CFA Ethics 100
Which of the following actions most likely violates Standard I(D) Misconduct?
) A Level I candidate submits a request to her employer for auto travel reimbursement using inflated mileage totals
Lucy Ackert and Chris Brown prepared the following information to be included in the promotional materials of their employer, Lofton Securities. Lucy Ackert is one of five CFAs at Lofton Securities. She satisfied all requirements for the CFA designation in 1998. Chris Brown holds a CFA Level I designation, which he passed in 2001. He is registered to take the next scheduled Level II examination. Are the promotional materials prepared by Ackert and Brown fully consistent with the Standards of Professional Conduct?
) Ackert: No. Brown: No.
Which of the following are recommended procedures of compliance according to Standard I(D), Misconduct?
) Conduct background checks on potential employees to ensure that they are of good character
Which of the following is least likely part of the CFA Institute Code of Ethics?
) Contractual provisions.
Jim Crockett is a portfolio manager for Miami Advisors and reports to Vicki Tubbs, the Chief Investment Officer. Miami has developed a proprietary model that has been thoroughly researched and is known throughout the industry as the Miami model. The model is purely quantitative and takes a given set of client characteristics and universe of potential securities and forms a portfolio for the investor. Individual portfolio managers are responsible for selecting securities to fit into the model based on recommendations from the firm's research department and the managers' own judgment. Because of the specific nature of the inputs to the model, each manager is responsible for applying the model on his or her own computer. The basic philosophy of the process is thoroughly explained to clients. Crockett does not understand the basics of the model, but feels that since it provides pure quantitative output, he does not need to understand it. However, he misapplies the model for several of his clients. In reviewing some of Crockett's portfolios, Tubbs finds the errors and points them out to Crockett. Which of the following statements regarding Tubbs and Crockett is CORRECT?
) Crockett has violated the Standards by not exercising diligence and thoroughness in making investment recommendations
Bob Hatfield, CFA, has his own money management firm with two clients. The accounts of the two clients are equal in value. One of the clients gets married and the assets of the new spouse and the client are combined. With the larger portfolio of the now married client, Hatfield determines that they can assume a higher level of risk and begins a change in the policy concerning that portfolio. Which of the following would violate Standard III(C), Suitability?
) Implement a similar policy for the other client who did not just get married.
The Global Investment Performance Standards (GIPS) were designed to apply primarily to which of the following groups?
) Investment management firms located worldwide that seek to comprehensively and accurately present historical investment performance.
Jane Dawson, CFA, an analyst at a New York brokerage firm, suspects that Bob Boatman, CFA, another analyst at the same firm, has violated a state securities law. According to the CFA Institute Standards of Professional Conduct, Dawson is:
) NOT required to report the violation to the appropriate governmental or regulatory organizations.
A copyrighted technique for measuring the downside risk of an investment has just been revealed to the public. If an analyst adopts the technique, he must cite the use of the technique in all research reports in which the technique is used EXCEPT:
) Neither of these answers provide grounds for an exception.
A CFA Institute member works for Secure Securities, Inc., and plays rugby on the firm's rugby team. Secure Securities' team recently played the team of a rival firm. During the game, a fight broke out and the CFA Institute member was the instigator, but no one was seriously hurt. Is this a violation of I(A) concerning maintaining knowledge and complying with laws, rules, and regulations?
) No, because a fight at a rugby game is not a professional activity.
The following scenarios refer to two analysts who are employed at Global Securities, a large brokerage firm. Paula Linstrom, CFA, is instructed by her supervisor to write a research report on Delta Enterprises. Delta's stock is widely held by institutional and individual investors. Although Linstrom does not own any of Delta's stocks, she believes that one of her friends may own 10 shares of Delta. The stock currently sells for $25 per share. Linstrom does not believe that informing her employer about her friend's possible ownership of Delta shares is necessary. Hershel Wadel, a member of CFA Institute, is asked by his supervisor to write a research report on Gamma Company. Wadel's wife inherited 500 shares of Gamma Company from her father when he died five years ago. Gamma stock currently sells for $35 per share. Wadel does not believe that informing his employer about his wife's ownership of Gamma shares is necessary. According to CFA Institute Standards of Professional Conduct, which the following statements about Linstrom and Wadel's conduct is most accurate?
) Only one of these analysts must disclose a potential conflict of interest.
Which of the following statements is most accurate about the Standard concerning referral fees?
) Referral fees must be disclosed before proceeding with an agreement for service.
Which of the following statements about legal and ethical standards is most accurate?
) Some illegal acts are considered ethical.
Which of the following is least likely required of fiduciaries who are responsible for pension plans?
) Supporting the sponsor's management during proxy fights.
The Securities and Exchange Board of India (SEBI) has just enacted a new stock-trading rule. SEBI will give brokers a 10-day grace period, during which violators of the rule will be immediately notified and given a chance to remedy their situation to comply with the new rule. If a CFA Institute member located in India or doing business in India unknowingly violates the rule and then remedies the situation within the 10-day grace period, has the member violated Standard I(A)?
) Yes, because the member did not maintain knowledge and know of the rule
Connie Baker, CFA, is an analyst with the brokerage and investment banking firm Hill and Stevens (H&S). Baker's supervisor, John Lewis, has asked her to write a research report on Jagged Rock Brewing. The H&S mergers and acquisitions department has represented Jagged Rock in all of its acquisitions for the past 12 years. Both Hill and Stevens sit on Jagged Rock's board. According to the Standards of Professional Conduct, can Baker write the report?
) Yes, if she discloses the directorships and the mergers-and-acquisitions relationship.
A money manager is meeting with a prospect. She gives the client a list of stocks and says, "These are the winners I picked this past year for my clients. Their double-digit returns indicate the type of returns I can earn for you." The list includes stocks the manager had picked for her clients, and each stock has listed with it an accurately measured return that exceeds 10%. Is this a violation of Standard III(D), Performance Presentation?
) Yes, unless the positions listed constitute a complete presentation (i.e., there were no stocks omitted that did not perform in the double digits).
When providing outside services, a member should provide all of the following information to her current employer EXCEPT:
) a promise to remit an agreed-upon percentage of the proceeds to the current employer.
When Wes Smith first joined Advisors, Inc., he was excited that all the analysts at the firm had the CFA designation. In letters to prospective clients, he states that this ensures that Advisors can provide better service than their competitors. With respect to Standard VII(B), Reference to CFA Institute, the CFA Designation, and the CFA Program, this is:
) a violation because he cannot guarantee better service.
An analyst belongs to a nationally recognized charitable organization, which requires dues for membership. The analyst has worked out a deal under which he provides money management advice in lieu of paying dues. While performing services for the organization, the analyst discovers some useful computer programs that his predecessor developed and left as the property of the organization. The analyst decides to use the computer programs in his consulting business. This action is:
) a violation of Standard I(D) concerning misconduct.
Which of the following characteristics distinguishes a profession from an occupation? Members of a profession:
) abide by a code of ethics.
Robe Advisory Services operates an office in San Francisco, where it manages portfolios for its clients based in the United States. The firm also maintains an office in Tokyo, where it employs Sam Lee, CFA who researches Japanese stocks. According to the CFA Institute Standards of Professional Conduct, Lee is required to maintain knowledge of and comply with all applicable laws, rules, and regulations in:
) both the U.S. and Japan and the CFA Institute Standards of Professional Conduct.
Andrea Waters is an investment analyst who has accumulated and analyzed several pieces of nonpublic information through her contacts with drug firms. Although no one piece of the information she collected is "material," Waters correctly concluded that the earnings of one of the drug companies would be unexpectedly high in the coming year. According to CFA Institute Standards of Professional Conduct, Waters:
) can use the information to make investment recommendations and decisions.
According to Standard III(A) Loyalty, Prudence and Care, brokerage is an asset of the:
) client.
A CFA charterholder in a managerial position is in the process of hiring new analysts. If the charterholder conducts background checks on the job applicants with respect to their character, the charterholder has:
) complied with Standard I(D) concerning professional misconduct.
An ethical decision-making framework:
) considers alternative actions and unintended consequences.
Standard VI(C), Referral Fees, requires the member to do all of the following EXCEPT:
) disclose to the referred client the percentage of the member's business that comes from referrals.
Standards of conduct are most accurately described as:
) giving members of a group a minimum level of acceptable behavior.
Jessica French is an individual investment advisor with 200 clients and claims she conforms to Global Investment Performance Standards (GIPS). French includes all of the clients on her books. One of those clients is her father, to whom she charges no fee. However, she manages that portfolio using the same processes as she uses for her paying clients. Another client included in the composite is John Randolph, a wealthy entrepreneur. Randolph is the only client who does not give her discretion over the assets and makes every decision himself, getting suggestions from French and using her to implement decisions. French:
) has violated GIPS because it includes Randolph's account, but not because it includes her father's account.
Samuel Goldstein, CFA, is an analyst for Tamarack Securities. Goldstein's father, Reuben, has a client account at Tamarack. In ordering trades, Goldstein should place orders in:
) his clients' and his father's accounts in the first group and his personal accounts in the second group.
Ken Howell, CFA, plans to issue a buy recommendation for Glazer Oil, Inc., based on his analysis and forecasts. Howell suspects that the company will soon announce merger plans with a Japanese oil company. To investigate, Howell attempts to call three executives at Glazer. Different secretaries inform Howell that the executives are "attending a conference overseas" or "traveling in Japan." Howell is able to confirm that all three are in the same city in Japan where the potential merger partner is headquartered. Howell feels confident that the merger will go forward. According to CFA Institute Standards of Professional Conduct, Howell may issue a buy recommendation on the oil company:
) immediately.
According to the Code of Ethics, the professional judgment of a member should be:
) independent
A financial analyst and CFA Institute member sends a preliminary research report on a company to his supervisor. The supervisor approves the report, but then the analyst receives news that causes him to revise downward the earnings estimate of the company. The analyst resubmits the report to the supervisor with the new earnings estimate. The analyst soon finds out that the supervisor plans to release the first version of the report with the first earnings estimate without a reasonable and adequate basis. In response to this the analyst must:
) insist that the supervisor change the earnings forecast or remove his (the analyst's) name from the report.
Chris Babcock, CFA, a portfolio manager for a large Texas investment firm, has been offered compensation in addition to what her firm pays her. The offer is from one of her clients and the additional compensation will be based on her yearly performance in excess of the market index. Babcock should:
) make written disclosure to all parties involved before she accepts this offer.
An analyst has not paid his CFA Institute dues for several years but has filed a professional conduct statement annually. Which of the following statements regarding his status with CFA Institute is most accurate? The analyst:
) may not use the CFA designation
According to CFA Institute Standards of Professional Conduct, which of the following statements about material nonpublic information is NOT correct? Information is:
) nonpublic until it has been disseminated to a select group of investors
Andrew Mader, CFA, is an analyst with Metro Investment Services. During lunch with some of Metro's managers, Mader is told, "There are going to be major problems at Gebco (a firm that Metro had brought public last year). I was just over there and the place is just crawling with government inspectors." Mader had just issued a report with a "buy" recommendation on Gebco last week. Mader should:
) not do anything because to do so would violate his obligation to preserve confidentiality.
May Frost, CFA, is an equity research analyst for a "precious metals mining" exchange traded fund which has recently started significantly outperforming its benchmark after several years of stagnation. Upon investigating the source of the outperformance, Frost learns that the fund has experienced severe style drift, and now has a significant proportion of its resources invested in technology and Internet stocks. Frost reviews the fund's prospectus and learns the current sector weighting violates multiple prospectus covenants. Frost contacts her supervisor and the fund's compliance department and is told the portfolio weighting is not her responsibility and that she should not pursue the matter further. Frost reviews the firm's whistleblower policy, contacts personal legal counsel, and then contacts regulatory authorities regarding the style drift and prospectus violations. Frost is most likely
) not in violation of the Code and Standards.
Wallace Manaugh, CFA, is analyzing the stock of a manufacturer of fishing boats. By analyzing public information, speaking with the firm's suppliers and customers, and counting the new boats in the company's boat yard, Manaugh concludes that the company's new fishing boat is not meeting sales expectations. Anticipating that this will cause the stock price to decline, Manaugh takes a short position in the stock. Manaugh has:
) not violated CFA Institute Standards.
To comply with Standard IV(B), Additional Compensation Arrangements, members should do all of the following EXCEPT:
) reject any outside compensation immediately because it is not appropriate to accept outside compensation in a business setting.
Which of the following is a component of the Code of Ethics? CFA Institute members shall:
) use reasonable care and exercise independent professional judgment.
Millie Walker, CFA, established an aggressive growth portfolio for her client, Jesse Wilmer, over three years ago. Wilmer was placed on Walker's employer's client mailing list, and received monthly account statements and the firm's newsletter, which regularly informed clients that they should contact their account representative with any change in their personal circumstances or investment objectives. As of January, of this year, Walker had not spoken to Wilmer nor received any correspondence from Wilmer since the account was established. Walker has:
) violated the Code and Standards because the manager has not performed an update of Wilmer's financial situation and investment objectives.
Rhonda Meyer, CFA, is preparing a research report on Moon Ventures, Inc. In the course of her research she learns the following: Moon had its credit rating downgraded by a prominent rating agency 3 years ago due to sales pressure in the industry. The rating was restored 3 months later when the pressure resolved. Moon's insider trading has been substantial over the last 3 months. Holdings of Moon shares by officers, directors, and key employees were reduced by 50% during that period. In Meyer's detailed report making a buy recommendation for Moon, both the credit rating downgrade and the insider trading were omitted from the report. Meyer has
) violated the Code and Standards by not including the insider trading information in her report.
Todd Gable, CFA, was attending a noon luncheon when he overheard two software executives talking about a common vendor, Datagen, about how wonderful they thought the company was, and about a rumor that a major brokerage firm was preparing to issue a strong buy recommendation on the stock. Gable returned to the office, checked a couple of online sources, and then placed an order to purchase Datagen in all of his discretionary portfolios. The orders were filled within an hour. Three days later, a brokerage house issued a strong buy recommendation and Datagen's share price went up 20%. Gable then proceeded to gather data on the stock and prepared a report that he dated the day before the stock purchase. Gable has:
) violated the Standards by not having a reasonable basis for making the purchase of Datagen.
Hillary Jones, CFA, sometimes promises clients that she will allocate more shares from oversubscribed initial public offerings (IPOs) than she knows she will actually be able to deliver. Her employer has reprimanded her in the past for similar behavior. Which of the following statements is least accurate regarding Jones' behavior?
A) Her actions are a violation of the Standards only if prosecution results in a felony conviction.
All of the following are required for a CFA Institute member to maintain his or her active status EXCEPT:
A) Passing each exam in no more than two tries
According to the CFA Institute Standards of Professional Conduct, which of the following statements about members with supervisory responsibility is least accurate? Members with supervisory responsibility:
A) are relieved of their supervisory responsibility if they delegate their supervisory duties to other members of CFA Institute.
Which of the following statements regarding CFA Institute Global Investment Performance Standards (GIPS) is CORRECT? A firm that employs members of CFA Institute:
A) is not required to conform to the GIPS.
Which of the following activities would be following a component of the Code of Ethics explicitly?
Attending continuing education seminars on investing and inviting colleagues to come along.
Phil Trobb, CFA, is preparing a purchase recommendation on Aneas Lumber for his research firm. Which of the following least likely represents a conflict of interest that Trobb should disclose in his report?
B) Trobb's cousin repairs machines for Aneas.
According to CFA Institute Standards of Professional Conduct, members are least likely required to:
B) distribute a detailed research report to clients with any recommendation.
Lindsay Gordon is a Level II CFA candidate. Gordon's best friend, Steve Haney, is also a Level II candidate and has registered for the same exam window as Gordon. Because Haney's exam appointment is the day before Gordon's appointment, Gordon suggests that Haney try to remember some of the exam questions and let her know what they asked. After Haney takes his exam, he reminds Gordon that the Code and Standards prohibit candidates from disclosing specific exam questions, and only gives her a general idea of what topics were tested or not tested. Which of the following statements regarding Gordon and Haney is most accurate?
Both Gordon and Haney are in violation of the Code and Standards.
Selma Brown, CFA, is a portfolio manager for Mainland Securities. Rick Wood, one of her clients and owner of Wood Fitness Centers, offers to permit Brown and her immediate family to use the facilities at his fitness centers at no cost during 2003. To get this benefit, Brown must achieve on Wood's portfolio at least a 2-percentage point return above the total return on the S&P's 500 index during 2002. Brown orally informs her immediate supervisor of the nature and duration of the proposed arrangement. Arnold Turley, a CFA Institute member, is a portfolio analyst at Mainland Securities. He was just elected to the Board of Directors for Omega Services, which pays him $1,000 plus expenses for attending each of its quarterly board meetings. Turley e-mails Mainland's compliance officer informing her of this arrangement with Omega and receives a reply informing him that the agreement is acceptable. Did Brown or Turley violate CFA Institute Standards of Professional Conduct?
C) Brown: Yes, Turley: No
All of the following statements in promotion of your services are in violation of CFA Institute Standards of Practice handbook EXCEPT:
C) I passed Level II of the CFA Program in 2003.
A CFA Institute member puts the following statement on her resume: "I passed each level of the CFA exam on the first try." Is this a violation of Standard VII(B)?
C) No, because it is a statement of fact.
As countries adopt the Global Investment Performance Standards (GIPS), which of the following is least likely to occur?
C) The trend toward cross border investments will decline.
The mosaic theory is the idea that an analyst can:
C) make recommendations or trade based on several pieces of public or nonpublic information, each piece by itself being nonmaterial, but when compiled the information becomes material.
Recommended procedures to comply with the Standard related to fair dealing are most likely to include:
C) publishing personnel guidelines for pre-dissemination that prohibit those who know about a pending recommendation from discussing or acting on it.
A CFA charterholder may disclose confidential information about a client when:
C) the CFA Institute Professional Conduct Program requests it.
When calculating the performance of a composite, which of the following actions complies with GIPS?
Defining a composite so as to include portfolios that have been discontinued.
GIPS require that, to claim compliance, firms must present GIPS-compliant performance information for a minimum of five years or since inception if in existence less than five years. Firms may not link noncompliant performance information for any periods after January 1, 2000.
Including a graph showing the Fed's discount rates over the previous 12 months in a report that goes to clients.
Mark Roberts has resigned from a local investment advisory firm and begun working at Benjamin Investments. Without getting approval from his supervisor at Benjamin, Roberts uses a phone book to find the contact information of his old clients and asks for their continued business. Has Roberts violated any CFA Institute Standards of Professional Conduct?
No
Linda Schultz, CFA, is an investment advisor at Wheaton Investments. Schultz has been employed there for five years, and has never signed a "non-compete" clause. While at Wheaton, Schultz makes preparations to set up her own money management firm. She does not contact any existing clients before leaving Wheaton and does not take any firm records or files. After her resignation becomes effective, Schultz replicates a list of former clients from memory and uses public sources to get their contact information. She then contacts these former clients and solicits their business for her new firm. Has Schultz violated any CFA Institute Standards?
No. Schultz is in compliance with CFA Institute Standards
Ray Stone, CFA, follows the Amity Paving Company for his employer, Rubbell Securities. Which of the following scenarios is Stone least likely to have to disclose?
The fact that Stone's son worked at Amity as a laborer during the summer while in school.
Four years ago, American Securities discontinued its international small-cap investment strategy and terminated the GIPS composite for presenting its performance. To comply with GIPS, does American Securities still need to offer a compliant presentation for this composite?
Yes
A CFA charterholder takes a trip for which his firm will pay the expenses. Upon his return, he alters some of the numbers on restaurant receipts to inflate the expenses by about one half of a percent. Is this a violation of the Code and Standards?
Yes, because it reflects dishonesty.
A CFA charterholder is caught shoplifting and is sentenced to nine months in prison. Is this a violation of Standard I(D) Misconduct?
Yes, because the crime involved stealing.
Trude Front, CFA, is a portfolio manager. While in the normal course of her duties, she happens to overhear material non-public information concerning the stock of VTT Bowser. She purchases several exchange traded funds which contain VTT Bowser, while shorting similar exchange traded funds which do not contain VTT Bowser. This is most likely:
a violation of Standard II(A) "Material Non-Public Information."
Klaus Gerber, CFA, is a regular contributor to the Internet site WizeGuy. This past week Gerber has been incorrectly quoted as recommending that investors buy shares in Bradford, Inc. He is unaware that this message has been placed on the site as the quote was placed as a prank by an unknown source. This is the third time this has happened over the past month and each time the stock being mentioned moved in price according to the buy or sell recommendation. Fritz Fox, CFA, maintains and updates the WizeGuy site and has learned how to determine if the quotes being attributed to Gerber are actually valid. Several days later, he observes an investment recommendation, posted on the site, to buy Gresham, Inc. The investment recommendation is purported to be from Gerber, but Fox actually knows it to be bogus. He immediately sells 1,000 Gresham short and e-mails Gerber to inform him of the bogus recommendation. Gerber immediately issues a rebuttal, and Gresham falls by 14%. Fox's action is:
a violation of the Standard concerning use of material nonpublic information.
Ken Koski, CFA, issues a press release that includes the following statement: We are proud to announce that two of our managers have earned the right to use the CFA designation. In addition, four of our junior analysts have become Level III CFA candidates. These individuals have proven their dedication to the investment community and shown commitment to the highest ethical standards. With regard to the statements in the press release:
all these statements are in compliance with CFA Institute Standards.
While on a business trip, John Hayes, CFA, found a notebook that had apparently been left in the waiting area of an airport. Hayes opened the notebook and read the title: Confidential: Level II CFA Examination. Before returning the notebook to CFA Institute, he made a copy and gave it to Linda Sacket, one of his firm's analysts, who was a candidate for Level II of the CFA examination. Sacket read the questions and guideline answers before taking the Level II examination. According to the CFA Institute Standards of Professional Conduct:
both Hayes and Sacket violated the Standards.
An analyst is serving on the Board of Directors of a local publicly traded company. To avoid violating the CFA Institute Code and Standards, the analyst must disclose this to:
both his employer and his clients and prospective clients.
Which of the following is NOT an objective of the Global Investment Performance Standards (GIPS)?
calculation and presentation of investment performance in a fair, comparable format that provides full disclosure.
Regarding (1) not voting all client proxies, and (2) using a directed brokerage arrangement, a member would violate the Standards by:
engaging in neither of these practices.
Establishing standards of ethical behavior and monitoring professional conduct are best described as ways that professions:
establish trust.
All of the following are violations of Standard II(B) Market Manipulation EXCEPT:
exploiting differences in market inefficiencies.
Art Dodd, CFA, is a registered representative with Owens Securities. He is currently in a dispute with one client, Madge Phillips, about a limit order for her account that she feels was entered incorrectly, resulting in a loss (in her opinion) of $500. Dodd has 1,000 shares of an oversubscribed new issue to allocate to clients. He suggests to Phillips that he will give her 250 shares of this allocation to make up for the supposed trade error. Further, he offers to buy her dinner at a nice restaurant. According to the Standards of Practice, Dodd has most likely violated the Standard concerning:
fair dealing.
Bob Sampson is the head portfolio manager for Global Equities, which has been in existence for eight years. Beginning this year, the firm has decided to present performance information in compliance with GIPS. To claim GIPS compliance, the firm must present at least:
five years of GIPS-compliant performance information with no additional disclosure required for prior years.
Joshua Rosenberg, CFA, is an equity analyst who covers Northwest Implements, a farm implement manufacturer. Northwest's main factory is located in a sparsely inhabited region six hours by automobile from the nearest airport. Northwest has its own corporate jet and a landing strip is located near the facility. When Rosenberg contacts Northwest's management to gather information for a report he is preparing on the company, Northwest's chief financial officer, Thomas Blake, invites Rosenberg to visit Northwest's headquarters and meet with management. Blake offers to send Northwest's corporate jet to pick up Rosenberg from an airport near Rosenberg's home and to return him home the same evening. Rosenberg estimates that it would require three days for him to make the visit using commercial travel. If Rosenberg accepts Blake's offer and makes the trip to Northwest's headquarters on the corporate jet, Rosenberg:
has not violated the Code and Standards.
Nancy McCoy, CFA, is preparing a report on Gourmet Food Mart. As part of her research, she contacts the company's contractors, suppliers, and competitors. McCoy is told by the CEO of a major produce vendor that he is about to file a lawsuit against Gourmet Food Mart, seeking significant damages. McCoy incorporates this information into her research report, which projects a decline in profitability for Gourmet Food Mart due to the impending litigation. According to the CFA Institute Standards of Professional Conduct, McCoy:
has violated the Standards by utilizing material nonpublic information.
Dave Kline, CFA, is a personal investment advisor with 200 individual, family, and corporate accounts. After a dispute with a coworker on margin policy, he formally resigns his position by giving suitable notice. However, he does not follow his firm's established "Transition and Exit Policies" regarding his accounts. The firm's stated policies require him to notify each client of his planned departure and personally introduce them to their new account representative, Greg Potter. Kline sees Potter as a rival and states "...let Potter do his own work and find his own clients." Kline is most likely:
in violation of Standard IV(A) "Loyalty" for failing to follow the employer's policies and procedures related to notifying clients of his departure.
Longhorn Investments prepares its performance presentations in accordance with Global Investment Performance Standards (GIPS). As part of its employee benefits package, Longhorn does not charge a fee to its employees for managing their portfolios. When calculating total firm assets for the purpose of GIPS compliance, Longhorn should:
include these employee portfolios.
WEB, an investment-banking firm, is the principal underwriter for MTEX's upcoming debenture issue. Wendy Berry, CFA, an analyst with WEB, has found out from an employee in MTEX's programming department that a serious glitch was recently discovered in the software program of their major new product line. In fact, the glitch is so bad that most of their orders have been canceled. Berry checked the debenture's prospectus and found no mention of this development. The red herring prospectus has already been distributed. Berry's best course of action is to:
inform her immediate supervisor at WEB of her discovery
An analyst working at an investment firm has a client that rents limousines. The client tells the analyst that as long as he is the client's analyst, he can have free use of a limousine several times a year. The analyst needs to:
inform his supervisor in writing of the offer if the analyst intends to accept the offer.
Mark Williamson is "bearish" on ABC Manufacturing Company. Williamson is so convinced that ABC is overpriced, two weeks ago, he shorted 100,000 shares. Today, Williamson is "surfing" several popular investment bulletin boards on the internet and posting false derogatory comments about company management. According to Standard II(B), Market Manipulation, Williamson has engaged in:
information-based manipulation, but not transaction-based manipulation.
Chuck Hill, CFA, the financial manager of Niseron Corp., has just learned that Niseron's quarterly net income will fall well short of consensus analyst expectations. Hill decides that he should immediately notify analysts covering Niseron of this negative development. He calls two particular analysts first who have followed Niseron stock for several years and have alerted Hill to important developments at competing firms. Failing to notify these analysts might damage Hill's ability to monitor his competition, to the detriment of his own shareholders. Under CFA Institute's Code and Standards, Hill should most appropriately:
issue a press release regarding Niseron's earnings prior to calling analysts.
A money manager works for a full-service brokerage firm. After meeting with a new client and gathering all relevant information, the money manager says that she thinks her firm can perform all the financial services the new client needs. With respect to Standard I(C), Misrepresentation, this:
may not be a violation if the manager's opinion is based upon the factual information gathered.
Rhonda Morrow, CFA, is an analyst for Waller & Madison, a brokerage and investment banking firm. Waller & Madison is a market maker for CorpEast, and Tim Waller, a principal in Morrow's firm, sits on CorpEast's board. Morrow has been asked to write a research report on CorpEast. According to the Standard regarding disclosure of conflicts, Morrow:
may write the report if she discloses both that Waller & Madison is a market maker in CorpEast shares and that Waller sits on the CorpEast board.
Marion Klatt, CFA, is a representative for Thiel Financial Network. Klatt received a phone call at home from William Kind, a junior executive at Westtown Development Company, asking whether Klatt had heard that Westtown had just reached an agreement to acquire a major shopping mall chain at a very favorable price. (Klatt had not heard this news, and Klatt was able to confirm that the information had not yet been made public.) Kind requested that Klatt acquire 10,000 shares of Westtown for Kind's personal account. Klatt should:
not acquire the shares until the information is made public.
Brenda Simone is a money manager and the Blue Streets Pension Fund is one of her clients. The director of the pension fund calls Simone and asks her to use a particular broker so that the fund can obtain some research services with the soft dollars from that broker. Simone believes that the desired broker will provide the same price and execution as the normal broker that Simone uses. Simone does as the client wishes. Simone has:
not violated the Standards as long as the research provided by the broker will benefit the plan beneficiaries.
Jack Salyers, CFA, is considering starting his own firm to compete with his current employer. He takes several actions before turning in his resignation. Which of the following actions least likely violates the Standard concerning loyalty? Salyers:
registers his new firm with the government's financial regulators.
When a CFA Institute member who is presently employed by a firm undertakes any independent practice, he must do all of the following EXCEPT:
remand a percentage (to be determined by the employee and employer) of the income earned back to the employer.
CFA Institute members should encourage their employers to do all of the following EXCEPT:
require employees to write personal ethics statements.
Which of the following statements most accurately describes verification under the Global Investment Performance Standards (GIPS)? GIPS verification:
requires a verification report to be issued for the entire firm
amela Gee is a portfolio manager. She is planning to establish her own money management firm. She has already informed her employer, Branford, Inc., about her plans. In her remaining time at Branford, she can:
start the registration of her new company.
Jason Jones, a stock broker who has completed Level I of the CFA program and is registered for the next Level II CFA exam, may:
state that he is a Level II candidate in the CFA Program.
An analyst finds a stock that has had a low beta given its historical return, but its total risk has been commensurate with its return. When writing a research report about the stock for clients with well-diversified portfolios, according to Standard V(B), Communication with Clients and Prospective Clients, the analyst needs to mention:
the relationship of the historical beta and return only.
Maggie McCarthy is an individual investment advisor who uses mutual funds for her clients. She typically chooses from a list of 40 funds that she has thoroughly researched. The Figgs, a married couple that are a client, asked her to consider the Boilermaker fund for their portfolio. McCarthy had not previously considered the fund because when she first conducted her research three years ago, Boilermaker was too small to be considered. However, the fund has now grown in value, and after doing thorough research on Boilermaker, she found the fund was by far the most outstanding large company value fund in her list of funds. She puts the fund in the Figgs' portfolio, and in all new clients' portfolios, but not in any of her other clients' portfolios. Her reasoning is that her existing clients were comfortable with their current holdings, and she did not want to risk disturbing their comfort. Has McCarthy violated any Standards? McCarthy has:
violated the Standards by not dealing fairly with clients.
Chuck Thomas is the trustee of a trust of which Jill Wyatt is the main beneficiary. Wyatt's husband is the president of a company. In emptying the recycling bin at home, Wyatt finds some papers that lead her to believe that her husband's company will make a tender offer to acquire another firm. Wyatt takes the information to Thomas, who uses it to purchase shares of the company for the trust, but does not further disclose the information. Thomas has:
violated the Standards concerning material nonpublic information
Bertha Mader, CFA, received proxy material related to a hostile takeover attempt of Danube Industries by Balnet Company. She holds shares of Danube in most of her client accounts. Mader has a high opinion of Danube's management because they have run the company successfully and have always responded directly and honestly to her inquiries. She is not acquainted with Balnet's management team but knows they have a reputation for improving the bottom line at the companies they acquire, partly because they tend to replace upper management at their targets and assume their functions. Balnet's offer is 60% higher than the price of Danube shares before the announcement. Danube's management has contacted Mader and requested that she vote the shares she controls against the takeover because the management is concerned for their jobs and for the welfare of the company. To comply with the Code and Standards, Mader should:
vote for the takeover if it is in the best interest of Danube's shareholders, regardless of the consequences to current management.
