Ethics - Topic Test
Which of the following should a GIPS compliant firm most likely provide to each prospective client? 1. A copy of the GIPS standards 2. A compliant presentation every six months 3. A list of composite descriptions upon request
Answer A list of composite descriptions upon request GIPS compliant firms must provide a complete list of composite descriptions to any prospective client requesting them. The list must include terminated composites for a minimum of five years after the composite termination date.
Which of the following activities if undertaken by CFA Institute members and/or candidates would most likely violate the Code and Standards? 1. An analyst discloses confidential, sensitive information about a client account as part of an investigation by the CFA Institute Professional Conduct Program. 2. An institutional portfolio manager takes a group of clients to an expensive restaurant to discuss portfolio returns over the recently completed quarter without prior written consent from his employer. 3. A senior trader does not have safeguards in place to determine whether a junior trader under his supervision is following the firm's policies regarding best execution.
Answer A senior trader does not have safeguards in place to determine whether a junior trader under his supervision is following the firm's policies regarding best execution. Standard IV(C)-Responsibilities of Supervisors states that members and candidates must make reasonable efforts to prevent violation of applicable laws, rules, regulations, and the Code and Standards by anyone subject to their supervision or authority. Interviewing with a competitor during lunch or taking clients out to lunch do not necessarily violate any standard unless specifically prohibited in company policies.
When Abdullah Younis, CFA, was hired as a portfolio manager at an asset management firm two years ago, he was told he could allocate his work hours as he saw fit. At that time, Younis served on the board of three nonpublic golf equipment companies and managed a pooled investment fund for several members of his immediate family. Younis was not compensated for his board service or for managing the pooled fund. Younis's investment returns attract interest from friends and coworkers who persuade him to include their assets in his investment pool. Younis recently retired from all board responsibilities and now spends more than 80% of his time managing the investment pool for which he charges nonfamily members a management fee. Younis has never told his employer about any of these activities. To comply with the CFA Institute Standards of Professional Conduct with regard to his business activities over the past two years, Younis would least likely be required to disclose which of the following to his employer? 1. Family investment pool management 2. Non-family member management fees 3. Board Activities
Answer Board Activities Golf equipment is a business independent of the financial services industry such that any board obligations would not likely be considered a conflicct of interest requiring disclosure, according to Standard IV (B): Additional Compensation Arrangements. Standard IV (B) requires members and candidates to obtain permission from their employer before accepting compensation or other benefits from third parties for the services that might create a conflict with their employer's interests. Managing investments for family and non-family members could likely create a conflict of interest for Younis's employer and should be disclosed to his employer.
Which of the following least likely forms the basic structure for enforcement of the CFA Institute Professional Conduct Program? 1. Bylaws 2. Board of Governors 3. Rules of Procedure
Answer Board of Governors Although the board of governors maintains oversight and responsibility for the Professional Conduct Program, CFA Institute's Bylaws and Rules of Procedure form the basic structure for enforcement of the CFA Institute Code of Ethics and standard of Professional Conduct.
Roberto Sanchez, CFA, and Andreas Lopez, CFA, have worked as financial analysts for OneWorld Analytics for years. While at OneWorld, Lopez created a highly complex financial valuation model, with Sanchez making small contributions to its development. Recently, Lopez left OneWorld to start his own company using a simplified model he developed prior to joining OneWorld. Over a six month period, he improves this software, duplicating features he used at OneWorld. His upgraded program produces predictions similar to the results of the OneWorld program. At OneWorld, Sanchez continues to use the complex model he and Lopez developed and attains superior results. Whose behavior most likely conforms to the CFA Institute Standards of Professional Conduct? 1. Lopez but not Sanchez 2. Both Lopez and Sanchez 3. Sanchez but not Lopez
Answer Both Lopez and Sanchez Both Lopez and Sanchez upheld the requirements of Standard I(C)-Misrepresentation with regard to work completed for an employer. Sanchez has the right to continue using the software primarily developed by Lopez because OneWorld Analytics, not the employee, owns the software. Lopez does not leave with the model he developed while employed by OneWorld, and therefore, he is not in violation of the Standards of Professional Conduct. Once Lopez leaves OneWorld, he develops a separate model based on a model he developed prior to joining OneWorld. The simplified model remains the intellectual property of Lopez. The duplication of features is allowable under Standard IV(A)-Loyalty in that Lopez's expertise gained at his former employer is not considered to be confidential or privileged. Therefore, both Lopez and Sanchez upheld the Standards.
Tammi Holmberg is enrolled to take the Level I CFA examination. While taking the CFA examination, the candidate on Holmberg's immediate right takes a stretch break and a piece of paper from his pocket falls onto Holmberg's desk. Holmberg glances at the paper and realizes there is information written on the paper, which includes a formula Holmberg needs for the question she is working on. Holmberg had not memorized this formula and could not complete the question without this information. Holmberg pushes the paper off her desk and uses the formula to complete the question. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, Holmberg most likely: 1. Was free to act on the information that fell on her desk. 2. Is responsible for notifying exam proctors of her neighbor's violation. 3. Compromised her exam.
Answer Compromised her exam Holmberg's conduct compromised the validity of her exam and violated Standard VII(A)-Conduct as Members and Candidates in the CFA Program. Her conduct was also a violation of the rules and regulations of the CFA Program, the candidate pledge, and the CFA Institute Code of Ethics.
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 on this research when making recommendations to clients. Tacqueria should most likely do which of the following in order to conform to the CFA Institute Standards of Professional Conduct? 1. Conduct additional due diligence on Alpha Services 2. Use additional sources of thirdparty research 3. Undertake and add his own research to the existing reports
Answer Conduct additional due diligence on Alpha Services Tacqueria is in violation of Standard V(A)-Diligence and Reasonable Basis because he is required to undertake due diligence efforts on the third-party research provider on a regular basis in order to ensure that the quality of this research continues to meet his necessary standards.
Jorge Lopez, CFA, is responsible for proxy voting on behalf of his bank's asset management clients. Lopez recently performed a cost-benefit analysis that showed the proxy voting policies might not benefit the bank's clients. As a result, Lopez immediately changes the proxy voting policies and procedures without informing anyone. Lopez now votes client proxies on the side of management on all issues, with the exception of major mergers in which a significant impact on the stock price is expected. Lopez least likely violated the CFA Institute Standards of Professional Conduct in regard to: 1. Cost-benefit analysis. 2. Proxy voting policy disclosures. 3. Voting with management.
Answer Cost-benefit analysis. Performing a cost-benefit analysis showing that voting all proxies might not benefit the client and concluding that voting proxies may not be necessary in all instances is not a violation of Standard III(A): Loyalty, Prudence, and Care. However, even though voting proxies may not be necessary in all instances, part of a member's or candidate's duty of loyalty under Standard III(A) includes voting proxies in an informed and responsible manner, which is not being done when Lopez automatically votes with management on the majority of issues. In addition, members and candidates should disclose to clients their proxy voting policies, including any changes to that policy, as required by Standard III(A), which has not been done.
PNW Bank publishes Investment Monthly magazine, which highlights a specific stock in each issue. Publication of the magazine invariably causes the highlighted stocks to rise significantly in value. Rachel Coursing, CFA, manager of PNW's marketing department, often trades in the securities mentioned in the Investment Monthly articles prior to publication of the magazine. Coursing has access to the recommendations prior to the magazine's publication because the magazine is created in her department and edited by her. PNW's Code of Ethics restricts trading by all of the bank's analysts and portfolio managers and requires their trades to be precleared by the Compliance Department. Coursing least likely violated which of the following CFA Institute Standards of Professional Conduct? 1. Priority of Transactions 2. Material Nonpublic Information 3. Diligence and Reasonable Basis
Answer Diligence and Reasonable Basis Coursing has not violated Standard V(A)-Diligence and Reasonable Basis because she is not analyzing investments, making investment recommendations, or taking investment actions for clients. Coursing has violated Standard VI(B)-Priority of Transactions because clients of the bank have not been given priority over investment transactions in which a member or candidate is the beneficial owner. In addition, Coursing violated Standard II(A)-Material Nonpublic Information by trading on material nonpublic information. The Investment Monthly article written by PNW is considered nonpublic until the magazine is widely distributed, and publication of the magazine will materially impact the market price of stocks highlighted. Even though Coursing is not required by her bank to preclear her trades, she is restricted from trading by Standard II(A).
Oliver Rae, CFA, is an individual investment adviser specializing in commercial real estate. Rae recently packaged a real estate limited partnership (RELP), which he sold to his existing advisory clients in a private placement. The partnership has purchased four properties in which Rae held a 5% minority interest. According to the CFA Institute Standards of Professional Conduct, Rae should: 1. Return all profits earned from his minority interest to the limited partners. 2. Disclose conflicts related to the real estate he sold to the partnership. 3. Manage the partnership separately from his advisory business.
Answer Disclose conflicts related to the real estate he sold to the partnership. According to Standard VI(A)-Disclosure of Conflicts, members and candidates must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to clients.
Yao Tsang, CFA, has a large percentage of his net worth invested in the Australian mining company, Outback Mines, which he has held for many years. Tsang is in the process of moving to a new employer where he is responsible for initiating research on mining companies. Shortly after his move, Tsang is asked to complete a research report on Outback. In order to meet the CFA Institute Standards of Professional Conduct concerning his stock holding, which of the following actions is most appropriate for Tsang to take? 1. Refuse to write the report and ask his employer to assign another analyst to complete the analysis. 2. Sell his stock holdings to eliminate any potential conflict of interest. 3. Disclose his stock holding to his employer and to clients.
Answer Disclose his stock holding to his employer and to clients. Full disclosure should be made, as required by Standard VI(A)-Disclosure of Conflicts. This standard does not preclude an analyst from owning shares in a covered company, but any ownership needs to be adequately disclosed. Because the stock in question has been held for many years, it may not be practical to sell it because of such things as tax consequences. In addition, because the analyst has been hired to initiate coverage of mining companies, the firm may not have other analysts that would be as competent in completing a research report on mining companies.
Tibor Figeczky, CFA, is an equity trader at Global Investment Bank (GB). Figeczky traded the bank's investment portfolio profitably for the past three years and earned significant bonuses for his efforts. Subsequently, internal auditors of GB formally accused Figeczky of exceeding his trading authority and engaging in unauthorized trades. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, Figeczky should most likely: 1. Request a temporary suspension of his CFA Institute membership. 2. Refuse further bonuses until the issue is resolved. 3. Disclose the complaint to CFA Institute.
Answer Disclose the complaint to CFA Institute. Members and candidates must self disclose on the annual Professional Conduct Statement all matters that question their professional conduct, such as involvement in civil litigation or a criminal investigation or being the subject of a written complaint.
Additional Compensation Arrangements is most likely a subsection of which standard in the CFA Institute Standards of Professional Conduct? 1. Duties to Clients 2. Professionalism 3. Duties to Employers
Answer Duties to Employers Standard IV-Duties to Employers includes a subsection titled Additional Compensation Arrangements.
Victoria Christchurch, CFA, is a management consultant currently working with a financial services firm interested in curtailing its high staff turnover, particularly among CFA charterholders. In recent months, the company lost 5 of its 10 most senior managers, all of whom have cited systemic unethical business practices as the reason for their leaving. To curtail staff turnover by encouraging ethical behavior, it would be least appropriate for Christchurch to recommend the company do which of the following? 1. Encourage staff retention by offering increased benefits 2. Create, implement, and monitor a corporate code of ethics 3. Implement a whistleblowing policy
Answer Encourage staff retention by offering increased benefits Offering increased benefits to encourage staff retention would not necessarily stop the unethical behavior causing staff turnover and would effectively be asking the ethical employees to ignore the unethical behavior, thus being complicit in the behavior. Under Standard I(A): Knowledge of the Law, CFA charterholders and candidates must disassociate themselves from unethical behavior. Because the unethical business practices are seen as systemic, it would likely require them to leave the firm. Implementing a whistleblowing policy and adopting a corporate code of ethics would likely help to build a foundation of strong ethical behavior.
Sheila Schleif, CFA, is an equity analyst at an investment banking division of Mokara Financial Group, a full service financial group. Schleif uses a multifactor computer model to make stock recommendations for all clients of Mokara. Schleif discovers the model contains an error. If the error were corrected, her most recent buy recommendation communicated to all clients would change to a sell. Schleif corrects the error, changing the buy to a sell recommendation, and then simultaneously distributes via email the revision to all investment banking clients who received the initial recommendation. A week later, Schleif sells the same shares she held in her personal portfolio. Concerning her actions, Schleif most likely violated which of the following CFA Institute Standards of Professional Conduct? 1. Diligence and Reasonable Basis 2. Fair Dealing 3. Priority of Transactions
Answer Fair Dealing The analyst violated Standard III(B): Fair Dealing by selectively distributing the revised recommendation only to investment banking clients despite being responsible for making investment recommendations to all group clients. Schleif should distribute the change in recommendation to all clients who received the initial recommendation, not just those within the investment banking division of the group.
Which of the following statements concerning an investment firm's historical record is most likely correct according to the GIPS standards? 1. As long as a prospective client receives a compliant presentation at any time a firm meets its requirements 2. The recommendation is to present five years of GIPS compliant performance results. 3. If the composite has been in existence for fewer than five years, the firm must show its entire performance history since inception.
Answer If the composite has been in existence for fewer than five years, the firm must show its entire performance history since inception. If the composite has been in existence for fewer than five years, the firm must show its entire performance history since inception.
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 attendance at 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? 1. Diligence and Reasonable Basis 2. Independence and Objectivity 3. Disclosures of Conflicts
Answer Independence and Objectivity Lin is placing himself in a situation in which 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.
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 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 preclearance 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 companywide email from the CEO announcing Bowron's acquisition of Hanchin for $250 a share. In regard to her purchase of Hanchin stock, Tucker least likely violated the CFA Institute Standards of Professional Conduct concerning: 1. Priority of transactions 2. Material nonpublic information 3. Loyalty
Answer Material nonpublic information 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 because she is not a part of Bowron's decisionmaking team that determines the companies it plans to take over. The analyst had indicated numerous companies were viable options for take over, and she did not single out any one company in particular. However, trading the stock of a company the analyst recommended as an acquisition candidate does violate Standard IV(A): Loyalty because she did not give her employer the opportunity to take advantage of her skill/recommendation prior to buying the shares for her own portfolio. In addition, the analyst violated Standard VI(B): Priority of Transactions, which requires that investment transactions for clients and employers must have priority over investment transactions in which a member or candidate is the beneficial owner despite the fact that there are no stock preclearance procedures at Bowron.
Based on his superior return history, Vijay Gupta, CFA, is interviewed by the First Faithful Church to manage the church's voluntary retirement plan's equity portfolio. Each church staff member chooses whether to opt in or out of the retirement plan according to his or her own investment objectives. The plan trustees tell Gupta that stocks of companies involved in the sale of alcohol, tobacco, gambling, or firearms are not acceptable investments given the objectives and constraints of the portfolio. Gupta tells the trustees he cannot reasonably execute his strategy with these restrictions and that all his other accounts hold shares of companies involved in these businesses because he believes they have the highest alpha. By agreeing to manage the account according to the trustees' wishes, does Gupta violate the CFA Institute Standards of Professional Conduct? 1. No 2. Yes, because the restrictions provided by the trustees are not in the best interest of the members 3. Yes, because the manager was hired based on his previous investment strategy
Answer No According to Standard III(A): Loyalty, Prudence, and Care, Gupta's duty of loyalty, prudence, and care is owed to the participants and beneficiaries (members) of the pension plan. As a church plan, the restrictions are appropriate given the objectives and constraints of the portfolio.
Can an asset management firm that follows the Global Investment Performance Standards (GIPS) for select performance composites claim it is GIPS compliant? 1. Yes, but only if those composites meet GIPS performance reporting requirements 2. Yes, but only if it uses the GIPS return calculation requirements for all composites 3. No
Answer No GIPS compliance is a firm-wide process that cannot be achieved or claimed on just a single product or on selected composites. To be eligible to claim compliance, an asset management firm must fully comply with all requirements of the GIPS standards and claim compliance by using the GIPS Compliance Statement.
Preeta Singh, a CFA candidate, is an asset manager employed by a fund management company managing very large, segregated pension funds. In her spare time outside of working hours, Singh likes to provide management consulting services to small companies to help grow their businesses, focusing on strategic planning. Singh is paid for the consulting services and has also provided her employer information about these outside activities. Does Singh most likely violate the CFA Standards of Professional Conduct with regard to Duties to Employers? 1. Yes, with regard to Additional Compensation Arrangements. 2. No 3. Yes, with regard to Loyalty
Answer No Singh does not violate any standard relating to Duties to Employers. She conducts unrelated, noncompetitive services for clients outside of business hours and thus does not deprive her employer of the advantage of her skills and abilities, nor is there any indication she divulges confidential information or otherwise causes harm to her employer. She has informed her employers about her outside activities.
Sue Kim, CFA, a U.S. citizen, works as an analyst for a subsidiary of a U.S. investment firm on a small island that attracts offshore investment accounts. Local securities laws allow insider trading. While having dinner with the CEO of a local company, Kim learns the firm is in negotiations to be acquired for a significant premium. Would Kim most likely comply with the CFA Institute Code and Standards if she purchased the company's shares for her client accounts? 1. Yes, if she receives permission from compliance department 2. Yes, local laws allow insider trading 3. No
Answer No Standard II(A) prohibits members or candidates from acting on material nonpublic information even if local laws or compliance departments allow it. In the event of conflict between the Code and Standards and local laws, Standard I(A) requires members or candidates to comply with the stricter law, rule, or regulation.
Kelly Amadon, CFA, an investment adviser, has two clients: Ryan Randolf, 65 years old, and Keiko Kitagawa, 45 years old. Both clients earn the same amount in salary. Randolf, however, has a large amount of assets, whereas Kitagawa has few assets outside her investment portfolio. Randolf is single and willing to invest a portion of his assets very aggressively; Kitagawa wants to achieve a steady rate of return with low volatility so she can pay for her child's current college expenses. Amadon recommends investing 20% of both clients' portfolios in the stock of very low-yielding smallcap companies. Amadon least likely violated the CFA Institute Standards of Professional Conduct in regard to his investment recommendations for: 1. Both clients' portfolios. 2. Only Kitagawa's portfolio. 3. Only Randolf's portfolio.
Answer Only Randolf's portfolio. In Randolf's case, the investment may be appropriate given this client's financial circumstances and aggressive investment position. This investment would not be suitable for Kitagawa because of her need for a steady rate of return and her low-risk profile.
Danielle Deschutes, CFA, is a portfolio manager who is part of a 10 person team that manages equity portfolios for institutional clients. A competing firm, South West Managers, asks Deschutes to interview for a position with its firm and to bring her performance history to the interview. Deschutes receives written permission from her current employer to bring the performance history of the stock portfolio with her. At the interview, she discloses that the performance numbers represent the work of her team and describes the role of each member. To bolster her credibility Deschutes also provides the names of institutional clients and related assets constituting the portfolio. During her interview, Deschutes most likely violated the CFA Institute Standards of Professional Conduct with regard to: 1. The stock portfolio's performance history. 2. Providing details of the institutional clients. 3. Her contribution to the portfolio's returns.
Answer Providing details of the institutional clients. Deschutes most likely violated Standard III(E): Preservation of Confidentiality by failing to preserve the confidentiality of client records when she disclosed specific details about clients in the equity portfolio.
Meshack Bradovic, CFA, was recently hired as a credit analyst at a credit rating agency whose major clients include publicly listed companies on the local stock exchange. One of the clients is currently preparing to issue a new bond to finance a major factory project. Analysts are speculating that without the new factory, the company will not survive the onslaught of competition from increasing imports; therefore, the company is counting on an upgraded credit rating to enhance the subscription level of the issue. Bradovic's research suggests the creditworthiness of the company has severely deteriorated over the last year because of negative operating cash flows. Without conducting extensive research, Bradovic's boss puts pressure on him to upgrade the credit rating to an investment grade rating. Bradovic reports this pressure to the firm's compliance department, where he is encouraged to follow his boss's advice. What course of action is most appropriate for Bradovic to prevent any violation of the CFA Standards of Professional Conduct? 1. Quit his position with the firm. 2. Disassociate with the credit rating report, the bond issue, and the client. 3. Upgrade the rating but note his objections in writing.
Answer Quit his position with the firm. Bradovic's boss's insistence that all credit ratings be given an investment grade rating, irrespective of the analysis undertaken, indicates a systemic disregard for due diligence, reasonable basis, and true representation. This shows a total disregard for the CFA Institute Standards of Professional Conduct, in particular Standard V(A)-Diligence and Reasonable Basis. Bradovic's best course of action consequently is to resign because the company's current practice of giving false credit ratings is likely to continue.
Carlos Cruz, CFA, is one of two founders of an equity hedge fund. Cruz manages the fund's assets, and the other cofounder, Brian Burkeman, CFA, is responsible for fund sales and marketing. Cruz notices the most recent sales material used by Burkeman indicates assets under management are listed at a higher value than the current market value. Burkeman justifies the discrepancy by stating recent market declines account for the difference. To comply with the CFA Institute Standards of Professional Conduct, Cruz should least likely take which of the following actions? 1. Provide a disclaimer in marketing materials indicating prices are as of a specific date. 2. Correct the asset information and provide updates to prospective clients. 3. Report the discrepancy to CFA Institute's Professional Conduct Program.
Answer Report the discrepancy to CFA Institute's Professional Conduct Program. A violation of Standard I(A): Knowledge of the Law is likely to occur unless the asset base information is corrected. Cruz has yet to violate any CFA Institute standards, so he need not report a violation. If Cruz does not take action, however, he will be in violation of the standards and at that point would need to report this violation under Standard I(A). The member should know his conduct may contribute to a violation of applicable laws, rules, regulations, or the CFA Institute Standards of Professional Conduct related to the inaccurate sales materials. Cruz should seek to have the information corrected and accurate information provided to prospective clients. It may also be prudent to seek the advice of legal counsel.
Wang Dazong, CFA, is a sole proprietor investment adviser. Dazong believes in putting his money at risk along with his clients' and trades the same securities as his clients. In order to ensure fair treatment of all accounts, he rotates trade allocations so that each account has an equal likelihood of receiving a fill on their orders. This allocation procedure also applies to Dazong's own account. According to the CFA Institute Standards of Professional Conduct, the allocation procedure used by Dazong: 1. Should be disclosed and written approval received from clients. 2. Complies with the Standards of Professional Conduct. 3. Requires revision to ensure client trades take precedence.
Answer Requires revision to ensure client trades take precedence. Standard VI(B)-Priority of Transactions requires client transactions to be given precedence over transactions made on behalf of the member's or candidate's firm or personal transactions. Because the adviser trades alongside his clients and allocates trades on a rotating basis, there are times when the adviser's trades will receive priority over his clients in violation of the Standards of Professional Conduct. A member or candidate having the same investment positions or being coinvested with clients does not always create a conflict. Some clients in certain investment situations require members or candidates to have aligned interests. Personal investment positions or transactions of members or candidates or their firms should never, however, adversely affect client investments.
Abe Seneca, CFA, supervises a team of analysts who create index funds for institutional investors. When Seneca makes sales demonstrations without his colleagues to potential clients simulating the fund's performance, the scenarios he prepares how outcomes based on assumptions reflecting upside bias and positive risk assessments. Gail Tremblay, CFA, an analyst in Seneca's group, observes that the actual performance of these index funds is less than indicated in the scenario outcomes shown in the sales meetings. Seneca least likely violated which of the following CFA Institute Standards of Professional Conduct? 1. Responsibilities of Supervisors 2. Performance Presentation 3. Loyalty
Answer Responsibilities of Supervisors Standard IV(C)-Responsibilities of Supervisors has not been violated; when Seneca makes sales demonstrations to potential clients, he is not acting as a supervisor of any employee because he prepared the material himself. Seneca, however, violated Standard IV(A)-Loyalty by misleading potential investors on the performance they might achieve with the index funds, thereby causing reputational risk to his employer. Seneca has also violated Standard III(D)-Performance Presentation because the sales demonstrations he conducts do not provide a fair and accurate representation of performance clients are likely to experience.
Edo Ronde, CFA, an analyst for a hedge fund, One World Investments, is attending a key industry conference for the microelectronics industry. At lunch in a restaurant adjacent to the conference venue, Ronde sits next to a table of conference attendees and is able to read their nametags. Ronde realizes the group includes the president of a publicly traded company in the microelectronics industry, Fulda Manufacturing, a company Ronde follows. Ronde overhears the president complain about a production delay problem Fulda's factories are experiencing. The president mentions that the delay will reduce Fulda's earnings by more than 20% during the next year if not solved. Ronde relays this information to the portfolio manager he reports to at One World explaining that in a recent research report he recommended Fulda as a buy. The manager asks Ronde to write up a negative report on Fulda so the fund can sell the stock. According to the CFA Institute Standards of Professional Conduct, Ronde should least likely: 1. Request the portfolio manager not act on the information 2. Revise his research report 3. Leave his research report as is
Answer Revise his research report Ronde should refuse to follow his supervisor's request. If Ronde revises his research report based on information he overheard at the industry conference, he would violate Standard II (A): Material Nonpublic Information. The production delay is material and considered nonpublic until it is widely distributed. Therefore, it should not be included in Ronde's research report or acted on until it becomes public. Ronde should try to encourage Fulda to make the information public.
Lisa Blackstone, a new CFA charterholder, had to explain to her firm's marketing department that making any claim of superior analytical skills resulting from her designation would most likely violate: 1. Standard VII: Responsibilities as a CFA Institute Member or CFA Candidate. 2. Standard IV: Duties to Employers. 3. Standard V: Investment Analysis, Recommendations, and Actions.
Answer Standard VII: Responsibilities as a CFA Institute Member or CFA Candidate. Claiming that the CFA designation is proof of superior analytical skills violates Standard VII(B): References to CFA Institute, the CFA Designation, and the CFA Program. When referring to CFA Institute, CFA Institute membership, the CFA designation, or candidacy in the CFA Program, members and candidates must not misrepresent or exaggerate the meaning or implication of membership in CFA Institute, holding the CFA designation, or candidacy in the CFA Program.
Charles Mbuwanga, a Level III CFA candidate, is the business development manager for Sokoza Investment Group, an investment management firm with high-net-worth retail clients throughout Africa. Sokoza introduced listed Kenyan REITs (real estate investment trusts) to its line of investment products based on new regulations introduced in Kenya to diversify its product offering to clients. The product introduction comes after months of researching Kenyan property correlations with other property markets and asset classes in Africa. Sokoza assigns Mbuwanga as part of the sales team that will introduce this product to its clients across Africa. Mbuwanga subsequently determines most of Sokoza's clients' portfolios would benefit from having a small Kenyan property exposure to help diversify their investment portfolios. By promoting the Kenyan REITs for Sokoza's client portfolios as planned, Mbuwanga would least likely violate which of the following standards? 1. Independence and Objectivity 2. Suitability 3. Knowledge of the Law
Answer Suitability There is no indication Mbuwanga's recommendation is based on any compensation package based on sales targets. If he had a sales target as part of his responsibility to promote the new product, it could be conceived that his independence and objectivity would be in question. Mbuwanga does, however, seem to be in violation of Standard III(C): Suitability because although research with regard to correlation was undertaken, an analysis based on each individual client's return and risk objectives was not done. He may also be in violation of Standard I(A): Knowledge of the Law because he would need to determine whether the Kenyan REIT product is allowable in each of the countries where his clients reside.
Stian Klun, CFA, is preparing a brochure to advertise his firm. The brochure includes the following disclosures: "I am a CFA, so I am a member of CFA Institute, which constitutes the most elite group of professionals within the investment management business. In order to become a CFA charterholder, I had to complete a comprehensive program of study in the investment management field." Klun is least likely to have violated the CFA Institute Standards of Professional Conduct related to referencing: 1. The CFA Designation. 2. The CFA Program. 3. CFA Institute.
Answer The CFA Program The CFA Program has been properly referenced, whereas CFA Institute and the CFA designation have been improperly referenced in violation of Standard VII(B)-Reference to CFA Institute, the CFA Designation, and the CFA Program. CFA Institute cannot be referred to as the most elite group of professionals within the investment management business because it is an opinion that cannot be objectively determined. The CFA acronym should be used an adjective rather than a noun (i.e., CFA charterholder).
According to the Code and Standards regarding knowledge of laws and regulations, CFA Institute members and candidates must: 1. Have detailed knowledge of all the laws that could potentially govern the member's activities. 2. Spend a minimum of five hours per calendar year on continuing education activities related to applicable laws and regulations. 3. Understand the relevant regulations for all the countries where they trade securities.
Answer Understand the relevant regulations for all the countries where they trade securities. Standard I(A)Knowledge of the Law requires members and candidates to understand applicable laws and regulation in those countries where they trade or conduct business. Although 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 Code and Standards do not require a minimum of five hours of continuing education.
Maria Martinez is a research analyst and a Level II CFA candidate. Recently, friends of Martinez organized a party for her 30th birthday. At the party, Martinez received an inexpensive gift from a friend who is the CEO of a publicly listed company Martinez recommends to clients. Martinez also received gifts from some of the firm's best clients. Aware of her employer's policy requiring her to report all gifts received within one week of receipt, Martinez declares the gifts she received from the firm's clients two days after the party. Does Martinez most likely violate the CFA Institute Code of Ethics and Standards of Professional Conduct? 1. No, because her CEO friend's gift was inexpensive 2. No, because the gifts do not impact her research independence and objectivity 3. Yes
Answer Yes Standard I(D)-Misconduct states that members and candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence. By only reporting the gifts she received from clients and not the inexpensive gift from her CEO friend, she does not conform to her employer's gift policy of reporting all gifts. Her noncompliance with employer policies reflects adversely on her professional reputation and honesty.
A large manufacturing company is seeking help finding a fund manager for its pension plan. After a comprehensive but unsuccessful search, Brett Arun, CFA, is hired to solicit proposals from various fund managers. The client pays Arun a lumpsum fee for his services. The search concludes with Ramport Investments being hired as the pension plan's manager. A year after Ramport is hired, the pension administrator sends Arun a letter telling him how satisfied the pension trustees are with the services provided by the fund manager. Subsequently, without the plan sponsor's knowledge, Arun receives a payment from Ramport for successfully introducing it to the pension plan under an agreement Arun entered into with Ramport when the initial contact with the fund manager was made. With regard to the payment received, did Arun most likely violate the CFA Institute Standards of Professional Conduct? 1. Yes, because he should have refused payment from the fund manager 2. No 3. Yes, because he did not disclose the referral fee to the client
Answer Yes, because he did not disclose the referral fee to the client Arun has violated Standard VI(C)-Referral Fees because he did not disclose the referral fee arrangement with Ramport to his client prior to Ramport being appointed as the client's fund manager. This disclosure is necessary for the client to be able to determine Arun's level of independence and objectivity in recommending Ramport to the fund. If Arun had made proper disclosure, he would be able to accept the payment without violating any CFA Institute Standards of Professional Conduct.
Upon receiving notification that he passed his Level III CFA exam, Paulo Garcia updates his educational background on his social media site by adding "completed the CFA course." Does Garcia most likely violate the CFA Institute Standards of Professional Conduct? 1. Yes, because he doesn't describe the certification process 2. Yes, because it could imply he has obtained the charter 3. No
Answer Yes, because it could imply he has obtained the charter Standard VII(B)-Reference to CFA Institute, the CFA Designation, and the CFA Program forbids candidates to imply they have a partial designation or cite an expected completion date of any level of the CFA Program. Final award of the charter is subject to meeting the CFA Program requirements and approval by the CFA Institute Board of Governors. Garcia should state that he "passed Level III CFA exam" or "passed all three levels of the CFA exams." Stating that he "passed the CFA course" could be taken to mean he obtained his charter, which is incorrect.
Joan Tasha, CFA, a supervisor at Olympia Advisers (OA), wrote and implemented compliance policies at her firm. Derek Longtree, a longtime OA employee, recently changed the asset allocation of a client that was inconsistent with her financial needs and objectives and with OA's policies. Until now, Longtree has never violated OA's policies. Tasha discusses the issue with Longtree but takes no further action. Do Tasha's actions concerning Longtree most likely violate any CFA Institute Standards of Professional Conduct? 1. Yes, because she did not take steps to ensure that the violation will not be repeated 2. No 3. Yes, because she failed to detect Longtree's actions
Answer Yes, because she did not take steps to ensure that the violation will not be repeated Once a supervisor learns that an employee has violated or may have violated the law or the Standards of Professional Conduct, the supervisor must promptly initiate an investigation to ascertain the extent of the wrongdoing, as required by Standard IV(C)-Responsibilities of Supervisors. Relying on an employee's statements about the extent of the violation or assurances that the wrongdoing will not recur is not enough. eporting the misconduct up the chain of command and warning the employee to cease the activity are also not enough. Pending the outcome of the investigation, a supervisor should take steps to ensure that the violation will not be repeated, such as placing limits on the employee's activities or increasing the monitoring of the employee's activities.
Amanda Covington, CFA, works for McJan Investment Management. McJan employees must receive prior clearance of their personal investments in accordance with McJan's compliance procedures. To obtain prior clearance, McJan employees must provide a written request identifying the security, the quantity of the security to be purchased, and the name of the broker through which the transaction will be made. Pre-cleared transactions are approved only for that trading day. As indicated below, Covington received prior clearance. Security Quantity Broker Prior Clearance Security A Quantity: 100 Broker: Easy Trade Prior Clearance: Yes Security B Quantity: 150 Broker: Easy Trade Prior Clearance: Yes Two days after she received prior clearance, the price of Stock B decreased, so Covington decided to purchase 250 shares of Stock B only. In her decision to purchase 250 shares of Stock B only, did Covington violate any CFA Institute Standards of Professional Conduct? 1. Yes, relating to her employer's compliance procedures 2. No 3. Yes, relating to diligence and reasonable basis
Answer Yes, relating to her employer's compliance procedures Prior clearance processes guard against potential and actual conflicts of interest; members are required to abide by their employee's compliance procedures. (See Standard VI(B)).
Abdul Naib, CFA, was recently asked by his employer to submit an updated document providing the history of his employment and qualifications. The existing document on file was submitted when he was hired five years ago. His employer notices the updated version shows Naib obtained his MBA two years ago, whereas the earlier version indicated he had already obtained his MBA at the time of his hire. Because the position Naib was hired for had a minimum qualification of an MBA, Naib is asked to explain the discrepancy. He justifies his actions by stating: "I knew you would not hire me if I did not have an MBA, but I already had my CFA designation. Knowing you required an MBA, I went back to school on a part-time basis after I was hired to obtain it. I graduated at the top of my class, but this should not come as any surprise because you have seen evidence I passed all of my CFA exams on the first attempt." Did Naib most likely violate the CFA Institute Standards of Professional Conduct? 1. No 2. Yes, with regard to Reference to the CFA Designation 3. Yes, with regard to Misconduct
Answer Yes, with regard to Misconduct Naib knowingly misrepresented his qualifications at the time of his hire by stating he had obtained an MBA when in fact he had not. This action reflects adversely on his professional integrity, violating Standard I(D):Misconduct. Stating he passed his CFA exams in three consecutive years is not a violation of Standard VII(B): Reference to CFA Institute, the CFA Designation, and the CFA Program if it is factual. There is no evidence given to indicate he did not pass as claimed.
David Bravoria, CFA, is an independent financial adviser for a highnetworth client with whom he had not had contact in more than two years. During a recent, brief telephone conversation, the client states he wants to increase his risk exposure. Bravoria subsequently recommends and invests in several high-risk venture capital funds on behalf of the client. Bravoria continues, as he has done in the past, to send to his client monthly, detailed itemized investment statements. Did Bravoria most likely violate any CFA Institute Standards of Professional Conduct? 1. Yes, with regard to purchasing venture capital funds 2. No 3. Yes, with regard to investment statements
Answer Yes, with regard to purchasing venture capital funds Bravoria violated Standard III(A)-Loyalty, Prudence, and Care because he had not updated his client's profile in more than two years and thus should not have made further investments, particularly in high-risk investments, until he had updated the client's risk and return objectives, financial constraints, and financial position. Bravoria provided his client with investment statements more frequently than that what is required (i.e., quarterly) so was not in violation of providing regular account information.
