Ethics
To claim compliance with the GIPS standards, a firm is required to: adhere to certain calculation methodologies. conduct an independent third-party verification of its claim of compliance. perform periodic internal compliance checks of its investment performance process
A
Andrew Smith, CFA, works for Granite, a commercial bank that also has a sizeable sell side research division. Smith is presenting financing solutions to a potential business client, Dynamic Materials Corp. As part of his presentation, Smith mentions that Granite will initiate research coverage on Dynamic. Is Smith's arrangement most likely appropriate with regards to the CFA Standards? Yes. No, because Smith cannot offer to provide research coverage on a company if they become a corporate finance client. No, because Granite cannot provide research coverage on a corporate finance client as this constitutes a violation of research independence.
A is correct because under Standard I(B) members and candidates must protect their independence and objectivity. Agreeing to provide objective research coverage of a company does not constitute a violation of this standard provided the analyst writing the report is free to come up with their own independent conclusion. Smith can agree to provide research coverage but cannot commit Granite's research department to providing a favorable recommendation.
In order to provide investors with a more comprehensive view of a firm's performance, the current GIPS standards includes new provisions related to: various measures of risk. all aspects of performance measurement. the unique characteristics of each asset class.
A is correct. Historically, the GIPS standards focused primarily on returns. In the spirit of fair representation and full disclosure, and in order to provide investors with a more comprehensive view of a firm's performance, the current GIPS standards includes new provisions related to risk.
Which of the following is not included in the nine major provisions of the Global Investment Performance Standards (GIPS)? Input Data, Calculation Methodology, and Real Estate Fundamentals of Compliance, Composite Construction, and Disclosure Calculation Methodology, Composite Construction, and Alternative Assets
C is correct because Alternative Assets is not among the nine major provisions or sections of the Global Investment Performance Standards, which include: Fundamentals of Compliance, Input Data, Calculation Methodology, Composite Construction, Disclosure, Presentation and Reporting, Real Estate, Private Equity, and Wrap Fee/Separately Managed Account (SMA) Portfolios.
For a retail client's portfolio to be included in a GIPS compliant firm's composite, it will most likely be in a composite: composed of discretionary funds. restricted to retail funds. with both fee-paying and non-fee-paying funds.
A is correct. A composite must include all actual, fee-paying, discretionary portfolios managed in accordance with the same investment mandate, objective, or strategy.
"Additional Compensation Agreements" is most likely a sub-section of which CFA Institute Standard of Professional Conduct? Duties to Employers Duties to Clients Professionalism
A is correct. Standard IV-Duties to Employers includes a sub-section entitled "Additional Compensation Agreements".
Which of the following statements is least likely correct with regards to the nine major sections comprising the GIPS standards? To claim compliance, firms need only calculate their performance according to GIPS requirements All requirements must be met in order to be fully compliant with the GIPS Firms are encouraged to adopt and implement the recommendations
A is correct. To claim compliance, firms must meet all GIPS requirements, not just calculate their performance according to GIPS requirements.
An investment management firm that does not adopt the GIPS standards could mischaracterize its overall performance by presenting a performance history: that includes terminated portfolios. composed of a single top-performing portfolio. for an investment mandate over all periods since the firm's inception
B
According to the recommended procedures for compliance with CFA Institute Standard V(C): Record Retention, who is most likely responsible for maintaining the records that support investment actions? The firm Research analysts The chief compliance officer
A is correct. According to the recommended procedures for compliance with CFA Institute Standard V(C): Record Retention, the responsibility to maintain records that support investment action generally lies with the firm, rather than individuals.
Which of the following statements is a stated purpose of disclosure in Standard VI(C)-Referral Fees? Disclosure will allow the client to request discounted service fees. Disclosure will help the client evaluate any possible partiality shown in the recommendation of services. Disclosure means advising a prospective client about the referral arrangement once a formal client relationship has been established.
The correct answer is B. Answer B gives one of the two primary reasons listed in the Handbook for disclosing referral fees to clients under Standard VI(C)-Referral Fees. (The other is to allow clients and employers to evaluate the full cost of the services.) Answer A is incorrect because Standard VI(C) does not require members or candidates to discount their fees when they receive referral fees. Answer C is inconsistent with Standard VI(C) because disclosure of referral fees, to be effective, should be made to prospective clients before entering into a formal client relationship with them.
According to the Fundamentals of Compliance—Requirements section of the GIPS standards, a firm must: include in total firm assets those assigned to a sub-advisor selected by the firm. alter historical composite performance after a significant change in the firm's organization occurs. represent that the calculation methodology used by the firm is "in accordance with the Global Investment Performance Standards" when presenting performance.
A
Claire Jones, CFA, is an analyst following natural gas companies in the United States. At an industry energy conference, the CFO of Alpine Energy states they are interested in making strategic acquisitions. At a separate event, Alpine's head of exploration commented he is bullish on natural gas production prospects within Northeastern Pennsylvania. Jones is aware that Alpine currently has very little exposure to this region. She also knows another company in her universe, Pure Energy, Inc., is based in Northeastern Pennsylvania and controls significant assets in the area. Pure Energy is highly leveraged, and Jones believes they will need to raise additional capital or partner with another firm to move to the production phase with their assets. Jones attempts to contact Alpine's CEO with an unrelated question and is told he is unavailable because he is on a business trip to Northeastern Pennsylvania. Jones updates her research on Pure Energy and then recommends the stock to Lisa Wong, CFA, a portfolio manager who purchases significant positions in client accounts. The following week, Pure Energy announces that they have entered into an agreement to be purchased by Alpine for a significant premium. Has either Jones or Wong most likely violated Standards with regards to the integrity of capital markets? No. Yes, Jones' recommendation is based on insider information. Yes, both Jones and Wong have acted on insider information.
A is correct because Jones has used the mosaic theory to combine non-material, nonpublic information with material public information.
James Simone, CFA, the CFO of a publicly listed company, seeks to improve the quality of his company's communication with institutional fund managers. He holds an investor briefing with this group the evening before the company earnings are announced. The company's quarterly earnings are broadcast in a press release the next day before the market opens. The earnings information in the investor briefing is identical to that in the press release. Did Simone most likely violate the CFA Institute Standards of Professional Conduct? Yes No, because investor briefing and press release information are identical. No, because the company releases information while the market is closed.
A is correct because Simone violated Standard II(A)-Material Nonpublic Information by giving institutional fund managers access to material nonpublic information prior to public dissemination (i.e., the press release). By releasing earnings results to a select group of institutional fund managers prior to a public press release, Simone allows the institutional fund managers a time advantage over other investors not invited to the investor briefing.
According to the Code and Standards regarding knowledge of laws and regulations, CFA Institute members and candidates must: understand the relevant regulations for all the countries where they trade securities. have detailed knowledge of all the laws that could potentially govern the member's activities. spend a minimum of five hours per calendar year on continuing education activities related to applicable laws and regulations.
A is correct because Standard I(A) requires members and candidates to understand applicable laws and regulations in those countries where they trade or conduct business. While an understanding of laws and regulations is required, members and candidates can rely on legal counsel and compliance to be subject matter experts in these areas. The Standards do not require a minimum of five hours of continuing education.
Wouter Duyck, CFA, is the sole proprietor of an investment advisory firm serving several hundred middle class retail clients. Duyck claims to be different from his competitors because he conducts research himself. He discloses that to simplify the management of all these accounts he has created a recommended list of stocks, from which he selects investments for all of his clients based on their suitability. Duyck's recommended list of stocks is obtained from his primary broker, who has completed due diligence on each stock. Duyck's recommended list least likely violates which of the following CFA Institute Standards of Professional Conduct? Fair Dealing. Misrepresentation. Diligence and Reasonable Basis.
A is correct because Standard III(B)-Fair Dealing concerns the fair treatment of clients when making investment recommendations or taking investment action, but there is no indication that the advisor has discriminated against any clients with regard to his recommendations as he invests all clients in the same universe of stocks. The advisor has violated Standard I(C)-Misrepresentation with his research, which is not independently created and instead relies upon information provided by his broker. This is contrary to the advisor telling clients he does his own independent investment research. In addition, the advisor has violated Standard V(A)-Diligence and Reasonable Basis, as he has not made reasonable and diligent efforts to determine if the third party's research is sound.
Bailey Watson, CFA, manages 25 emerging market pension funds. He recently had the opportunity to buy 100,000 shares in a publicly listed company whose prospects are considered "above industry norm" by most analysts. The company's shares rarely trade because most managers take a "buy and hold" strategy due to the company's small free float. Before placing the order with his dealer, Watson allocated the shares to be purchased according to the weighted value of each of his clients' portfolios. When it came time to execute the trades, the dealer was only able to purchase 50,000 shares. To prevent violating Standard III(B)-Fair Dealing, it would be most appropriate for Watson to reallocate the 50,000 shares purchased by: reducing each pension fund's allocation proportionately. distributing them equally amongst all the pension fund portfolios. allocating randomly but giving funds left out priority on the next similar type trade.
A is correct because Standard III(B)-Fair Dealing requires members and candidates to deal fairly and objectively with all clients. Certain clients cannot be favored over other clients when their investment objectives and circumstances are similar. Therefore, the most appropriate way to handle the reallocation of an illiquid share is to reduce each client's proportion on a pro rata, or weighted basis.
Rodney Rodrigues, CFA, is responsible for identifying professionals to manage specific asset classes for his firm. In selecting external advisers or subadvisers, Rodrigues reviews the adviser's investment process, established code of ethics, the quality of the published return information, and the compliance and integrated control framework of the organization. In completing his review, Rodrigues most likely violated the CFA Institute Standards of Professional Conduct with regards to his due diligence on: adherence to strategy. performance measures. internal control procedures.
A is correct because Standard V(A)-Diligence and Reasonable Basis applies to the level of review necessary in selecting an external adviser or subadviser and would at minimum include reviewing the adviser's adherence to its stated strategy.
Umi Grabbo, CFA, is a highly regarded portfolio manager for Atlantic Advisors, a mid-sized mutual fund firm investing in domestic securities. She has watched the hedge fund boom and on numerous occasions suggested that her firm create such a fund. Senior management has refused to commit resources to hedge funds. Attracted by potential higher fees associated with hedge funds, Grabbo and several other employees begin development of their own hedge fund to invest in international securities. Grabbo and her colleagues are careful to work on the fund development only on their own time. Because Atlantic management thinks hedge funds are a fad, she does not inform her supervisor about the hedge fund creation. According to the Standards of Practice Handbook, Grabbo should most likely address which of the Standards immediately? Disclosure of Conflicts Priority of Transactions Additional Compensation Arrangements
A is correct because according to Standard VI(A)-Disclosure of Conflicts, Grabbo should disclose to her employer her hedge fund development as this activity could possibly interfere with her responsibilities at Atlantic. In setting up a hedge fund, Grabbo was not acting for the benefit of her employer. She should have informed Atlantic that she wanted to organize the hedge fund and come to some mutual agreement on how this would occur.
Li Chen, is a CFA candidate and an equity research analyst at an independent research firm. Chen is contacted by Granite Technologies, Inc., to write an issuer-paid research report on the firm to increase awareness of Granite's stock amongst the investment community. Which statement best represents how Chen should respond to this assignment request? Chen should: negotiate a flat fee and disclose this relationship in her report. decline to write the report as it will compromise her independence. accept long-term warrants on Granite's stock in lieu of any cash compensation.
A is correct because by negotiating a flat fee, her independence and objectivity would not be questioned as her fee would not be based on the results of her research. In addition, by fully disclosing the relationship in her report she allows the reader to determine if her judgment is compromised. As a result, Chen is maintaining compliance with Standard I(B)-Independence and Objectivity.
Which of the following statements concerning an investment firm's historical record is most likely correct according to the GIPS standards? If the composite has been in existence for fewer than five years, the firm must show its entire performance history since inception. The goal is to present five years of GIPS compliant performance results. As long as a prospective client receives a compliant presentation at any time a firm meets its requirements.
A is correct because if the composite has been in existence for fewer than five years, the firm must show its entire performance history since inception.
Adira Badawi, CFA, who owns a research and consulting company, is an independent board member of a leading cement manufacturer in a small local market. Because of Badawi's expertise in the cement industry, a foreign cement manufacturer looking to enter the local market has hired him to undertake a feasibility study. Under what circumstances can Badawi most likely undertake the assignment without violating the CFA Institute Code of Ethics and Standards of Professional Conduct? If he: makes full disclosure to both companies. receives written permission from the local company. signs confidentiality agreements with both companies.
A is correct because making full and fair disclosure of all matters that could reasonably be expected to impair one's independence and objectivity or interfere with respective duties to one's clients is required by Standard VI(A)-Disclosure of Conflicts of the CFA Institute Code of Ethics and Standards of Professional Conduct.
Robin Herring, CFA, is a government bond research analyst at an independent credit rating agency. A competitor credit rating agency just downgraded the bonds of a government Herring follows. Herring notes that all of the information in the competitor's report was covered in his analysis published last week. In the past, Herring has been slow to downgrade bonds, so he starts to doubt his own analysis after seeing the competitor's report. Herring decides to reissue his credit rating of this government bond and match the competitor's downgrade. In his revised report, Herring states that new information has been made available to justify the downgrade. Herring posts the revision on the credit rating agency's website and provides it by e-mail to all clients who received the original. Herring's rating change least likely violated which of the following CFA Institute Code of Ethics and Standards of Professional Conduct? Fair Dealing Communication with Clients Diligence and Reasonable Basis
A is correct because the analyst has dealt fairly with all clients by sending them an e-mail and posting his rating change on the credit rating agency's website when making material changes to his prior investment recommendation; therefore, he has not violated Standard III(B)-Fair Dealing. Clients should be treated fairly when material changes in a member's or candidate's prior investment recommendations are disseminated, which has been done.
Colin Caldwell, CFA, is the chief investment officer of Northwest Mutual Fund, whose investment objective is to invest in fixed income emerging market securities. Caldwell allocates the fund's assets primarily to bonds of commodity producers in emerging markets and invests in a combination of several different investments to ensure an acceptable level of risk. The allocation is clearly disclosed in all fund communications. High volatility in the commodities markets at the start of the year makes Caldwell pessimistic about returns, so he shifts the fund into emerging market and US government securities, positions he maintains at the end of the year. This change is noted in the next annual report to fund shareholders. Caldwell's investment change least likely violated the CFA Institute Code of Ethics and Standards of Professional Conduct concerning: diversification. communication with clients. investments outside his mandate.
A is correct because the investment officer has invested in a combination of several different investments to ensure an acceptable level of risk rather than having all assets in a single investment, and he has sought a reasonable amount of diversification. However, the shift into emerging market and US government securities was communicated to clients in the annual report and not on an ongoing basis, in violation of Standard V(B)-Communication with Clients and Prospective Clients. Additionally, the investment officer has not followed the investment style previously communicated to fund investors (i.e., to invest in fixed income emerging market securities), specifically when he invested in US government securities, a violation of Standard III(C)-Suitability.
Alexander Newton, CFA, is the chief compliance officer for Mills Investment Limited. Newton institutes a new policy requiring the pro rata distribution of new security issues to all established discretionary accounts for which the new issues are appropriate. The policy also provides for the exclusion of newly established discretionary accounts from the distribution until they have reached their one-month anniversary date. This policy is disclosed to all existing and potential clients. Did Newton most likely violate any CFA Institute Standards of Professional Conduct? Yes. No, because this allocation policy is not inequitable under the Standards. No, because this policy has been adequately disclosed to all existing and potential clients.
A is correct because under Standard III(B)-Fair Dealing, members and candidates should disclose to clients and prospective clients how they select accounts to participate in an order and how they determine the amount of securities each account will buy or sell. Trade allocation procedures must be fair and equitable, and disclosure of inequitable allocation methods does not relieve the member or candidate of this obligation. All discretionary accounts should be treated in the same manner. Treating newer accounts differently would be considered inequitable regardless if this policy is disclosed.
According to the GIPS standards, a verification report confirms all of the following except whether: specific composite presentations are accurate. a firm has complied with all firm-wide composite construction requirements. processes and procedures are designed to calculate and present compliant performance
A is correct. According to the Global Investment Performance Standards (GIPS), verification does not ensure the accuracy of any specific composite presentations. Verification tests if a firm has properly constructed composites, and if the firm's systems are designed to properly calculate and present performance in compliance with the GIPS standards. Verification does not, in any way, provide assurance about the results of a specific composite. That level of assurance is provided through an additional level of testing of a specific composite, called a performance examination or performance audit.
After a firm presents a minimum required number of years of GIPS-compliant performance, the firm must present an additional year of performance each year, building up to a minimum of: 10 years of GIPS-compliant performance. 5 years of GIPS-compliant performance. 15 years of GIPS-compliant performance.
A is correct. After a firm presents a minimum of five years of GIPS-compliant performance, the firm must present an additional year of performance each year, building up to a minimum of 10 years of GIPS-compliant performance.
Which of the following groups is most likely responsible for maintaining oversight and responsibility for the Professional Conduct Program (PCP)? CFA Institute Board of Governors Disciplinary Review Committee Professional Conduct Division
A is correct. All CFA Institute members and candidates enrolled in the CFA Program are required to comply with the Code and Standards. The CFA Institute Board of Governors maintains oversight and responsibility for the Professional Conduct Program (PCP).
Who most likely determines whether a violation of the CFA Institute Code and Standards or testing policies has occurred and what sanction should be imposed? The: Professional Conduct Staff and the Disciplinary Review Committee Professional Conduct Staff Disciplinary Review Committee
A is correct. Both the Professional Conduct Staff and the Disciplinary Review Committee are responsible for determining whether a violation of the Code and Standards or testing policies has occurred and if so what sanction should be imposed. Following their investigation, the Professional Conduct Staff may conclude the inquiry with no disciplinary sanction, issue a cautionary letter, or continue proceedings to discipline the member or candidate which include the charges and a proposed sanction. If that proposal is rejected by the member or candidate, the matter is referred to a panel composed of DRC Members. The panel's task is to determine whether a violation of the Code and Standards or testing policies occurred and if so what sanction should be imposed.
Which of the following is least likely sufficient to meet recommended or required procedures for compliance with CFA Institute Standard III(A): Loyalty, Prudence, and Care? Disclose any existing conflicts of interest. Establish a regular client meeting schedule. Seek best execution when trading on behalf of clients.
A is correct. Disclosing any existing conflict of interest is least likely adequate to comply with the recommended or required procedure for compliance with CFA Institute Standard III(A): Loyalty, Prudence, and Care. The recommended procedure for compliance states that members and candidates must disclose all actual and potential conflicts of interest so that clients can evaluate those conflicts.
According to the GIPS standards, firms must do all of the following except: Provide investors with a comprehensive view of their performance only in terms of returns. Comply with all requirements of the standards, such as updates, Guidance Statements, and clarifications. Adhere to certain calculation methodologies and make specific disclosures along with their performance.
A is correct. Firms must provide investors with a comprehensive view of their performance in terms of risk and returns, not just returns.
Which of the following is most likely required to comply with the GIPS standards regarding input data? Portfolio valuations must: use accrual accounting for all interest earning investments. be obtained from independent third parties. use fair value for periods on or after 1 January 2015.
A is correct. GIPS Standard 1 Input Data states that accrual accounting must be used for fixed-income securities and for all other investments that earn interest income. The value of fixed-income securities must include accrued income.
Which of the following should a GIPS compliant firm most likely provide to each prospective client? A list of composite descriptions upon request. A copy of the GIPS standards. A compliant presentation every six months.
A is correct. GIPS compliant firms must provide a complete list of composite descriptions to any prospective client that makes such a request. The list must include terminated composites for a minimum of five years after the composite termination date.
Which of the following is not a component of the CFA Institute Code of Ethics? Promote financial integrity and seek to prevent and punish abuses in the financial markets. Place the integrity of the investment profession and the interests of clients above their own personal interests. Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.
A is correct. Punishing abuses in the financial sector is not included in any of the six components of the CFA Code of Ethics.
Which of the following is least likely part of the CFA Institute Standards of Professional Conduct, Standard II-Integrity of Capital Markets? Members and candidates: must promote the integrity and viability of the global capital markets for the ultimate benefit of society. who possess material nonpublic information that could affect the value of an investment must not act or cause others to act on the information. must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.
A is correct. The Code of Ethics of CFA Institute states that Members of CFA Institute (including CFA charterholders) and candidates for the CFA designation ("Members and Candidates") must promote the integrity and viability of global capital markets for the ultimate benefit of society. It is not part of the CFA Institute Standards of Professional Conduct, Standard II-Integrity of Capital Markets.
Which of the following statements related to why the GIPS standards were created is least likely correct? GIPS standards were created to: provide clients certainty in what is presented and allow them to make reasonable comparisons. identify a set of ethical principles for firms to follow in calculating and presenting historical investment results. establish a standardized, industry wide approach for investment firms to follow.
A is correct. The GIPS standards were created to ensure fair representation and full disclosure of investment performance, not to provide certainty in what is presented.
Verification of compliance with the GIPS standards most likely requires: an independent third party to carry out the verification. an assurance that the composite presentations are accurate. verification for each specific composite under review.
A is correct. While a firm is responsible for their own compliance claim, they cannot perform their own verification. An independent third party must undertake the verification.
Which of the following categories completely represents an ethical principle of CFA Institute as outlined in the Standards of Practice Handbook? Individual professionalism Responsibilities to clients and employers Ethics involved in investment analysis and recommendations
A is correct. Within the Standards of Practice Handbook, CFA Institute addresses ethical principles for the profession, including individual professionalism; responsibilities to capital markets, clients, and employers; ethics involved in investment analysis; recommendations, and actions; and possible conflicts of interest.
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. Paper did not violate the Code and Standards. Paper violated the Code and Standards by claiming the performance of the entire fund as his own. Paper violated the Code and Standards by including the historical results of his prior employer.
Answer B is correct. 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.
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? Stafford did not violate the Code and Standards because the prospectus informed investors of the fund's soft dollar policies. Stafford violated the Code and Standards because improving her investment skills is not a reasonable use of the soft dollar account. Stafford violated the Code and Standards because the CFA Program does not meet the definition of research allowed to be purchased with brokerage commissions.
Answer C is correct. 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.
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 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. A member or candidate may not accept employment with the new firm because Jackman's incentive offer violates the Code and Standards. A member or candidate is not eligible for the new position unless he or she is currently unemployed because soliciting the clients of the member's or candidate's current employer is prohibited.
Answer C is correct. Standard IV(A)-Loyalty discusses activities permissible to members and candidates when they are leaving their current employer; soliciting clients is strictly prohibited. Thus, answer A is inconsistent with the Code and Standards even with the required disclosure. Answer B is incorrect because the offer does not directly violate the Code and Standards. There may be out-of-work members and candidates who can arrange the necessary commitments without violating the Code and Standards.
The GIPS standards are instrumental in: enabling regulatory enforcement of investment performance reporting. establishing best practices for calculating and presenting investment performance. eliminating barriers to entry in markets with no investment performance standards.
B
According to the CFA Institute Code of Ethics and Standards of Professional Conduct, trading on material nonpublic information is least likely to be prevented by establishing: firewalls. selective disclosure. personal trading limitations.
B is correct as selective disclosure occurs when companies discriminate in making material nonpublic information public. Corporations that disclose information on a limited basis create the potential for insider-trading violations. Standard II(A).
Several years ago, Leo Peek, CFA, co-founded an investment club. The club is fully invested but has not actively traded its account for at least a year and does not plan to resume active trading of the account. Peek's employer requires an annual disclosure of employee stock ownership. Peek discloses all of his personal trading accounts, but does not disclose his holdings in the investment club. Peek's actions are least likely to be a violation of which of the CFA Institute Standards of Professional Conduct? Misrepresentation Transaction priority Conflicts of interest
B is correct as there is no indication that the investment club is trading ahead of clients [Standard VI(B)].
Ri Lin, CFA, is a Portfolio Manager with Dynasty Investment Management. Lin is performing research on Titan Mining for potential inclusion in his fund. Management at Titan is interested in having a well-known fund manager such as Lin as a shareholder. Titan pays for Lin to fly to a company retreat in Tokyo, where a brief introductory meeting is followed by attending a sporting event and then dinner at one of the city's top restaurants. Lin participates after disclosing the activities to Dynasty's compliance department. Which standard did Lin's actions most likely violate? Disclosures of Conflicts Independence and Objectivity Diligence and Reasonable Basis
B is correct because Lin is placing himself in a situation where his objectivity or appearance of objectivity may be compromised, which is a violation of Standard I(B). It would have been more advisable for Lin to decline having Titan pay for this trip.
Ken Kawasaki, CFA, shares a building with a number of other professionals who are also involved in the investment management business. Kawasaki makes arrangements with several of these professionals, including accountants and lawyers, to refer clients to each other. An informal score is kept on the expectation the referrals will equal out over time, eliminating the need for any cash payments. Kawasaki never mentions this arrangement to clients or prospective clients. Does Kawasaki's agreement with the other building occupants most likely violate any CFA Institute Standards of Professional Conduct? No. Yes, related to referral fees. Yes, related to communication with clients.
B is correct because Standard VI(C) requires disclosure of any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services. Even without cash changing hands the arrangement provides for a quid pro quo referral of clients and should be disclosed.
Fundamental Asset Managers claims compliance with the CFA Institute Global Investment Performance Standards (GIPS) and manages both discretionary and non-discretionary accounts. When constructing a single composite for Fundamental, Juma Dzuya includes all discretionary, fee-paying accounts with both value and growth strategies. Does the composite constructed by Dzuya most likely meet GIPS criteria? Yes. No, because of non-similar investment strategies. No, because non-discretionary accounts are not included.
B is correct because a composite must include all actual, fee-paying, discretionary portfolios managed in accordance with the same investment mandate, objective, or strategy (Standards IV Composites). By including both the value and growth portfolios, the composite is made up of portfolios with different investment mandates or strategies.
Henrietta Huerta, CFA, writes a weekly investment newsletter to market her services and obtain new asset management clients. A third party distributes the free newsletter on her behalf to those individuals on its mailing list. As a result, it is widely read by thousands of individual investors. The newsletter recommendations reflect most of Huerta's investment actions. After completing further research on East-West Coffee Roasters, Huerta decides to change her initial buy recommendation to a sell. To avoid violating the CFA Institute Standards of Professional Conduct it would be most appropriate for Huerta to distribute the new investment recommendation to: newsletter recipients first. asset management clients first. newsletter recipients and asset management clients simultaneously.
B is correct because according to Standard III(A)-Loyalty, Prudence, and Care, members and candidates must place their clients' interests first before their own interests. The temptation may be to release the changed recommendation to newsletter recipients simultaneously with or even before the asset management clients to try to obtain new clients. However, to avoid violating Standard III(A)-Loyalty, Prudence, and Care, Huerta must ensure that any change in an investment recommendation is first distributed to her asset management clients before any newsletter recipients, who are not necessarily clients (that is, they receive the newsletter for free from a third party distribution list).
Miranda Grafton, CFA, purchased a large block of stock at varying prices during the trading session. The stock realized a significant gain in value before the close of the trading day, so Grafton reviewed her purchase prices to determine what prices should be assigned to each specific account. According to the Standards of Practice Handbook, Grafton's least appropriate action is to allocate the execution prices: across the participating client accounts at the same execution price. across the participating client accounts pro rata on the basis of account size. on a first-in, first-out basis with consideration of bundling orders for efficiency.
B is correct because according to Standard III(B) best practices include allocating pro rata on the basis of order size, not account size. All clients participating in the block trade should receive the same execution price and be charged the same commission.
Zhao Xuan, CFA, is a sell side investment analyst. While at a software industry conference, Zhao hears rumors that Green Run Software may have falsified its financial results. When she returns to her office, Zhao conducts a thorough analysis of Green Run. Based on her research, including discussions with some of Green Run's customers, Zhao is convinced that Green Run's reported 50% increase in net income during recent quarters is completely fictitious. So far, however, Zhao is the only analyst suspicious about Green Run's reported earnings. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, the least appropriate action for Zhao is to: report her suspicions to Green Run's management. do nothing until other analysts support her analysis. recommend that her clients sell their Green Run shares immediately.
B is correct because the analyst has conducted thorough research that indicates the company falsified its financial results, and she should request the company address this issue publicly as recommended by Standard II(A)-Material Nonpublic Information. If a member or candidate determines that information is material, the member or candidate should make reasonable efforts to achieve public dissemination of the information. This effort usually entails encouraging the issuer company to make the information public. If public dissemination is not possible, the member or candidate must communicate the information only to the designated supervisory and compliance personnel within the member's or candidate's firm and must not take investment action on the basis of the information.
Noor Mawar, CFA, manages a trust fund with the beneficiary being an orphaned 18-year-old student. The investment policy dictates that trust assets are expected to provide the student with a stable low-risk source of income until she reaches the age of 30 years. Based on information from an Internet blog, the student asks Mawar to invest in a new business venture that she expects will provide high returns over the next five years. Mawar ignores the request, instead securing conservative investments to provide sufficient income. Did Mawar most likely violate the CFA Institute Code of Ethics and Standards of Professional Conduct? Yes. No, because the client's objectives were met. No, because the investment time frame does not match the investment horizon.
B is correct because the client is the trust/trustees, not the beneficiary. Mawar followed Standard III(C) -Suitability by managing the trust assets in a way that would likely result in a stable source of income while keeping the risk profile low, thereby complying with the investment objectives of the trust.
Solomon Sulzberg, CFA, is a research analyst at Blue Water Management. Sulzberg's recommendations typically go through a number of internal reviews before they are published. In developing his recommendations, Sulzberg uses a model developed by a quantitative analyst within the firm. Sulzberg made some minor changes to the model but retained the primary framework. In his reports, Sulzberg attributes the model to both the quantitative analyst and himself. Before the internal reviews of his reports were completed, Sulzberg buys shares in one of the companies. After the internal review is complete he fails to recommend the purchase of the stock to his clients and erases all of his research related to this company. Sulzberg least likely violated the CFA Institute Code of Ethics and Standards of Professional Conduct related to: Record Retention. Misrepresentation. Priority of Transactions.
B is correct because the research analyst has not violated Standard I(C)-Misrepresentation because he has not knowingly made any misrepresentations related to investment analysis, recommendations, actions, or other professional activities. The research analyst has correctly attributed the model to both the quantitative analyst and to himself as he has revised the original model. Research developed while employed by a firm are the property of the firm, and the analyst is in violation of Standard V(C)-Record Retention as members and candidates must develop and maintain appropriate records to support their investment analysis, recommendations, actions, and other investment-related communications with clients and prospective clients. As a general matter, records created as part of a member's or candidate's professional activity on behalf of his or her employer are the property of the firm. The analyst also violated Standard VI(B)-Priority of Transactions by taking advantage of his knowledge of the stock's value before allowing his employer to benefit from that information.
Situational influences in decision making will most likely be minimized if: strong compliance programs are in place. longer-term consequences are considered. individuals believe they are truthful and honest.
B is correct.
Decision makers who use a compliance approach are most likely to: avoid situational influences. oversimplify decision making. consider more factors than when using an ethical decision-making approach
B is correct. A compliance approach can oversimplify decision making and may not encourage decision makers to consider the larger picture. A strong compliance culture may be a good start in developing an ethical culture but can become another situational influence that may result in employees failing to consider other important factors.
What is the minimum period of compliant performance that a 12-year-old firm must present to comply with the GIPS standards? Five years Ten years Twelve years
B is correct. After a firm presents a minimum of 5 years of GIPS-compliant performance, the firm must present an additional year of performance for each year since its inception, building up to a minimum of 10 years of GIPS-compliant performance. Accordingly, a firm in existence for 12 years must present, at a minimum, 10 years of compliant performance to comply with the GIPS standards.
A general ethical decision-making framework will most likely: define a series of actions for each possible situation. facilitate the decision-making process for all decisions. ensure a decision or plan of action does not harm stakeholders.
B is correct. Ethical decision-making frameworks are designed to facilitate the decision-making process for all decisions. They help people look at and evaluate a decision from multiple perspectives, enabling them to identify important issues they might not otherwise consider.
The Duties to Employers standard states that members and candidates must not: accept any gifts that might compromise their independence and objectivity. deprive their employer of their skills and abilities as related to their employment. accept compensation competing with their employer's interest and with the written consent of all parties involved.
B is correct. The IV.A Loyalty section of the Duties to Employers standard states that members and candidates cannot deprive their employer of the advantage of their skills and abilities in matters related to their employment.
Based on the Conflicts of Interest standard, members and candidates must: disclose, as required by law, those conflicts interfering with their professional duties. disclose, as appropriate, any benefit paid to others for the recommendation of products. seek employer approval before prioritizing their investment transactions over those clients.
B is correct. The VI.C Referral Fees section of the Conflicts of Interest standard requires members and candidates to disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services.
The benefits of an ethical decision-making framework would least likely include: making wise decisions. focusing on immediate consequences. limiting unintended consequences.
B is correct. The benefits of an ethical decision-making framework are least likely to include focusing on immediate consequences. The framework allows the decision maker to focus on multiple perspectives and does not limit the decision maker to a short-term focus.
Which of the following statements best describes an aspect of the Standards of Professional Conduct? Members and candidates are required to: ensure any portfolio mandate followed is fair, accurate, and complete. promptly disclose changes that might materially affect investment processes. have a reasonable and adequate basis for decisions about client confidentiality.
B is correct. The current Standards of Professional Conduct requires members and candidates to promptly disclose any changes that might materially affect investment processes.
A CFA Institute member would violate the standard for material nonpublic information by: conducting price distortion practices. inappropriately causing others to act. inadequately maintaining investment records.
B is correct. Under Standard II.A Material Nonpublic Information, members having material nonpublic information that could affect the value of an investment must not cause others to act on the information.
All of the following accurately represent the GIPS standards concerning an investment firm's definition and historical performance record except: firm must be defined as a distinct business unit. when changes are made in a firm's organizational structure the composite performance of the surviving investment firm is calculated from that point on. firm assets under management include the total market value of discretionary and non-discretionary assets, including fee-paying and non-fee-paying accounts.
B is correct. When a firm changes its organizational structure, historical composite results cannot be changed.
Alexandra Smirnov, CFA, is a pension consultant to the Springwell Pension Fund. After reviewing Springwell's three-year performance presentation showing the fund's underperformance relative to its investment objectives and agreed benchmarks, Smirnov recommends that the fund hire new asset managers. Smirnov proposes that the fund hire Newday Managers on the basis of recent meetings she has had with the firm. Lengthy discussions at these meetings included Newday's investment strategy, its suitability to manage pension funds, its ability to adhere to its stated strategy, the firm's historical investment performance, and its adoption of the CFA Institute Code and Standards. Smirnov turned down Newday's offer of an introduction fee when recommending its services, but did not inform Springwell trustees of this offer. Which of the following CFA Institute Standards does Smirnov most likely violate? Referral Fees Loyalty, Prudence, and Care Diligence and Reasonable Basis
C
Chris Rodriguez, CFA, is a portfolio manager at Nisqually Asset Management, which specializes in trading highly illiquid shares. Rodriguez has been using Hon Securities Brokers almost exclusively when making transactions for Nisqually clients, as well as for his own relatively small account. Hon always executes Rodriguez's personal trades at a more preferential price than for Rodriguez's client's accounts. This occurs regardless of whether or not Rodriguez personally trades before or after clients. Rodriguez should least likely do which of the following in order to comply with the CFA Institute Code of Ethics and Standards of Professional Conduct? Eliminate the exclusive trading arrangement. Trade client accounts before his own account. Average trade prices across all trading accounts.
C is correct because Rodriguez is in violation of Standard IV(A)-Loyalty, which requires, in matters related to their employment, members and candidates to act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer. Rodriguez should not accept the special treatment from Hon, and he should seek such favors for the clients of Nisqually, specifically the lower costs Rodriguez has been getting for his transactions. Rodriguez should not average transaction costs, as his clients should be given the lower preferential prices according to Standard III(A)-Loyalty Prudence and Care.
Manuel Tacqueria, CFA, is a sole proprietor investment adviser managing accounts for a diversified group of clients. Tacqueria obtains his investment research through a subscription service with Alpha Services, a large financial services organization. Tacqueria notes that the research reports are sound because they are extremely detailed and comprehensive. As a result, Tacqueria feels comfortable relying solely upon this research when making recommendations to clients. Tacqueria should most likely do which of the following in order to conform to the CFA Institute Code of Ethics and Standards of Professional Conduct? Utilize additional sources of third-party research Undertake and add his own research to the existing reports Conduct additional due diligence on Alpha Services
C is correct because Tacqueria is in violation of Standard V(A)-Diligence and Reasonable Basis as he is required to undertake due diligence efforts on the third-party research provider on a regular basis to ensure that the quality of this research continues to meet his necessary standards.
Sisse Brimberg, CFA, is responsible for performance presentations at her investment firm. The presentation that Sisse uses states that when making performance presentations her firm: deducts all fees and taxes; uses actual and simulated performance results; and bases the performance on a representative individual account. Based on the above information, which of the following is the most appropriate recommendation to help Brimberg meet the CFA Institute Standards of Professional Conduct in her performance presentations? She should present performance based on: a gross of fee basis. actual not simulated results. a weighted composite for all similar discretionary portfolios.
C is correct because in order to meet their obligations under Standard III(D), members should present the performance of the weighted composite of similar portfolios rather than using a single representative or all accounts, so this is the best selection of the options provided.
Oliver Opdyke, CFA, works for an independent research organization that does not manage any client money. In the course of his analysis of Red Ribbon Mining he hears rumors that the president of Red Ribbon, Richard Leisberg, has recently been diagnosed with late stage Alzheimer's disease, a fact not publicly known. The final stage of Alzheimer's is when individuals lose the ability to respond to their environment, the ability to speak, and, ultimately, the ability to control movement. Leisberg is the charismatic founder of Red Ribbon, and under his leadership the company grew to become one of the largest in the industry. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, the most appropriate action for Opdyke is to: immediately publish a sell recommendation for Red Ribbon Mining. confirm the president's diagnosis before publishing his research report. encourage Red Ribbon Mining management to disclose the president's medical condition
C is correct because members and candidates should make reasonable efforts to achieve public dissemination of information that is material and nonpublic, as required by Standard II(A)-Material Nonpublic Information. This effort usually entails encouraging the issuer company to make the information public. In this case, if the diagnosis is fact and not rumor, then this information is material and should be disclosed.
Jiro Sato, CFA, deputy treasurer for May College, manages the Student Scholarship Trust. Sato issued a Request for Proposal (RFP) for domestic equity managers. Pamela Peters, CFA, a good friend of Sato, introduces him to representatives from Capital Investments, who submitted a proposal. Sato selected Capital as a manager based on the firm's excellent performance record. Shortly after the selection, Peters, who had outstanding performance as an equity manager with another firm, accepted a lucrative job with Capital. Which of the CFA charterholders violated the CFA Institute Standards of Professional Conduct? Both violated Standards. Peters violated Standards. Neither violated Standards.
C is correct because members should use reasonable care and judgment to maintain independence and objectivity [Standard I(B)]. There is no indication of inappropriate behavior in selection of the equity manager or in the acceptance of employment with that manager; both decisions were based on the excellent performance records of the manager and the member, respectively.
Jackson Barnes, CFA, works for an insurance company providing financial planning services to clients for a fee. Barnes has developed a network of specialists, including accountants, lawyers, and brokers, who contribute their expertise to the financial planning process. Each of the specialists is an independent contractor. Each contractor bills Barnes separately for the work he or she performs, providing a discount based upon the number of clients Barnes has referred. What steps should Barnes take to be consistent with the CFA Institute Standards of Professional Conduct? Have his independent contractors approved by the insurance company List the consideration he receives from the specialists on monthly client invoices Inform potential clients about his arrangement with the contractors before they agree to hire him
C is correct because the referral arrangements should be disclosed to potential clients "before entry into any formal agreement for services" and not after the fact. This allows potential clients to consider whether the arrangement causes them any potential harm as a result of the arrangement (e.g., higher fees and potential conflicts of interests).
Vishal Chandarana, an unemployed research analyst, recently registered for the CFA Level I exam. After two months of intense interviewing, he accepts a job with a stock brokerage company in a different region of the country. Chandarana posts on a social media blog how being a CFA candidate really helped him get a job. He also notes how relieved he was when his new employer didn't ask him about being fired from his former employer. Which CFA Institute Code of Ethics or Standards of Professional Conduct did Chandarana least likely violate? Misconduct Loyalty to Employers Reference to the CFA Program
C is correct because there is no evidence Chandarana violated Standard VII(B) with regard to his being a CFA candidate. Specifically, Chandarana does not overstate his competency or imply he will achieve superior performance as a result of his CFA designation. It does appear, however, Chandarana did not act with integrity when he hid information that could potentially harm his new employer's reputation, thus violating Standard I(D)-Professionalism (Misconduct) and Standard IV(A)-Duty to Employers (Loyalty).
Tonya Tucker, CFA, is a financial analyst at Bowron Consolidated. Bowron has numerous subsidiaries and is actively involved in mergers and acquisitions to expand its businesses. Tucker analyzes a number of companies, including Hanchin Corporation. When Tucker speaks with the CEO of Bowron, she indicates that many of the companies she has looked at would be attractive acquisition targets for Bowron. After her discussion with the CEO, Tucker purchases 100,000 shares of Hanchin Corporation at $200 per share. Bowron does not have any pre-clearance procedures, so the next time she meets with the CEO, Tucker mentions she owns shares of Hanchin. The CEO thanks her for this information but does not ask for any details. Two weeks later, Tucker sees a company-wide email from the CEO announcing Bowron's acquisition of Hanchin for $250 a share. With regards to her purchase of Hanchin stock, Tucker least likely violated the CFA Institute Standards of Professional Conduct concerning: Loyalty. Priority of Transactions. Material Nonpublic Information.
C is correct because there is no indication the analyst had access to material nonpublic information and was in violation of Standard II(A)-Material Nonpublic Information. Specifically, Tucker did not have information concerning any decision by Bowron to acquire Hanchin stock since she is not a part of the decision-making team at Bowron, which determines the companies it plans to take over. The analyst had indicated numerous companies were viable options for takeover, and she did not single out any one company in particular.
Richard Cardinal, CFA, is the founder of Volcano Capital Research, an investment management firm whose sole activity is short selling. Cardinal seeks out companies whose stocks have had large price increases. Cardinal also pays several lobbying firms to update him immediately on any legislative or regulatory changes that may impact his target companies. Cardinal sells short those target companies he estimates are near the peak of their sales and earnings and that his sources identify as facing legal or regulatory challenges. Immediately after he sells a stock, Cardinal conducts a public relations campaign to disclose all of the negative information he has gathered on the company, even if the information is not yet public. Which of Cardinal's following actions is most likely to be in violation of the CFA Institute Standards of Professional Conduct? Selling stock short Trading on information from lobbyists Disclosing information about target companies
C is correct, as Cardinal's actions related to the public relations campaign and class action lawsuits are specifically intended to manipulate share prices lower and to advantage the manager. Cardinal has made deliberate attempts to create artificial price volatility designed to have a material impact on the price of an issuer's stock, in violation of Standard II(B)-Market Manipulation.
Florence Zuelekha, CFA, is an equity portfolio manager at Grid Equity Management (GEM), a firm specializing in commodities. Zuelekha, who previously focused on alternative energy, recently attends her first commodity conference, sponsored in large part by GEM. Independent industry experts argued that commodities would increase in value and recommended that investors hold at least 10% of their portfolio assets in commodities based on consistent increases in their values over the previous two years. Without doing any additional research, Zuelekha recommends to all her clients an immediate allocation of 5% of their portfolio into commodities. Over the next few weeks, Zuelekha moves her own portfolio to a 10% commodity allocation. Which of the CFA Standards did Zuelekha most likely violate? Priority of Transactions. Independence and Objectivity. Diligence and a Reasonable Basis.
C is correct, as Standard (V)-Diligence and a Reasonable Basis requires members and candidates to have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action. Relying solely upon attendance at a one-day conference listening to industry experts to make an investment recommendation, especially when the industry experts have based their recommendations upon price data only, would not meet the requirements of the Code and Standards with regard to Diligence and a Reasonable Basis.
A code of ethics most likely plays an important part in establishing a profession because: clients are assured a standardized level of care from all industry professionals. customers rely heavily on ongoing specialized services to achieve their desired outcome. a client relationship is based on trust whereby the professional puts his or her client's interests first.
C is correct. A code of ethics plays an important part in establishing a profession because a client relationship is based on trust, whereby the professional puts his or her client's interest first. The code enables a relationship to be established on the basis of trust, because clients rely heavily on the specialized knowledge and skills of professionals to achieve their goals. The code also requires the interests of the clients to be placed above those of the professional.
Which of the following is least likely to be a situational influence challenging ethical conduct? Loyalty to coworkers The bystander effect An overconfidence bias
C is correct. An overconfidence bias is not a situational influence, nor is it determined by external factors; instead, it is determined by a person's judgment about his or her own capabilities or those of others with whom the person is associated. Loyalty to coworkers (or colleagues) and the bystander effect are examples of situational influences challenging ethical conduct.
As stated in the revised 11th edition, the Standards of Professional Conduct: require supervisors to focus on the detection and prevention of violations. adopt separate ethical considerations for programs such as CIPM and Investment Foundations. address the risks and limitations of recommendations being made to clients.
C is correct. Given the constant development of new and exotic financial instruments and strategies, the standard regarding communicating with clients now includes an implicit requirement to discuss the risks and limitations of recommendations being made to clients.
If you are seeking guidance from the firm's code of ethics or written policies, your actions most likely reflect which phase of an ethical decision-making framework? Decide Reflect Consider
C is correct. If you are seeking guidance from the firm's code of ethics or written policies, you are in the Consider phase of the ethical decision-making framework. This phase involves taking time to consider the situation influences as well as personal behavioral biases that could affect your thinking and decision making. During this phase, you may also seek guidance from such trusted sources as the firm's compliance department or outside counsel.
A current Code of Ethics principle reads in full, "Promote the integrity: and viability of the global capital markets." of and uphold the rules governing capital markets." and viability of the global capital markets for the ultimate benefit of society."
C is correct. One of the principles in the Code of Ethics was updated to reflect the role that the capital markets have in society as a whole.
The Investment Analysis, Recommendations, and Actions standard states that members and candidates must: find an investment suitable for their client before making a recommendation. make reasonable efforts to ensure that performance presentation is fair, accurate, and complete. distinguish between fact and opinion in the presentation of investment analysis and recommendations.
C is correct. The V.B.4 Communications with Clients and Prospective Clients section of the Investment Analysis, Recommendations, and Actions standard states that members and candidates must distinguish between fact and opinion in the presentation of investment analysis and recommendations.
To maintain trust, the investment management profession must be interdependent with: regulators. employers. investment firms.
C is correct. The investment management profession and investment firms must be interdependent to maintain trust. Employers and regulators have their own standards and practices, which may differ from regulations and standards set by professional bodies.
As part of the Duties to Clients standard, members and candidates must: document client financial constraints after an initial investment action. maintain an equal balance of interests owed to their clients and employers. deal fairly and objectively with all clients when engaging in professional activities.
C is correct. Under the III.B Fair Dealing section of the Duty to Clients standard, members and candidates must deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities.
An ethical decision-making framework will most likely: include a pre-determined, uniform sequence. focus exclusively on confirmable facts and relationships. help avoid a decision that has unanticipated ethical consequences
C is correct. Using an ethical decision-making framework consistently will help you develop sound judgment and decision-making skills and avoid making decisions that have unanticipated ethical consequences. The decision-making process is often iterative, and the decision maker may move between phases of the framework. A decision maker should consider more than confirmable facts and relationships; for example, the decision maker should consider situational influences and personal biases.
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? Smith frequently purchases items produced by JNI. XYZ holds for its own account a substantial common stock position in JNI. Smith's brother-in-law is a supplier to JNI.
The correct answer is 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: Increase the recommendation by no more than one increment (in this case, to a "hold" recommendation). Place the company on a restricted list and give only factual information about the company. Assign a new analyst to decide if the stock deserves a higher rating.
The correct answer is 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.
Which of the following statements is correct under the Code and Standards? CFA Institute members and candidates are prohibited from undertaking independent practice in competition with their employer. 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. Members and candidates are prohibited from making arrangements or preparations to go into a competitive business before terminating their relationship with their employer.
The correct answer is B. Under Standard IV(A)-Loyalty, members and candidates may undertake independent practice that may result in compensation or other benefit in competition with their employer as long as they obtain consent from their employer. Answer C is not consistent with the Standards because the Standards allow members and candidates to make arrangements or preparations to go into competitive business as long as those arrangements do not interfere with their duty to their current employer. Answer A is not consistent with the Standards because the Standards do not include a complete prohibition against undertaking independent practice.
Which statement about a manager's use of client brokerage commissions violates the Code and Standards? A client may direct a manager to use that client's brokerage commissions to purchase goods and services for that client. Client brokerage commissions should be used to benefit the client and should be commensurate with the value of the brokerage and research services received. Client brokerage commissions may be directed to pay for the investment manager's operating expenses.
The correct answer is 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.
