further enhanced the portfolio management skills learned during my professional career. While completing the examination process in three consecutive years, I consistently received the highest possible scores on the topics of Ethics, Alternative Investments, and Portfolio Management." Has Rule violated Standard VII(B)-Reference to CFA Institute, the CFA Designation, and the CFA Program in his marketing material? A) Rule violated Standard VII(B) in stating that he completed the exams in three consecutive years. B) Rule violated Standard VII(B) in stating that he received the highest scores in the topics of Ethics, Alternative Investments, and Portfolio Management. C) Rule did not violate Standard VII(B).

B (according to Standard VII(B)-Reference to CFA Institute, the CFA Designation, and the CFA Program. CFA Program candidates do not receive their actual scores on the exam. Topic and subtopic results are grouped into three broad categories, and the exam is graded only as "pass" or "fail." Although a candidate may have achieved a topical score of "above 70%," she or he cannot factually state that she or he received the highest possible score because that information is not reported. Thus, answer C is incorrect. Answer A is incorrect as long as the member or candidate actually completed the exams consecutively. Standard VII(B) does not prohibit the communication of factual information about completing the CFA Program in three consecutive years.)

Employing a framework for decision making that includes the ethical aspects of the decision is most likely to: A) lead to higher profits. B) avoid any unintended ethical consequences of decisions. C) balance the interests of various stakeholders.

C (A decision-making framework that includes the ethical aspects of the decision is should consider the conflicts among the interests of various stakeholders so that decision makers can use the company's stated ethical principles and their judgment to balance these interests in an ethical manner. Profit maximization, at least in the short term, does not necessarily follow from sound ethical judgment. While integrating ethics into the decision-making process can consider and reduce unintended ethical consequences of a decision, avoiding them altogether can never be assured.)

Which of the following statements is most accurate? A profession's code of ethics: A) includes standards of conduct or specific benchmarks for behavior. B) ensures that all members of a profession will act ethically at all times. C) publicly communicates the shared principles and expected behaviors of a profession's members.

C (A profession's code of ethics publicly communicates the shared principles and expected behaviors of a profession's members. The existence of a code of ethics does not ensure that all members will behave in a manner consistent with the code and act ethically at all times. A profession will often establish a disciplinary process to address alleged violations of the code of ethics. A profession may adopt standards of conduct to enhance and clarify the code of ethics.)

Connie Fletcher, CFA, works for a small money management firm that specializes in pension accounts. Recently, a friend asked her to act as an unpaid volunteer manager for the city's street sweep pension fund. As part of the position, the city would grant Fletcher a free parking space in front of her downtown office. Before Fletcher accepts, she should most appropriately: A) do nothing because this is a volunteer position. B) inform her current clients in writing and discuss the offer with her employer. C) disclose the details of the volunteer position to her employer and obtain written permission from her employer.

C (According to Standard IV(A) Loyalty, members and candidates are expected to act for the benefit of their employer and not deprive the employer of their skills. Fletcher is performing work similar to the services that her employer provides. Although the position is a volunteer position, Fletcher will receive compensation in the form of a free parking space. In light of the circumstances, Fletcher must disclose the details of the position to her employer and get written permission before accepting the volunteer position.)

Robert Blair, CFA, Director of Research, has had an ongoing battle with his firm's management about the adequacy of its compliance system. Blair believes the firm's compliance procedures are inadequate in that they are not being monitored or carefully followed. Blair should most appropriately: A) resign from the firm unless the compliance system is strengthened and followed. B) send his superior a memo outlining the problem. C) decline in writing to continue to accept supervisory responsibility until reasonable compliance procedures are adopted.

C (According to Standard IV(C) Responsibilities of Supervisors, because he is aware that the firm's compliance procedures are not being monitored and followed and because he has repeatedly tried to get company management to correct the situation, Blair should decline supervisory responsibility until adequate procedures to detect and prevent violations of laws, regulations, and the Code and Standards are adopted and followed. If he does not do so, he will be in violation of the Code and Standards.)

A financial adviser has been saving a portion of his salary to purchase a new vehicle. He is on track to have enough saved within the next three months. His employer has offered a special bonus for this quarter, which will go to the team that attracts the most new investors into the firm's investment funds. In addition to the potential bonus, the firm pays a 5% commission to employees who sell shares in the firm's investment funds. Several of the funds are highly rated, including one designed to provide steady income to investors. The financial adviser has added only a few new investors to the firm's funds, but his teammates have been very successful in their efforts. The end of the quarter is one week away, and his team is competing closely with another team for the bonus. One of his teammates informs the financial adviser that he really needs the bonus so his elderly mother can receive medical treatment. Later that day, the financial adviser meets with an elderly client on a limited income who is seeking more income from his investment portfolio. The client is 89 years old and in poor health. According to the client's will, the client's investment portfolio will go to his favorite charity upon his death. Which of the following statements is most accurate? An ethical decision-making framework: A) is only beneficial when a firm lacks a code of ethics. B) is used to improve compliance with laws and regulations. C) is a tool for analyzing the potential alternative actions and consequences of a decision.

C (An ethical decision-making framework is a tool for analyzing the potential alternative actions and consequences of a decision.)

Josef Karloff, CFA, acts as liaison between Pinnacle Financial (an investment management firm) and Summit Inc. (an investment banking boutique specializing in penny stocks). When Summit underwrites an IPO, Karloff routinely has Pinnacle issue vague statements implying that the firm has cash flows, financial resources, and growth prospects that are better than is the case in reality. This action is most likely a violation of the section of the Standards concerning: A) fair dealing. B) nonpublic information. C) misconduct.

C (Since the statements are vague, we have no direct evidence that a violation of securities law has occurred. However, under Standard I(D) Misconduct, members and candidates are prohibited from engaging in activities involving deceit. Karloff 's action is a clear attempt to mislead the investing public regarding the value of Summit IPOs.)

A financial adviser has been saving a portion of his salary to purchase a new vehicle. He is on track to have enough saved within the next three months. His employer has offered a special bonus for this quarter, which will go to the team that attracts the most new investors into the firm's investment funds. In addition to the potential bonus, the firm pays a 5% commission to employees who sell shares in the firm's investment funds. Several of the funds are highly rated, including one designed to provide steady income to investors. The financial adviser has added only a few new investors to the firm's funds, but his teammates have been very successful in their efforts. The end of the quarter is one week away, and his team is competing closely with another team for the bonus. One of his teammates informs the financial adviser that he really needs the bonus so his elderly mother can receive medical treatment. Later that day, the financial adviser meets with an elderly client on a limited income who is seeking more income from his investment portfolio. The client is 89 years old and in poor health. According to the client's will, the client's investment portfolio will go to his favorite charity upon his death. Which of the following is most accurate? Ethical decision-making frameworks: A) are not needed if behavior is legal. B) identify who gains the most from a decision. C) can help reduce unanticipated ethical lapses and unexpected consequences.

C (Ethical decision-making frameworks can help avoid unanticipated ethical consequences.)

Daniel Lyons, CFA, is an analyst who covers several stocks including Horizon Company. Lyons's aunt owns 30,000 shares of Horizon. She informs Lyons that she has created a trust in his name into which she has placed 2,000 shares of Horizon. The trust is structured so that Lyons will not be able to sell the shares until his aunt dies, but may vote the shares. Lyons is due to update his research coverage of Horizon next week. Lyons should most appropriately: A) update the report as usual because he is not a beneficial owner of the stock. B) advise his superiors that he is no longer able to issue research recommendations on Horizon. C) disclose the situation to his employer and, if then asked to prepare a report, also disclose his beneficial ownership of the shares in his report.

C (Even though the shares are held in trust, Lyons is considered a beneficial owner under Standard VI(A) Disclosure of Conflicts because he has a pecuniary interest in the shares and because has the power to vote the shares. Lyons is obligated to inform his employer of the potential conflict. If Lyons's employer permits him to continue issuing investment recommendations on the company, Lyons must disclose the existence of a potential conflict in his reports. )

If a country has regulations in place that conflict with GIPS, firms that wish to claim GIPS compliance: A) may not do so because GIPS do not permit exceptions or partial compliance. B) must establish a subsidiary in a location where local law does not conflict with GIPS. C) must comply with local regulations and disclose the nature of the conflict in the presentation.

C (Firms must always comply with the laws and regulations of the country in which they reside. In cases where local regulations conflict with GIPS, a firm can still claim GIPS compliance if they disclose the conflict fully in an otherwise compliant presentation.)

Samantha Donovan, CFA, is an exam proctor for the Level II CFA exam. The day before the exam is to be administered, Donovan faxes a copy of one of the questions to two friends, James Smythe and Lynn Yeats, who are Level II candidates in the CFA program. Donovan, Smythe, and Yeats had planned the distribution of an exam question months in advance. Smythe used the fax to prepare for the exam. Yeats, however, had second thoughts and threw the fax away without looking at its contents. Which of the following statements is most likely correct? A) Smythe violated the Code and Standards, but Yeats did not. B) Donovan violated the Code and Standards, but Smythe did not. C) Donovan and Yeats both violated the Code and Standards.

C (In this situation, Donovan, Smythe, and Yeats all violated Standard VII(A) Conduct as Participants in CFA Institute Programs. The Standard prohibits conduct that compromises the integrity, validity, or security of the CFA exams. Donovan clearly breached the exam security. Smythe and Yeats both compromised the integrity of the exams by planning to use the actual exam question to gain an advantage over other candidates. Even though Yeats did not ultimately use the information to study for the exam, she participated in a scheme to cheat on the CFA exam.)

Which of the following statements is most accurate? A) Increased regulations are the most useful means to reduce unethical behavior by market participants. B) Regulators quickly design and implement laws and regulations to address practices that adversely affect the fairness and efficiency of markets. C) New laws designed to reduce or eliminate conduct that adversely affects the markets can create opportunities for different, but similarly problematic, conduct.

C (New laws designed to reduce or eliminate conduct that adversely affects the markets can create opportunities for different, but similarly problematic, conduct.)

Kate Wilson, CFA, is an equity analyst. Wilson enters two transactions for her personal account. Wilson sells 500 shares of Tibon, Inc., a stock on which her firm currently has a "Buy" recommendation. Wilson buys 200 shares of Hayfield Co. and the following day issues a research report on Hayfield with a "Buy" recommendation. Has Wilson violated the Code and Standards? A) No. B) Yes, both of her actions violate the Code and Standards. C) Yes, but only one of her actions violates the Code and Standards.

C (Only one of these transactions is a violation. Standard VI(B) Priority of Transactions requires members and candidates to give clients an adequate opportunity to act on a recommendation before trading for accounts in which the member or candidate has a beneficial ownership interest. Members and candidates may trade for their own accounts as long as they do not disadvantage clients, benefit personally from client trades, or violate any regulations that apply. The Standard does not prohibit members and candidates from entering personal transactions that are contrary to what their firms are recommending for clients, as long as the transaction does not violate any of these criteria.)

Which of the following is most likely a recommended procedure for complying with the Standard on performance presentation? A) Exclude terminated accounts from past performance history. B) Present the performance of a representative account to show how a composite has performed. C) Consider the level of financial knowledge of the audience to whom the performance is presented.

C (Recommendations stated in Standard III(D) Performance Presentation include considering the sophistication and knowledge of the audience when presenting performance data. Other recommendations are to include terminated accounts in past performance history; to present the performance of a composite as a weighted average of the performance of similar portfolios, rather than using a single representative account; and to maintain the records and data that were used to calculate performance.)

Which of the following statements is most accurate? A) Large financial rewards, such as bonuses, are the most powerful situational influences. B) When decision making focuses on short-term factors, the likelihood of ethical conduct increases. C) Situational influences can motivate individuals to act in their short-term self-interests without recognizing the long-term risks or consequences for themselves and others.

C (Situational influences can motivate individuals to act in their short-term self-interests without recognizing the long-term risks or consequences for themselves and others. Large financial rewards are powerful situational influences, but in some situations, other situational influences, such as loyalty to colleagues, may be even more powerful.)

Steve Matthews, CFA, is a principal at Carlson Brothers, a leading regional investment bank specializing in initial public offerings of small to mid-sized biotech firms. Just before many of the IPOs are offered to the general public, Matthews arranges for 10% of the shares to be distributed to management of the firm going public. This action is a violation of the Standard concerning: A) additional compensation. B) disclosure of conflicts of interest. C) fair dealing.

C (Standard III(B) Fair Dealing requires that members not use their position to disadvantage clients, specifically in the case of IPOs.)

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

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

Frist Investments, Inc. has just hired Michael Pulin to manage institutional portfolios, most of which are pension related. Pulin has just taken the Level III CFA exam and is awaiting his results. Pulin has more than 15 years of investment management experience with individual clients but has never managed an institutional portfolio. Pulin joined the CFA Institute as an affiliate member two years ago and is in good standing with the organization. Which of the following statements would be most appropriate for Frist to use in advertising Pulin as a new member of the firm? Putin: A) has many years of investment experience which, along with his participation in the CFA program, will allow him to deliver superior investment performance relative to other managers. B) is a CFA Level III and passed the first two exams on the first attempt. He is an affiliate member of the CFA Institute. We expect him to become a regular member if he passes the Level III examination. C) is a Level III CFA candidate and has many years of excellent performance in the investment management industry. Pulin is an affiliate member of the CFA Institute and will be eligible to become a CFA charterholder and regular member if he passes the Level III CFA Exam.

C (Standard VII(B) governs acceptable methods of referencing the CFA Institute, CFA designation, and CFA Program. Candidates may reference their candidacy if they are enrolled for, or waiting for the results of, a CFA exam. Pulin may also reference his membership status with the CFA Institute as well as his remaining eligibility requirements to become a CFA charter holder.)

Which of the following statements is most accurate? Standards of conduct: A) are a necessary component of any code of ethics. B) serve as a general guide regarding proper conduct by members of a group. C) serve as benchmarks for the minimally acceptable behavior required of members of a group.

C (Standards of conduct serve as benchmarks for the minimally acceptable behavior required of members of a group. Some organizations will adopt only a code of ethics, which communicates the organization's values and overall expectations regarding member behavior. Others may adopt both a code of ethics and standards of conduct. Standards of conduct identify specific behavior required of community members and serve as benchmarks for the minimally acceptable behavior of community members.)

Which of the following statements clearly conflicts with the recommended procedures for compliance presented in the CFA Institute Standards of Practice Handbook? A) Firms should disclose to clients the personal investing policies and procedures established for their employees. B) Prior approval must be obtained for the personal investment transactions of all employees. C) For confidentiality reasons, personal transactions and holdings should not be reported to employers unless mandated by regulatory organizations.

C (This question asks about compliance procedures relating to personal investments of members and candidates. The statement in answer C clearly conflicts with the recommended procedures in the Standards of Practice Handbook. Employers should compare personal transactions of employees with those of clients on a regular basis regardless of the existence of a requirement by any regulatory organization. Such comparisons ensure that employees' personal trades do not conflict with their duty to their clients, and the comparisons can be conducted in a confidential manner. The statement in answer A does not conflict with the procedures in the Handbook. Disclosure of such policies will give full information to clients regarding potential conflicts of interest on the part of those entrusted to manage their money. Answer B is incorrect because firms are encouraged to establish policies whereby employees clear their personal holdings and transactions with their employers.)

Grey recommends the purchase of a mutual fund that invests solely in long-term US Treasury bonds. He makes the following statements to his clients: I. "The payment of the bonds is guaranteed by the US government; therefore, the default risk of the bonds is virtually zero." II. "If you invest in the mutual fund, you will earn a 10% rate of return each year for the next several years based on historical performance of the market." Did Grey's statements violate the CFA Institute Code and Standards? A) Neither statement violated the Code and Standards. B) Only statement I violated the Code and Standards. C) Only statement II violated the Code and Standards.

C (This question involves Standard I(C)-Misrepresentation. Statement I is a factual statement that discloses to clients and prospects accurate information about the terms of the investment instrument. Statement II, which guarantees a specific rate of return for a mutual fund, is an opinion stated as a fact and, therefore, violates Standard I(C). If statement II were rephrased to include a qualifying statement, such as "in my opinion, investors may earn . . . ," it would not be in violation of the Standards.)

Which statement about a manager's use of client brokerage commissions violates the Code and Standards? A) A client may direct a manager to use that client's brokerage commissions to purchase goods and services for that client. B) Client brokerage commissions should be used to benefit the client and should be commensurate with the value of the brokerage and research services received. C) Client brokerage commissions may be directed to pay for the investment manager's operating expenses.

C (This question involves Standard III(A)-Loyalty, Prudence, and Care and the specific topic of soft dollars or soft commissions. Answer C is the correct choice because client brokerage commissions may not be directed to pay for the investment manager's operating expenses. Answer B describes how members and candidates should determine how to use brokerage commissions—that is, if the use is in the best interests of clients and is commensurate with the value of the services provided. Answer A describes a practice that is commonly referred to as "directed brokerage." Because brokerage is an asset of the client and is used to benefit the client, not the manager, such practice does not violate a duty of loyalty to the client. Members and candidates are obligated in all situations to disclose to clients their practices in the use of client brokerage commissions.)

Jurgen is a portfolio manager. One of her firm's clients has told Jurgen that he will compensate her beyond the compensation provided by her firm on the basis of the capital appreciation of his portfolio each year. Jurgen should: A) Turn down the additional compensation because it will result in conflicts with the interests of other clients' accounts. B) Turn down the additional compensation because it will create undue pressure on her to achieve strong short-term performance. C) Obtain permission from her employer prior to accepting the compensation arrangement.

C (This question involves Standard IV(B)-Additional Compensation Arrangements. The arrangement described in the question—whereby Jurgen would be compensated beyond the compensation provided by her firm, on the basis of an account's performance—is not a violation of the Standards as long as Jurgen discloses the arrangement in writing to her employer and obtains permission from her employer prior to entering into the arrangement. Answers A and B are incorrect; although the private compensation arrangement could conflict with the interests of other clients and lead to short-term performance pressures, members and candidates may enter into such agreements as long as they have disclosed the arrangements to their employer and obtained permission for the arrangement from their employer.)

Jamison is a junior research analyst with Howard & Howard, a brokerage and investment banking firm. Howard & Howard's mergers and acquisitions department has represented the Britland Company in all of its acquisitions for the past 20 years. Two of Howard & Howard's senior officers are directors of various Britland subsidiaries. Jamison has been asked to write a research report on Britland. What is the best course of action for her to follow? A) Jamison may write the report but must refrain from expressing any opinions because of the special relationships between the two companies. B) Jamison should not write the report because the two Howard & Howard officers serve as directors for subsidiaries of Britland. C) Jamison may write the report if she discloses the special relationships with the company in the report.

C (This question involves Standard VI(A)-Disclosure of Conflicts. The question establishes a conflict of interest in which an analyst, Jamison, is asked to write a research report on a company that is a client of the analyst's employer. In addition, two directors of the company are senior officers of Jamison's employer. Both facts establish that there are conflicts of interest that must be disclosed by Jamison in her research report. Answer B is incorrect because an analyst is not prevented from writing a report simply because of the special relationship the analyst's employer has with the company as long as that relationship is disclosed. Answer A is incorrect because whether or not Jamison expresses any opinions in the report is irrelevant to her duty to disclose a conflict of interest. Not expressing opinions does not relieve the analyst of the responsibility to disclose the special relationships between the two companies.)

Michelieu tells a prospective client, "I may not have a long-term track record yet, but I'm sure that you'll be very pleased with my recommendations and service. In the three years that I've been in the business, my equity-oriented clients have averaged a total return of more than 26% a year." The statement is true, but Michelieu only has a few clients, and one of his clients took a large position in a penny stock (against Michelieu's advice) and realized a huge gain. This large return caused the average of all of Michelieu's clients to exceed 26% a year. Without this one investment, the average gain would have been 8% a year. Has Michelieu violated the Standards? A) No, because Michelieu is not promising that he can earn a 26% return in the future. B) No, because the statement is a true and accurate description of Michelieu's track record. C) Yes, because the statement misrepresents Michelieu's track record.

C (This question relates to Standard I(C)-Misrepresentation. Although Michelieu's statement about the total return of his clients' accounts on average may be technically true, it is misleading because the majority of the gain resulted from one client's large position taken against Michelieu's advice. Therefore, this statement misrepresents the investment performance the member is responsible for. He has not taken steps to present a fair, accurate, and complete presentation of performance. Answer B is thus incorrect. Answer A is incorrect because although Michelieu is not guaranteeing future results, his words are still a misrepresentation of his performance history.)

A financial adviser has been saving a portion of his salary to purchase a new vehicle. He is on track to have enough saved within the next three months. His employer has offered a special bonus for this quarter, which will go to the team that attracts the most new investors into the firm's investment funds. In addition to the potential bonus, the firm pays a 5% commission to employees who sell shares in the firm's investment funds. Several of the funds are highly rated, including one designed to provide steady income to investors. The financial adviser has added only a few new investors to the firm's funds, but his teammates have been very successful in their efforts. The end of the quarter is one week away, and his team is competing closely with another team for the bonus. One of his teammates informs the financial adviser that he really needs the bonus so his elderly mother can receive medical treatment. Later that day, the financial adviser meets with an elderly client on a limited income who is seeking more income from his investment portfolio. The client is 89 years old and in poor health. According to the client's will, the client's investment portfolio will go to his favorite charity upon his death. Which of the following situational influences is likely to have the most effect on the financial adviser's efforts to get new clients to invest in the funds? His relationship with his: A) client. B) employer. C) teammates.

C (The financial adviser's relationship with his teammates is likely to have the most effect on the financial adviser's efforts.)