Ethics - Practice Questions

Which of the following is under Standard III Duties to Clients? A. Priority of transactions B. Fair dealing C. Misrepresentation

B. Fair dealing The second choice is correct. This falls under Duties to Clients.

Which of the following statements is most accurate? Firms claiming compliance with the Global Investment Performance Standards: A. may rename a composite. B. must not rename a composite. C. must not include a portfolio in more than one composite.

A. may rename a composite. Firms may rename composites but must disclose any name changes. All fee-paying, discretionary portfolios must be included in at least one composite.

Under the Code and Standards, Standard III: Duties to Clients does not include which of the following items? A. Suitability. B. Record retention. C. Performance measurement.

B. Record retention. Record retention falls under Standard V.

In the event that local law is in conflict with GIPS, firms must: A. present two versions of their performance. B. comply with local law without further disclosure. C. comply with local law and disclose the nature of the conflict.

C. comply with local law and disclose the nature of the conflict. When in conflict, GIPS requires that firms conform to applicable laws and to disclose the nature of the conflict.

Joe is in charge of a very large equity management firm that does a significant amount of trading with soft-dollar commissions. At the end of the year, what percent of the soft-dollar commissions is he allowed to pay out in annual bonuses to his employees? A. 0% B. Up to 10% C. Up to 25%

A. 0% Joe is not allowed to pay out any annual compensation bonuses to employees with soft-dollar commissions. Instead, all proceeds from these activities must go to the purchase of goods and services that directly benefit the client.

The Wealth Advisors firm (WA) complies with GIPS and recently acquired the accounts of a bankrupt money manager Pristine Management (PM). Which of the following portfolios would least likely be included in one of WA's composites? A. A portfolio managed by a sub-advisor hired by PM with two years left on her contract. B. A real estate portfolio that WA has closed to new investors and intends to divest over the next two years. C. The wrap fee accounts that WA intends to add to its existing clients.

A. A portfolio managed by a sub-advisor hired by PM with two years left on her contract. GIPS require that all discretionary, fee-paying accounts be included in at least one composite. Discretionary means that the investment decisions are made by WA. Since the sub-advisor manages the portfolio, and the sub-advisor was chosen by PM, it does not qualify as a WA's discretionary account. Sub-advisor-managed accounts may be included if the sub-advisor was vetted and selected by WA.

Which of the following statements regarding the GIPS standards is most likely to be correct? A. Any investment manager may choose to comply with the GIPS standards. B. GIPS compliance can be achieved on a single product or composite, or on a firm-wide basis. C. Plan sponsors, consultants, and software providers can choose to comply with GIPS.

A. Any investment manager may choose to comply with the GIPS standards. Only investment management firms that actually manage assets can claim compliance with the Standards. Plan sponsors and consultants cannot claim compliance unless they actually manage assets for which they are making a claim of compliance. Similarly, software vendors cannot be compliant.

Chris Fernandez has been the leading analyst at Bright Consultancy Inc. Chris's boss, Sam Patrick, is very pleased with Chris's performance, so he approved Chris's trip to Switzerland for research work on a pharma company that was sponsored by the client. Chris accepts the offer gladly and completes his report. During his visit he learns about a new drug the company is planning to launch within two years, and he publishes this in his report before its official announcement is made. Which of the following is most accurate? A. Chris has violated Standards I(B) and II(A), whereas Sam has violated standards related to duties to employer. B. Chris has violated Standard I(B), whereas Sam has not violated any standards. C. Chris has violated Standards I(B) and II(A), whereas Sam has violated the standards related to professionalism.

A. Chris has violated Standards I(B) and II(A), whereas Sam has violated standards related to duties to employer. Chris has violated Standard I(B) related to independence and objectivity by accepting the client-sponsored trip that could possibly affect his research. He has also violated Standard II(A) by using material nonpublic information about the launch of a new drug. Sam has violated standards related to duties to employer by not being a vigilant supervisor, as he approved Chris's trip and his report.

Sydney Wicks is a fixed-income analyst with Consistent Capital. A colleague introduced him to commodity-linked bonds as a means to enhance returns. Believing that his firm would not be interested in these securities, he buys several for his personal account. Some months later, Wicks writes a report recommending that his firm consider commodity-linked bonds for its clients and includes the issue he owns in a list of potential investments. According to the Standards of Professional Conduct, Wicks must: A. Disclose his beneficial ownership of the issue in the report. B. Liquidate his positions prior to making any recommendations. C. List his holdings in the next quarterly investment disclosure document.

A. Disclose his beneficial ownership of the issue in the report. Wicks' ownership of bonds he includes in his recommendation creates the appearance of a conflict, at the very least. Therefore, he must disclose his ownership interest in the report.

Under Standard III (B) Fair Dealing, the following are required actions for compliance except: A. Disseminate investment recommendations to all clients regardless of whether the securities are suitable for the clients. B. Ensure the investment recommendation is available to all clients concurrently, where possible. C. Restrict the number of people who would know that an investment recommendation is going to be communicated.

A. Disseminate investment recommendations to all clients regardless of whether the securities are suitable for the clients. The first choice is correct. To ensure compliance with the Standard, members should seek to communicate investment recommendations to all clients who have indicated an interest and those for whom the securities are suitable. There is no need to communicate recommendations to clients for whom the securities are deemed unsuitable.

According to Standard III (D), when communicating investment performance information, members and candidates must make reasonable efforts to ensure that it is A. Fair, accurate, and complete. B. Fair, measurable, and complete. C. Fair, understandable, and complete.

A. Fair, accurate, and complete. The first choice is correct. Standard III (D) states, "When communicating investment performance information, members and candidates must make reasonable efforts to ensure that it is fair, accurate, and complete."

Rodney Webber is a technology analyst with DAT Research. After accepting a position with one of DAT's competitors, he realizes that he cannot take records of his past work to his new firm. While cleaning out his old office, Webber empties the file cabinet containing those records into a waste bin for shredding. Did Webber violate the Standards of Professional Conduct? A. Yes. B. No, because he did not take the records with him. C. No, because his past work is no longer relevant.

A. Yes. The records of Webber's past work belong to DAT Research. While it is a violation of the Standard for him to take them, it is also a violation to destroy them without DAT's permission.

Which of the following is a statement of a member's duty under the Code and Standards? A. In the absence of a specific applicable law and other rules and regulations, the Code and Standards govern the member's actions. B. When the applicable local law, rules, and regulations do not adequately cover the use of material nonpublic information, a member is free to take advantage of the loophole. C. When there is a conflict between the Code and Standards and local law, rules, and regulations, a member can use their discretion when deciding which rules or Standards to comply with.

A. In the absence of a specific applicable law and other rules and regulations, the Code and Standards govern the member's actions. The rule of thumb is that if an applicable law is stricter than the requirements of the Code and Standards, members must adhere to the law; otherwise, they must adhere to the Code and Standards. This relates to Standard I(A): Knowledge of the Law.

Saxit Asset Management has a proprietary model for valuing securities that is based on a combination of fundamental and macroeconomic factors. The model has always been run based on a statistical technique called principal component analysis. After recent personnel changes at the firm, the head of investment management decides that the model will no longer be used and that managers will use more subjective techniques to value investments. Clients are not informed of the change in the investment process unless they make a direct inquiry about the subject. The head of investment management is: A. In violation of Standard V(B): Communication with Clients B. Not in violation of Standard V(B) because the personnel changes justified the change in investment process C. Not in violation of Standard V(B) because the change is being fully disclosed when clients inquire about the process

A. In violation of Standard V(B): Communication with Clients By failing to disclose to clients a substantial change to its investment process, the head of investment management of Saxit has violated Standard V(B). Clients must always be informed of changes in the investment process, regardless of the reasons why the changes occur. Only disclosing the change in process in response to an inquiry from a client is not proactively disclosing the change.

Jim Bell is a research analyst who has recently changed employers. His original employer did not consent to Bell taking to his new employer any documentation relating to his previous recommendations. He previously had a "Strong Sell" recommendation on the leading company in his sector and wishes to initiate coverage of the company with the same rating. Bell issues a "Strong Sell" rating at his new firm and bases his recommendation on public sources and his memory of information gathered at his previous firm. Bell is: A. In violation of Standard V(C): Record Retention B. Not in violation of Standard V(C): Record Retention, provided he retains records of the public sources and information gathered at his previous firm C. Not in violation of Standard V(C): Record Retention since experience and knowledge gained at previous employers is permitted to be used at his new employer

A. In violation of Standard V(C): Record Retention Standard V(C): Record Retention requires that when a member or candidate leaves a firm to seek other employment, the member or candidate cannot take the property of the firm, including original forms or copies of supporting records of the member's or candidate's work, to the new employer without the express consent of the previous employer. The member or candidate cannot use historical recommendations or research reports created at the previous firm because the supporting documentation is unavailable. For future use, the member or candidate must re-create the supporting records at the new firm with information gathered through public sources or directly from the covered company and not from memory or sources obtained at the previous employer. The second answer is incorrect since Bell did not receive consent to take records to his new firm, and The third answer is incorrect since records cannot be reproduced from memory.

Which of the following statements is least likely, consistent with the recommended procedures for compliance with Standard VI(B): Priority of Transactions? A. Investment firms should ban all employees from participation in equity IPOs. B. Strict limits should be placed on investment personnel acquiring securities in private placements. C. Investment personnel involved in the investment decision-making process should establish blackout periods prior to trades for clients.

A. Investment firms should ban all employees from participation in equity IPOs. The recommendations of Standard VI(B) are that investment personnel should have limited participation in equity IPOs, not that there should be a blanket ban across all personnel. The second and third answers are recommendations for compliance.

Jonathan Mathew, an investment analyst and an animal rights activist, joined a procession in New York for which he was detained by the police. Based on the information, which of the following statements is most accurate about the code of ethics and standards of professional conduct? A. Jonathan has not violated any standards. B. Jonathan has violated Standard I(D) related to misconduct. C. Jonathan has violated Standard I(A) related to knowledge of law.

A. Jonathan has not violated any standards. Jonathan has not violated any standards, as his involvement in procession does not affect his professional integrity and CFA institute does not prevent candidates or members from expressing views on personal beliefs.

Samantha Gonzalez, CFA, advises individual investors for a boutique firm. She learns that a client is interested in specialized mortgage products. Gonzalez believes her firm can help the client with this matter and asks the client to consider using her firm. Gonzalez subsequently learns that her firm's expert on specialized mortgage products has taken an extended leave of absence for health reasons, leaving a void in this area of expertise. Has Gonzalez most likely violated the Standards? A. No B. Yes, with respect to misrepresentation C. Yes, with respect to loyalty, prudence, and care

A. No According to Standard I(C) - Misrepresentation, members and candidates must not "knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities." This includes misrepresenting their own or their firm's capabilities. However, in this example, Gonzalez did not know the firm's expert had taken a leave. As long as she informs the client that the person with the expertise is not currently available to advise on this matter, there is no violation.

Laura is concerned there are potentially serious violations of the CFA Standards of Professional Conduct taking place at her firm amongst members of senior management. She is unsure what to do and needs advice. From whom should she seek counsel? A. Chief Compliance Officer. B. CFA Institute C. An Attorney

C. An Attorney If Laura did not believe members of senior management were involved in the potential violations, she would seek the advice of her chief compliance officer. However, in this instance her best course of action is to seek the counsel of an attorney.

All analysts at Trenton Investments, including Mike Goguen, CFA, utilize the same top-down multi-factor model to determine the fair market value of potential investments. Clients are aware of the general model but not its factors, although they are not proprietary. Recommendations are made based on the calculated multi-factor values relative to observed market values of assets. Trenton recently changed the model to a bottom-up multi-factor model in an attempt to more accurately price assets. In an email to all of his current and prospective clients, Goguen included the exact specification of the new multi-factor model and stated that more accurate asset valuations are expected from the new model. Has Goguen most likely violated CFA Institute Standards? A. No B. Yes, because he suggested that the new model will generate more accurate asset valuations C. Yes, because he should have notified existing clients prior to notifying prospective clients

A. No According to Standard V(B) - Communication with Clients and Prospective Clients, clients must be made aware of the investment process used by the Member and must be informed of any changes to this process. Additionally, Members must include factors relevant to the analysis, determined using their reasonable judgment, in communications with clients. A change from a top-down to a bottom-up multi-factor model is likely important information to clients even if the specific factors are generally unknown to the public. Goguen has informed all clients and prospects of the change in the model and has stated an expectation of improved results from the model without guaranteeing results or stating the improvement as fact.

Victor Danton, CFA, provides advisory services to individual investors. Whenever he recommends a stock in which he holds a beneficial interest, Danton explicitly tells his clients about his potential conflict of interest in plain language. Recently, Danton sold a significant portion of his personal holdings of Goldraker Mining shares in order to pay for his son's university tuition. Danton has recommended Goldraker to several of his clients for whom it is an appropriate investment and many have purchased the company's shares based on his advice. Has Danton violated the CFA Standards? A. No B. Yes, by failing to disclose his potential conflict of interest in writing C. Yes, by selling shares that his clients purchased based on his advice

A. No Danton has not violated the CFA Standards. 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 their clients, prospective clients, and employer." It is up to each member or candidate to determine the manner in which such disclosures are made. In this example, Danton does not violate this Standard by choosing to disclose his conflicts orally rather than in writing. Additionally, Danton has not violated this Standard by selling shares that he had recommended to his clients because he is not personally benefiting from transactions executed on behalf of clients and he has a legitimate purpose for selling his shares.

Phillip Wilson is a portfolio manager with Safe Investments. Wilson places a portion of his fund's trades with Better Brokers. Better's commissions are higher than the average broker, but Wilson receives macroeconomic and industry reports each quarter from their research department that he uses in managing his portfolios. One of his clients requested that Wilson place his account's trades with Delta Brokers so that he can get their market commentary newsletter. Delta is not one of Safe Investments' recommended brokers. Did Wilson violate the Standards of Professional Conduct by placing trades with Better or Delta? A. No. B. Yes, because Wilson cannot allow a client to direct their brokerage to an unknown broker. C. Yes, because Wilson cannot use a client's soft dollars for purposes that don't directly affect that client's outcomes.

A. No If the research that Wilson gets from Better helps him to make investment decisions on behalf of his clients, then he is justified in paying the higher commissions. These types of "soft dollar" arrangements are permissible under the Standards as long as they benefit the clients. The Standards also permit client-directed brokerage as a means to obtain research, as well.

Emily Rushton, CFA, accepts a performance bonus from a client after receiving verbal consent to do so from her supervisor. Has Rushton most likely adhered to the Standards? A. No B. Yes, because she has her supervisor's consent C. Yes, because her interests are aligned with those of her client and her employer

A. No Standard IV(B) - Additional Compensation Arrangements requires members and candidates to obtain the written, not verbal, consent of all parties involved before accepting any compensation that might reasonably be expected to create a conflict with their employer's interests. Written consent may be an email or some other digital format, as long as it can be documented.

Sharm Cu, CFA, filed a personal bankruptcy 10 years ago when she was a college student because of an uninsured car accident. She never disclosed her personal bankruptcy to any of her clients. Did Cu violate any CFA Institute Standards of Professional Conduct? A. No B. Standard I (C) Misrepresentation C. Standard I (D) Misconduct

A. No The first choice is correct. Personal bankruptcy that does not involve fraudulent or deceitful business conduct is not a violation of Standard I (D).

Sally Stream, CFA, works for an investment firm that claims to report in compliance with the Global Investment Performance Standards (GIPS). Stream handles presentation of investment results as well as portfolio management duties. Immediately following distribution of the prior quarter's composite results to all clients, Stream discovers there has been a typographical error that resulted in a material overstatement of the value of assets in one of the firm's composites. The erroneous data was distributed to clients before the error is discovered. Has Stream most likely violated the Standards? A. No B. Yes, with respect to misrepresentation C. Yes, with respect to performance presentation

A. No According to Standard I(C) - Misrepresentation, members and candidates "must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities." According to Standard III(D) - Performance Presentation, members and candidates "must make reasonable efforts to ensure that it is fair, accurate, and complete." In this example, there was no intention to knowingly misrepresent the value of the composite's assets and there is no evidence that Stream failed to make a reasonable effort to ensure that the information provided to clients was accurate. Errors can occur and this one was unintentional. As long as corrective action is taken, the Standards have not been violated.

Last weekend Angela Hui, a candidate for the Level II CFA exam, was arrested for causing a public disturbance while marching in a rally to support increased government transparency. Has Hui most likely violated the Standards? A. No B. Yes, with respect to misconduct C. Yes, with respect to conduct as participants in CFA Institute programs

A. No Hui has not violated Standard I(D) - Misconduct, which is not intended to govern actions that are unrelated to a member or candidate's professional activities. In this example, an act of civil disobedience in support of a cause outside of work hours does not constitute engagement in "professional conduct involving dishonesty, fraud, or deceit." Nor does this reflect adversely on Hui's "professional reputation, integrity, or competence." Hui has not violated Standard VII(A) - Conduct as Participants in CFA Institute Programs, as she has not engaged in any conduct that "compromises the reputation or integrity of CFA Institute or the CFA designation or the integrity, validity, or security of CFA Institute Programs."

Robert Lucia is an analyst preparing a report on FranCo Industries. He uses forecasted earnings per share as a key input to his valuation model. After listening to a management conference call with other analysts, Lucia uses the projected earnings suggested by the FranCo's CEO to value the firm without further analysis. In his report, he cites several of the reasons mentioned on the call to support his valuation. Did Lucia have a reasonable and adequate basis for his valuation? A. No. B. Yes, because the CEO is best equipped to estimate earnings. C. Yes, because he supported his valuation with several reasons.

A. No. Relying solely on the company's management estimates lacks the diligence necessary to perform a valuation analysis. While management's opinions might have analytical merit, they must be judged in light of other sources or analysis.

Rita Ross serves as a member of the CFA Institute Council of Examiners and participates in a preview of the CFA exam to be administered the following month. She is also a university professor with several students planning to sit for the upcoming exam. One of her students is having difficulty memorizing a complex formula, which unbeknownst to the student, will not appear on the exam. Ross advises the candidate that a perfect score is not required to pass and that her time would be better spent on other areas of the curriculum. Did Ross violate the Standards of Professional Conduct with her advice? A. No. B. Yes, because she gave an unfair advantage to her student. C. Yes, because she is privy to the contents of the upcoming exam.

A. No. The advice that Ross gave to her student was not particular to the content of the exam and, therefore, did not endanger its integrity.

Oscar Vansant is a portfolio manager with Starstruck Asset Managers (SAM). After being recruited by a competing firm, he resigns without a non-competition agreement. Upon beginning work at his new firm, Vansant solicits business from his former employer's clients using the telephone numbers he can recall and on-line business directories. Did Vansant violate the Standards of Professional Conduct? A. No. B. Yes, because all client contact information belongs to SAM. C. Yes, because recollection stems from his employment at SAM.

A. No. Upon exiting an employment relationship, members must adhere to any noncompetition agreements. In the absence of one, members must refrain from taking any data, materials, contact lists, or proprietary methods from their former employer without first getting permission. However, the member's skills and memory are his own. Therefore, rebuilding, reconstructing, or seeking information through other means are not violations of the Standard.

Kevin Larch works as an investment advisor with Bender Associates. He decided to leave the firm and start his own advisory company that will compete with Bender. In preparation for leaving Bender, Larch incorporates his new business, registers with regulatory agencies, and leases office space. Larch did not discuss his plans with his supervisor at Bender. Did Larch violate the Standards of Professional Conduct? A. No. B. Yes, because he is planning to compete with his employer. C. Yes, because he must notify his employer before taking any actions.

A. No. While Larch remains an employee of Bender's, he must perform his duties to the best of his abilities and not deny his employer of opportunities or his skills. However, making preparations for exiting the firm is not a violation of the Standard as long as it is done on his own time without the use of Bender's facilities, equipment or staff.

Marco Maggio, CFA, is scheduled to visit the corporate headquarters of Venus Industries. Maggio expects to use the information obtained there to complete his research report on Venus stock. The location of Venus Industries is within a 15-minute drive of a prestigious golf course. On arrival at the Venus premises, Maggio learns that Venus is offering Maggio an extension of his stay that weekend and invites him for a day of golf with all expenses paid. Venus Industries also offers to pay for all the expenses for the trip, including the cost of meals, hotel room, and air transportation back to Venus Industries. Which of the following actions would be the best course for Maggio to take under the Code and Standards? A. Pay for all travel expenses, including costs of meals and incidental items and politely reject the golf outing offer. B. Reject the golf outing offer but accept the reimbursement of the travel expenses since they are legitimate business-related expenses. C. Accept the expenses-paid trip and disclose the value of the trip in the report, but it is at Maggio's discretion to take the golf outing offer without disclosing it, as it occurs outside working hours.

A. Pay for all travel expenses, including costs of meals and incidental items and politely reject the golf outing offer. Maggio risks violating Standard I(B): Independence and Objectivity because accepting any significant gift may impede his independence and objectivity. He should pay, whenever possible, for his own travel expenses and not accept the golf outing.

Which of the following falls under Standard III Duties to Clients? A. Performance presentation B. Diligence and reasonable basis C. Priority of Transactions

A. Performance presentation The first choice is correct. This falls under Duties to Clients.

Allison Kinley is an analyst with Insight Research Associations (IRA). Kinley wants to start her own research firm and is planning to leave IRA. She meets with her supervisor to discuss her resignation, but no documentation of the meeting is produced. In anticipation of her departure, she copies several of the reports that she authored for IRA and downloads a forecasting spreadsheet that she and a colleague at IRA had developed. Did Kinley violate the Standards of Professional Conduct by: Copying Reports? Downloading Spreadsheets? A.Yes Yes B.Yes No C.No Yes A. Row A B. Row B C. Row C

A. Row A The reports and spreadsheets that Kinley produced as an employee at IRA belong to the firm. If she wishes to take them, she must first get her supervisor's consent. Kinley may recreate the reports and spreadsheets from memory after departing the firm.

The fixed-income corporate finance department of Golden Brothers, an investment banking firm, has decided to compete for the advisory and underwriting bond offering of Kia Telcom, a "hot" telecommunications company. The firm's equity brokerage unit is about to publish a "sell" recommendation on Kia Telcom due to an unexpected announcement of cost overruns. The head of fixed-income investment banking has asked the head of the equity brokerage unit to change the recommendation from "sell" to "buy" before distributing the research report to clients. According to the Code and Standards, the bestcourse of action for the equity brokerage unit is to: A. Place Kia Telcom on a restricted list and publish only factual information about the company. B. Assign a more senior analyst to decide if the stock deserves a higher rating for the sake of objectivity since less senior analysts may err in judgment. C. Increase the rating by no more than one increment (in this case, to a "hold" recommendation) since little harm is done by being a bit more positive, while the firm's overall interest is served.

A. Place Kia Telcom on a restricted list and publish only factual information about the company. In this case, any action to accommodate the interest of the investment banking department that may compromise the independence and objectivity of the brokerage research efforts can violate Standard I(B) and the Code of Ethics.

Which of the following is not a component of the Code of Ethics? A. Place their own personal interests above the integrity of the investment profession and the interests of clients. B. Must not engage in any professional conduct involving dishonesty, fraud, or deceit. C. Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.

A. Place their own personal interests above the integrity of the investment profession and the interests of clients. The first choice is correct. This is not a component.

A fund manager is considering adding the following three portfolios with similar strategies to their relevant composite: Portfolio A: Actual, fee-paying, and discretionary Portfolio B: Simulated, non-fee-paying, and discretionary Portfolio C: Actual, fee-paying, and non-discretionary Which of these portfolios must the manager include in the composite, according to the GIPS standards? A. Portfolio A B. Portfolio B C. Portfolio C

A. Portfolio A A composite must include all actual, fee-paying, discretionary portfolios managed in accordance with the same investment mandate, objective, or strategy.

Which of the following falls under Standard III Duties to Clients? A. Preservation of confidentiality B. Communication with clients and prospective clients C. Material nonpublic information

A. Preservation of confidentiality The first choice is correct. This falls under Duties to Clients.

An investigation into the professional conduct of a member may be initiated by: A Media Report An Anonymous Phone Call A.Yes No B.No Yes C.Yes Yes A. Row A B. Row B C. Row C

A. Row A A PCP investigation may be initiated by one of four occurrences. 1) Selfreporting of an incident on the member's annual disclosure statement; 2) A written complaint filed with the PCP; 3) A media report implicating a violation; 4) An exam proctor report filed from an official examination center.

Hoffman Neffer is a large brokerage firm that offers investment banking services. The firm has participated in the IPO and secondary offerings of Ryper Industries. Liz Clayton works in Hoffman's research department and is preparing a report on Ryper. Her spouse owns shares in Ryper in a retirement account. In the research report, Clayton must disclose: Hoffman's Investment Banking DealsHer Beneficial Stock Ownership A.Yes Yes B.Yes No C.No Yes A. Row A B. Row B C. Row C

A. Row A Clayton has two conflicts of interest. First is the investment banking relationship between her firm and Ryper. Second is the beneficial ownership of stock, which is defined as shares owned by her, her spouse, a family member living with her, or a trust in which she has a beneficial interest. Both conflicts must be disclosed in the report.

Jason Kessler is responsible for performance reporting for GenZ Investments. The firm's largest portfolios' performance records are compiled using the Global Investment Performance Standards (GIPS), but Kessler's supervisor feels that smaller portfolios do not justify the added cost of GIPS compliance. GIPS require that the standards be applied on a firmwide basis to qualify for a valid claim of GIPS-compliant reporting. Kessler adds a GIPS compliance statement to each of the large portfolios' performance records, but not the small portfolios'. Did Kessler violate GIPS or the Standards of Professional Conduct? GIPSStandards of Professional Conduct A.Yes Yes B.Yes No C.No Yes A. Row A B. Row B C. Row C

A. Row A GIPS must be applied on a firmwide basis. Therefore, if the Standards are only applied to some portfolios, a valid claim of compliance cannot be made for any of the portfolios. Making a claim of compliance with GIPS when the performance presentation does not conform to GIPS is itself a misrepresentation and a violation of the Standard.

Donald Monk is an investment banker working on a secondary offering for Dynamic Engineering. On a visit to Monk's office, Patricia Wright, Dynamic's CFO, is given a tour of the office. During the tour, Monk and Wright openly discuss the pending offering and its expected performance based on higher projected earnings over the next three quarters. This information is overheard by several brokers as the sell-side offices are toured. The salesmen begin recommending the stock to clients based on what they overheard. Did Monk or the salesmen violate the Standards of Professional Conduct? MonkSalesmen A.Yes Yes B.Yes No C.No Yes A. Row A B. Row B C. Row C

A. Row A Monk violated the Standard by encouraging others to trade in the stock through his careless management of the sensitive information. By openly discussing the pending offering, he effectively encouraged others to trade on the information. The salesmen should not have traded on material, nonpublic information regardless of how it was obtained.

Raj Gupta works for a clearing firm, executing trades for online brokers. His direct supervisor is Rhonda Perkins. Each has made the following statements with respect to fiduciary duties and the Standards of Professional Conduct. Gupta: "The Standards create a fiduciary duty between me and our clients." Perkins: "The Standards require that you act in the clients' best interests by seeking best execution and adhering to the trade parameters they set." Which of the statements are accurate? GuptaPerkins A.No Yes B.Yes No C.Yes Yes A. Row A B. Row B C. Row C

A. Row A The Standards do not impose a fiduciary duty on members to all their clients. They do require that members place their clients' interests ahead of their own within the scope of the services provided. For Gupta, Standard III(A) requires him only to perform his function to execute trades as instructed by clients without extending it to a broader fiduciary duty.

Arbor Timber Company invited a group of analysts to tour its new lumber mill and meet with firm executives. Because the location is fairly remote, Arbor will provide transportation to the site on a chartered flight and provide lodging at a local ski resort. After the meetings, the analysts are invited to stay for the weekend to enjoy skiing and other activities at the resort paid by Arbor. According to the Standards of Professional Conduct, which of the following may be accepted by the analysts? Chartered Flight Weekend Activities A.Yes No B.No Yes C.Yes Yes A. Row A B. Row B C. Row C

A. Row A Whenever possible, members should pay for their own transportation and lodging. However, under certain circumstances, like accessing the remote locations described here, members may accept such hospitality. However, enjoying a weekend of recreation could give the appearance of infringing on one's objectivity at the very least. Therefore, any weekend activities, including lodging should be declined.

Patrick Hind manages individual retirement accounts for a number of clients. One of his clients, James Soltis, is a high net worth individual with over $1 million in his account. Another client, Stephanie Wagner, is of much more modest means with only $100,000 in her account. Both clients are very conservative and have over 10 years until retirement. An analysis of their risk tolerance at the beginning of the relationship with Hind showed that neither would feel comfortable with more than a five percent loss of principal in any given year. Hind invests Wagner in short- and intermediate-term high-grade corporate bonds and Treasuries. Since Soltis' high net worth enables him to assume more risk, Hind invests his account in more aggressive domestic growth stocks and emerging markets. Did Hind violate the Standards of Professional Conduct with respect to the suitability of the investments chosen for: Soltis' Account? Wagner's Account? A.Yes Yes B.Yes No C.No Yes

A. Row A B. Row B C. Row C

Which of the following statements is most accurate? A. Separately managed account portfolios may be included in a single composite B. Separately managed account portfolios must be included in a single composite C. Firms claiming compliance with the GIPS standards must not present performance net of wrap fees under any circumstances

A. Separately managed account portfolios may be included in a single composite Firms may create sponsor-specific composites that include only the separately managed account (SMA) portfolios of a single sponsor. The sponsor's name must be disclosed. Firms may report the performance of a sponsor-specific composite on a gross of wrap fee basis for the purpose of generating wrap fee/SMA business, but they must disclose that the presentation is only for the use of the sponsor.

Barino Financial Services Inc., an investment consulting firm, makes investment recommendations through various business publications. Sam Patrick, Barino's chief investment analyst, was working on a report in which he included analysis developed by Bryan Corp., another consulting firm, and used a model developed by Syed Pasha, an employee of Barino Financial Services Inc. Sam did not give credit to both Bryan Corp. and Syed for the report. Sam has violated: A. Standard I(C), as he did not give credit to Bryan Corp. B. Standard I(D), as he did not give credit to both Bryan Corp. and Syed. C. Standard I(C), as he did not give credit to both Bryan Corp. and Syed.

A. Standard I(C), as he did not give credit to Bryan Corp. Sam has violated Standard I(C) pertaining to plagiarism, as he did not give credit to Bryan Corp. Sam need not give credit to Syed's work, as Syed is an employee of Barino Financial Services Inc.

Steve Michael, CFA is having lunch with one of his friends at a local restaurant and overhears someone talking about a pending merger for Pharmotech stock. Michael walks over to this person because he follows this stock as well and knows nothing of a merger, only to find out it is the company's CEO making these statements. Which of the following Standards of Professional Conduct applies to this situation? A. Standard II(A) B. Standard IV(A) C. Standard V(A)

A. Standard II(A) Standard II(A) covers the ethical guidelines for disclosing material nonpublic information.

Which of the following is most likely to be material information? Statement I: Trailins Inc. is appointing a new CEO. Statement II: Trailins Inc. is filing for a bankruptcy. Statement III: Trailins Inc. has lost a legal dispute. A. Statements I, II, and III. B. Statements I and III only. C. Statements I and III only.

A. Statements I, II, and III. All the statements will most likely have an immediate impact on a company's stock price.

Leonard Clark, research analyst, at Zinc Inc. was found to be drunk at work. Leonard's supervisor, Ben Thomas, found that this is affecting Leonard's work lately. It was also brought to his attention that during Leonard's official visit to a Middle East country, where it is illegal to consume alcohol, he consumed alcohol. Which of the following is most accurate? Statement I: Leonard has not violated any standards related to professional ethics. Statement II: Ben should warn Leonard because he has violated Standard I(D) related to misconduct. Statement III: Ben should send all the employees a list of acceptable behavior at work and also mention the disciplinary actions regarding such behavior. Statement IV: Leonard has not violated Standard I(A) related to knowledge of law. A. Statements II, III, and IV. B. Statements II and III. C. Statements I, III, and IV only.

A. Statements II, III, and IV. Ben should warn Leonard about his behavior because his personal habit is affecting his ability to work and reflects poorly on his character. Also, Ben should make all the employees aware of acceptable behavior at work. Leonard has not violated Standard I(A) related to knowledge of law, as the standard is confined only to professional activities.

Which of the following is least likely to be an example of market manipulation according to the Code and Standards? A. Taking advantage of market inefficiencies to make profits on arbitrage strategies. B. Agreeing to issue stock in an IPO to market participants if they commit they will generate turnover in the stock subsequent to listing. C. Purchasing leading stocks in an index just prior to the expiry date of futures contracts on the index in order to make a profit on a long position in the index futures contract.

A. Taking advantage of market inefficiencies to make profits on arbitrage strategies. Market manipulation is artificially creating stock market prices or volumes. Arbitrage strategies are not a form of manipulation, since they are taking advantage of pricing inefficiencies existing in the market, and are a legitimate practice.

Joanne works at the Waco Texas Trust Company and observes several things she knows are in violation of both state law and CFA Standards. Under the Standards of Professional Conduct, what is she not required to do? A. Not participate in the violations B. Disassociate herself from the violations C. Report the violations

C. Report the violations Joanne is not required to report the violation to the authorities or CFA Institute under the Standards of Professional Conduct.

Christiana Tesi is an execution trader at Chuck McAteer, a small institutional investment adviser that manages several mutual funds and private accounts. Her manager, Michael Bond, has recently been tipped off that Tesi is "front running" fund orders on her personal account—an activity she has been doing for several years. Which of the following statements is most likely to be accurate? A. The actions of both Tesi and Bond are in violation of the Standards. B. Tesi is in violation of the Standards; Bond is not in violation of the Standards. C. Tesi is not in violation of the Standards; Bond is in violation of the Standards.

A. The actions of both Tesi and Bond are in violation of the Standards. Tesi's actions are in violation of Standard II(B): Market Manipulation since she is using proprietary information of the firm to personally benefit. Bond, as supervisor of Tesi, is in violation of Standard IV(C): Responsibilities of Supervisors since it appears that he has not established an effective compliance system for monitoring personal dealing at McAteer.

During an initial public offering (IPO) quiet period, an analyst working on an IPO discovers that the company has made previous material misstatements that will inflate the IPO price and could possibly prevent the IPO from reaching the market in a timely manner. The firm could lose business, and the sales team will lose millions in commissions. The analysis team also has numerous potential financial incentives connected with the IPO. With which of the following would the analyst most likely consult regarding possible courses of action? A. The firm's compliance department B. The sales team that brought in the business C. A mentor outside the firm who is not affiliated with the company

A. The firm's compliance department The analyst will most likely contact the firm's compliance department, although protocol suggests she would consult first with her supervisor unless there was some reason to suspect this would be detrimental to an ethical outcome. The sales team definitely has an interest in the IPO going to market. A mentor outside the firm could be put in the position of receiving material nonpublic information from the analyst, which causes a breach of trust with the client and could result in another person trading on such information.

The Professional Conduct staff under the direction of CFA Institute are least likely to make an inquiry into a member's conduct when: A. They perform random checks on members' professional conduct. B. The media reports on a member whose professional conduct appears to have been unethical. C. Members self-disclose on their Professional Conduct Statement that they are involved in litigation regarding their investment advice.

A. They perform random checks on members' professional conduct. There is no mention of CFA Institute performing random checks on members' (or candidates') behavior. The circumstances that might prompt an enquiry are self-disclosure by a member, written complaints, media, or other public sources providing information, or whenever a candidate is suspected of comprising their professional conduct during an examination.

Matthew Dawkins, CFA, is a trader of a brokerage firm. He wants to improve his knowledge on laws, rules, and regulations applicable to his professional activities. According to the CFA Institute Standards of Professional Conduct, the following are recommended compliance procedures, except: A. To follow past practices within his firm. B. To review the firm's written compliance procedures on a regular basis. C. To be updated about changes in applicable laws, rules, and regulations by attending technical seminars.

A. To follow past practices within his firm. The first choice is correct. Following past practices within the firm is not a recommended compliance procedure under Standard I (A) Knowledge of the Law because the past practice may not be in compliance with the latest applicable laws, rules, and regulations.

Under the Code of Ethics, members must: A. Use reasonable care in performing their professional duties. B. Disclose the format and methods used in their analysis. C. Apply the Code and Standards if they are stricter than governing laws.

A. Use reasonable care in performing their professional duties. The Code is distinct from the Standards of Professional Conduct. The Code represents six guiding principles that inform and underlie the Standards. Of the choices, only the principle of reasonable care is explicitly stated in the Code.

Joe Folds has recently completed the CFA Program and has been asked his opinion of the process by Tyler Screde, who is considering embarking on the Program. According to the Standards, how should Folds respond? A. With his opinion B. With fact only, not opinion C. He should decline to comment

A. With his opinion Standard VII(A) does not cover expressing opinions regarding CFA Institute, the CFA Program, or other CFA Institute programs. Members and candidates are free to disagree and express their disagreement with CFA Institute on its policies, its procedures, or any advocacy positions taken by the organization. When expressing a personal opinion, a candidate is prohibited from disclosing content-specific information, including any actual exam questions and the information as to subject matter covered or not covered in the exam.

Granite Capital provides descriptions of all of its current composites as well as any of its composites that have been terminated within the previous five years to all prospective clients who request this information. Descriptions of composites that were terminated more than five years ago are not provided. Is this practice most likely consistent with the requirements for compliance with the Global Investment Performance Standards (GIPS)? A. Yes B. No, because the firm has not provided descriptions of all of its terminated composites C. No, because this information should be provided to all prospective clients regardless of whether it is requested

A. Yes According to Provision I.0.A.10 of the GIPS, "Firms must provide a complete list of composite descriptions to any prospective client that makes such a request. Firms must include terminated composites on the firm's list of composite descriptions for at least five years after the composite termination date."

Bryan Haver, CFA, is a salesman at Asset Allocation Services. He frequently takes clients and prospects to lunch where he often consumes several drinks, becoming intoxicated. His assistant handles his calls and most other duties on days when Haver has one of these lunch meetings with clients, while Haver naps on the couch in his office. Is Haver in violation of the Standards of Professional Conduct? A. Yes. B. No, because entertaining clients is part of his job as a salesman. C. No, because his assistant handles his duties while he naps.

A. Yes. The Standards require that members exhibit professionalism and competence in all their activities. Frequent intoxication, particularly with clients, reflects poorly on the member, the industry, and the CFA charter.

Jessica Walters is a portfolio manager for a large investment firm based in London. One of Walters' clients, Elaine Meyers, is the wife of a top executive at Veridian Dynamics (VDN). Walters notices that Meyers's portfolio has significantly outperformed those of her other clients this year, due largely to some well-timed trades of VDN shares. Walters is suspicious and believes Meyers is acting on material nonpublic information provided by her husband when trading VDN shares, but Walters decides not to take action, as she has no proof to substantiate her suspicions. Several months after noticing the suspect trades, Walters has not discussed the matter with anyone. Has Walters most likely violated the Standards? A. Yes, by failing to take any further action B. Yes, by not publically disclosing the possible violation C. No, because she lacked proof that a violation had occurred

A. Yes, by failing to take any further action Standard I(A) - Knowledge of the Law states that when there is doubt about the action to take, it is best to seek the advice of compliance personnel or legal counsel. She is not required to publicly disclose her suspicions, but she also has a reasonable basis for discussing them with legal authorities, her firm's compliance department, and/or her personal lawyer. By failing to take any further action, Walters has most likely violated this Standard.

Rajif Singh is a salesman at Crimson Associates, a small brokerage firm. A&R Corporate Finance provides investment banking services to middle-market firms in the Midwest. The managing partner at A&R contacted Singh and offered to provide referrals and prospective client lists if Crimson's brokers would promote an A&R client's latest issue. According to the Standards of Professional Conduct, may Singh accept such a proposal? Yes, provided he discloses the arrangement to his clients and employer. Yes, because the arrangement does not include a monetary incentive. No, because arrangement creates an obvious conflict of interest. A. Yes, provided he discloses the arrangement to his clients and employer. B. Yes, because the arrangement does not include a monetary incentive. C. No, because arrangement creates an obvious conflict of interest.

A. Yes, provided he discloses the arrangement to his clients and employer The Standard does not categorically prohibit referral fees or arrangements. However, such potential or perceived conflicts must be disclosed.

Patrick Shallet is an advisor to university endowments in assessing capital expenditures. One of the universities he advises is considering a construction project to build a new biology lab. Part of Shallet's analysis includes detailed plans for the land development and construction costs. At a dinner party, a wealthy friend, Nancy Wang, mentions that she would like to make a donation to a university if she could receive naming rights on a campus structure. Shallet shows Wang the cost estimates for the new biology lab and suggests that she contact the university's board of directors regarding a donation. Did Shallet violate the Standard of Professional Conduct? A. Yes. B. No, because he acted in his client's best interest. C. No, because endowments are nonprofit entities.

A. Yes. Shallet may not disclose financial details of the project to prospects without the consent of the university. Although his intentions are good, his actions violate the Standard.

Mika Shane, CFA, is an analyst with Zeta Consulting. In preparing an analysis for a prospective merger between Mega Trucking and Big Haul Trucking, Shane purchases several reports prepared by other analysts. The reports contain a variety of statistics summarized in line and bar charts. Using the same data, Shane converts them to pie and point charts, renames the charts for her purposes, and modifies the labels used for the data. According to the Standards of Professional Conduct, is Shane required to cite the source of each chart? A. Yes. B. No, because she purchased the reports and now owns the data. C. No, because she modified the charts from their original layouts.

A. Yes. Shane must cite the source so that the reader can make an informed judgment as to their credibility. Furthermore, simply making cosmetic changes to the charts would not imply that the underlying data was collected and summarized by Shane.

Richard Pyncus is the sales manager for Longman Asset Management (LAM), which manages a family of mutual funds. One fund, Rainbow Long-Only I (aka Rainbow I), recently broadened its mandate to allow for the use of leverage. Although he knew some were out of date, Pyncus distributed "summary sheets" to his salesmen on all LAM's funds, including Rainbow I. The sheet for Rainbow I listed its lack of leverage among its characteristics. Did Pyncus violate the Standards of Professional Conduct? A. Yes. B. No, because the salesmen are expected to advise clients about the change. C. No, as long as the next printing of the summary sheets includes updated information.

A. Yes. Standard I(C) is violated when Pyncus provides information for dissemination to clients that misrepresented the characteristics of LAM's funds. Misstating the use of leverage in Rainbow I neglects to alert clients to the increased risk of holding this fund. At the very least, Pyncus must point the discrepancy out to his salesmen and advise them to explain the change, as well as its significance, to clients and prospects before allowing them to invest in Rainbow I.

Jan Watson is a retired portfolio manager. As a retiree, he stopped paying dues to CFA Institute and has not filed his Professional Conduct Statement. He recently accepted a volunteer position as treasurer of his condominium association. The directory of association officers lists him as "Jan Watson, CFA (retired)." Does Watson's use of the CFA designation violate the Standards of Professional Conduct? A. Yes. B. No, because retired members are not required to pay dues or file conduct statements. C. No, because he is not using the designation within the context of the investment industry.

A. Yes. Standard VII(B) does not make special provisions for retired members who do not pay dues or file a Professional Conduct Statment. CFA Institute does offer reduced dues for members who classify themselves as retired. Only after following the appropriate procedures and receiving notice from CFA Institute that their status has changed may Watson resume using the designation. Furthermore, altering the designation with "(retired)" is a violation of this standard.

Barbara White is a portfolio manager with Ajax Advisors. Whenever an oversubscribed issue is offered, she instructs the firm's brokers to purchase shares for her husband's account along with her client accounts. By including an allocation to her husband's account, the client accounts receive slightly smaller lots in their allocations. Did White violate the Standards of Professional Conduct? A. Yes. B. No, because she did not exclude any client accounts. C. No, because her husband's account is a family client account.

A. Yes. White's husband's account is, for all intents and purposes, her own. Therefore, she is required to purchase shares for her clients first and, only if any shares remain after satisfying their demand, then purchase for herself.

Bravo Asset Managers handles a variety of institutional, private accounts, and hedge funds. The firm has a policy of allocating block trades and oversubscribed issues by order of priority. The best priced transactions are first allocated to the appropriate hedge fund, then institutional accounts, and lastly private accounts. As a result, the hedge funds usually outperform other accounts, even when they invest in the same assets at the same time. Bravo's new account documentation spells out this policy and requires the signatory to accept the terms in writing. Does this policy violate the Standards of Professional Conduct with respect to fair dealing? A. Yes. B. No, because the policy is disclosed and accepted by account holders. C. No, because the policy is applied consistently to all trades.

A. Yes. The Standard does not allow managers to favor certain clients over others with respect to allocating trades. All shares should be allocated among client accounts at the average price. The Standards do not allow managers to subject clients to patently unfair policies even if the clients consent.

Lyle Kent is a broker at Jackson & Phax (J&P), a discount brokerage firm that is expanding into research and asset management services. In an effort to generate business for the new units, J&P is offering an employee incentive of $500 for each new client referral from the brokerage unit that signs on with the asset management group. Kent has made several successful referrals in the first month without disclosing the incentive program. Did Kent violate the Standards of Professional Conduct? A. Yes. B. No, because the referral was directed toward his own firm. C. No, because the bonus is part of his employment compensation.

A. Yes. The Standard does not prohibit referral fees or arrangements but requires that they be disclosed before entering into a service agreement so that the client can make an informed judgment as to the motivations of the providers.

Wendel Ross is an automotive analyst for a large brokerage firm. While having dinner at a fancy restaurant, he recognized the chairman, CEO, and CFO of a major auto manufacturer seated at the next table. The executives appeared to be celebrating, and Ross overheard the CFO quip that their new model's sales far exceeded expectations. The CEO, Mark Riggins, remarked that the consensus earnings estimate is far too low and that he expects this quarter to be the biggest surprise in the company's history. The next morning, Ross made a substantial trade to acquire the automaker's shares. Did Ross violate the Standards of Professional Conduct? A. Yes. B. No, because he owed no fiduciary duty to the automaker. C. No, because he did not solicit the information.

A. Yes. The Standard prohibits trading on material, nonpublic information regardless of how it was obtained.

Kevin Kraft is a money manager with Quadrangle Investments. His neighbor, Wendy Sloan, works in the printing unit of a market research firm. Sloan emails copies of the research reports of two influential analysts in her firm to Kraft one day prior to their distribution to clients. Kraft uses the reports to trade client accounts, but does not trade his personal account. Did Kraft violate the Standards of Professional Conduct? A. Yes. B. No, because the report is distributed one day later. C. No, because he owes no fiduciary duty to the research firm.

A. Yes. The Standard prohibits trading on material, nonpublic information. Trading client accounts does not insulate Kraft from the requirements of this Standard. Kraft must wait for the information to be made public, including a reasonable time for the information to be digested, prior to trading in the securities.

Peter Griffin is a supervisory analyst in the research department at a brokerage firm. He is responsible for reviewing subordinate analysts' reports prior to distribution to clients. Griffin maintains a weekly list of companies with pending reports along with each analyst's proposed recommendation, which he posts on a bulletin board outside his office. Unbeknownst to Griffin, employees from other departments became aware of this list and have been trading both personal and client accounts based on the information contained on the list. Did Griffin violate the Standards of Professional Conduct? A. Yes. B. No, because he is not responsible for employees he does not supervise. C. No, because he is unaware of the trading activities of the employees.

A. Yes. The Standard requires managers to take reasonable efforts to prevent and detect violations of company policies, governing laws, and the Standards of Professional Conduct. Posting pending recommendations outside his office is an obviously unsecured way to manage sensitive information. Griffin should have anticipated that the information could be used by unauthorized persons.

Susan Jenkins is a portfolio manager for the Jenkins Large-Cap Value Fund. The fund's mandate states that it will invest in large-cap, low P/E stocks with solid fundamentals. Jenkins feels that value stocks are currently out of favor with the market and changes the fund's asset mix to include 30% growth stocks and 20% small-cap stocks. Over the next quarter, the fund's performance improves. Did Jenkins violate the Standards of Professional Conduct? A. Yes. B. No, because she improved the fund's performance. C. No, because the deviation from the mandate is temporary.

A. Yes. The Standard requires that asset managers adhere to their stated mandates. If Jenkins wants to change the fund's stated focus, she must first advise her clients of the change so that they might make an informed judgment as to whether the fund still suits their needs.

Sarah Write, CFA, is an independent equity research analyst operating an investment advisory website that provides stock recommendations and reports. In addition to unsolicited research reports, Write also writes issuer-paid reports for a flat fee. Although the issuer-paid reports do not disclose the contractual relationship between Write and the subject company, her website user agreement includes the following statement. "Certain research may be performed at the request of the issuer." Did Write violate the Standards of Professional Conduct? A. Yes. B. No, because she disclosed issuer-paid research in the user agreement. C. No, because the Standards do not apply to Internet websites.

A. Yes. The Standards do not prohibit issuer-paid reporting. However, providing such services creates a potential conflict of interest. Analysts must take steps to preserve their independence and objectivity by only accepting a flat fee. The relationship between the analyst and the issuer must be fully disclosed in the report so that the reader may make an informed judgment as to its objectivity.

When disassociating oneself from activities that are in violation of the Standards of Professional Conduct, which of the following is not a requirement for charterholders? A. Document the violation. B. Urge the perpetrator(s) to stop the violation. C. Resign your position.

C. Resign your position Only in extreme circumstances may a charterholder be required to resign their position. It is not an automatic requirement of disassociating oneself from ethical violations.

A financial advisor faced with an ethical dilemma involving his colleagues, the firm, and a client will most likely resolve the dilemma within an ethical framework to the benefit of: A. a client B. the firm C. colleagues in the firm

A. a client Of this group, duties to clients are more important than duties to colleagues or the firm when an ethical framework for resolving ethical dilemmas is in place. Otherwise, the situational influences of doing well at the firm or being seen as important to colleagues will typically take the upper hand. In fact, few stakeholders are more important than clients in the ethical framework. One possible stakeholder group that trumps a client would be the investing public. Doing something that affects a large number of investors has severe consequence to the financial system, the economy, the firm, and so on.

Leo Tang, CFA, is an independent research analyst that has been hired by Delta DotCom to produce a report that the firm hopes will generate interest in its upcoming IPO. The firm offers Tang a flat fee to be paid when he begins the project, plus an opportunity to participate in the IPO, and a small allotment of stock options. According to the Standards of Professional Conduct, Tang should: A. accept the fee, but decline the stock options and participation in the IPO. B. accept the fee and the stock options, but decline participation in the IPO. C. accept the stock options, but decline the fee and participation in the IPO.

A. accept the fee, but decline the stock options and participation in the IPO. Conducting research paid by the subject firm is not a violation of the Standards. However, steps must be taken to ensure the independence and objectivity of the report. The best practice is to accept flat fee compensation without any conditions on the recommendations or analysis.

Which of the following statements is most accurate? Affiliate members of CFA Institute: A. may have their actions investigated by Professional Conduct Program staff. B. are not required to complete a Professional Conduct Statement but must pay their membership dues. C. may use the CFA designation if they complete a Professional Conduct Statement and pay their membership dues.

A. may have their actions investigated by Professional Conduct Program staff. Standard VII(B) - Reference to CFA Institute, the CFA Designation, and the CFA Program notes that only "regular" members of CFA Institute have earned the right to use the CFA designation - affiliate members are not permitted to do so. However, affiliate members of CFA Institute are required to complete an annual Professional Conduct Statement and pay their membership dues in order to maintain their status. Like regular members of CFA Institute, affiliate members must adhere to the Code and Standards and are therefore subject to a possible investigation by Professional Conduct Program staff if they are suspected of failing to do so.

According to the Duties to Clients Standard, members are obligated to: A. place their employer's interests ahead of their own. B. judge the suitability of assets based on their stand-alone risk. C. provide the names of former clients to prospective customers.

A. place their employer's interests ahead of their own. Standard III Duties to Clients requires that covered persons place both their clients' and employer's interests ahead of their own. Assets' risk should be judged in a portfolio context. Confidentiality would prohibit a covered person from sharing the names of clients with prospects.

Pedro Ochoa prepares the performance reports for Sociedad del Mundo (SM). The firm recently lost a major client who took its portfolio to another firm after poor performance. SM's executive manager replaced the portfolio manager responsible for the underperformance and asked Martinez to remove the terminated portfolio from its composite for reporting purposes. According to the Standards of Professional Conduct, Ochoa's best course of action is to: A. refuse to remove the terminated portfolio from the composite. B. remove the terminated portfolio from the composite as instructed. C. move the terminated portfolio to another composite as a compromise.

A. refuse to remove the terminated portfolio from the composite. Members may be pressured to compromise their independence and objectivity from within their organizations. Standard I(B) mandates that they resist these influences. Removing the terminated portfolio would misrepresent the actual historic performance of the firm. Fairness and complete disclosure demands that composites include all their constituent portfolio's track records. Furthermore, shifting portfolios between composites distorts this record by altering their performance after the fact.

CFA charterholders and candidates in the CFA program must act for the ultimate benefit of: A. society. B. capital markets. C. their employer.

A. society. The CFA Institute Code of Ethics states that members and candidates must "promote the integrity and viability of the global capital markets for the ultimate benefit of society."

John works at an investment consulting firm that provides manager search and selection services. His boss asks John to place a manager in a client presentation that would otherwise not fit the search criteria. His boss believes the manager will recommend his consulting firm to other clientele if selected. John's boss is most likely violating Standard: A. 1(A). B. 1(B). C. 1(C).

B. 1(B) Standard 1(B) covers issues pertaining to influencing analysts during the manager search and selection process.

Employees need not report to their employers the receipt of _____ as a gift from clients. A. A set of golf clubs B. A tote bag with the client's logo C. A one-week Caribbean cruise

B. A tote bag with the client's logo The second choice is correct. Token items are allowed as long as it does not affect members' independency and objectivity under Standard I(B).

According to the Conflicts of Interest Standard, members must: A. Avoid any conduct that creates a real or potential conflict of interest. B. Disclose any compensation received for recommending products or services. C. Decline to accept referral fees from parties other than their employer.

B. Disclose any compensation received for recommending products or services. Conflicts of interest are a common dilemma for investment professionals. The Standards of Professional Conduct provide guidance on handling them. First, members should anticipate the sources of conflicts and avoid them. Second, if it is unavoidable, you should disclose the conflict to the affected clients in enough detail that they might make an informed decision as to whether it might prove to disadvantage them. The Standards do not categorically prohibit gifting, bonuses, or referral fees. They do, however, require formal disclosures to employers and clients.

Patrick Stemster is a technology analyst for a mutual fund. To help him identify promising companies in complex industries, he relies on an expert network service to provide contacts with technical experts. Stemster is currently considering a recommendation on Terabyte Information Systems (TIS) based on their cutting edge database system, which is currently in testing. According to the Standards of Professional Conduct, which of the following experts would least likely be considered a source of material nonpublic information? A. The chief engineer conducting the tests for TIS. B. An academic recognized for his research in the same field. C. A junior scientist who signed a non-disclosure agreement with TIS.

B. An academic recognized for his research in the same field. The determination of whether information is material is based largely on the source. Standard II(A) permits members to use and rely on outside experts to help them understand and evaluate technical industries. However, members must be careful not to trade on material nonpublic information provided by these experts. Clearly, anyone participating in the research and development activities of the company would be considered an insider. Therefore, the least likely source of material nonpublic information would be an unaffiliated expert. Members cannot rely on the contracts or agreements between the experts and the target firms to ensure material information is not passed to them.

Which of the following statements is most likely to be consistent with Standard V(B): Communication with Clients? A. Analysts should not use opinions in research and only report facts. B. Analysts should clearly distinguish between fact and opinion in research. C. Analysts should always have an opinion and not just state facts in research.

B. Analysts should clearly distinguish between fact and opinion in research. Standard V(B) requires that opinion be separated from fact in research reports. Violations often occur when reports fail to separate the past from the future by not indicating that information based on estimates are opinions subject to future circumstances.

Adrian Johns has just been awarded a CFA charter following his successful completion of the CFA Program. Which of the following statements made by Johns is an inappropriate reference to the CFA program and designation? A. As a CFA charterholder, I am committed to maintaining high ethical standards of conduct. B. As I passed the CFA examinations in three consecutive years, I am highly qualified to manage client funds. C. I believe the CFA program provides the highest qualification in the international investment management industry.

B. As I passed the CFA examinations in three consecutive years, I am highly qualified to manage client funds. Statements that are factual with respect to passing the exams are acceptable, but to claim superiority in doing so is unacceptable. Statements that emphasize the rigor of the CFA program or its commitment to ethical standards are permitted.

Kevin Chou is a research analyst with Global Partners. The research department consists of fifteen analysts and supervisors. After issuing a strong buy rating on Alpha Corp, Chou purchased a significant number of shares in Alpha for his personal account. Several weeks later he is asked to write a follow-up report for Alpha. According to the Standards of Professional Conduct, Chou's best course of action is to: A. Disclose his ownership to his employer and write an unqualified report. B. Ask that another analyst be assigned to write the report. C. Refuse to write the report due to a beneficial ownership conflict.

B. Ask that another analyst be assigned to write the report. The Standard recommends that the best way to deal with conflicts is to avoid them. Given that his initial report was written without a conflict and another staff analyst could write the new report, Chou's best course of action is to request to be recused from writing it.

Primary responsibility for oversight of the Professional Conduct Program rests with the CFA Institute's: A. Enforcement Committee. B. Board of Governors. C. Ethics Committee.

B. Board of Governors. The Board of Governors maintains responsibility for and oversight of the PCP. It and the Disciplinary Review Committee have the responsibility of enforcing the Code and Standards.

According to the Integrity of Capital Markets Standard, members must not knowingly: A. Exploit information not available to all market participants. B. Cause others to act on material nonpublic information. C. Possess material nonpublic information.

B. Cause others to act on material nonpublic information. Standard II Integrity of Capital Markets prohibits trading on inside information and market manipulation. Material nonpublic information includes information that is relevant to the price of the security and unknown to the public at large. Causing another to act on inside information is equivalent to acting on it yourself. The mere possession of inside information is not itself a violation.

Telthion Corp. is planning to raise funds by issuing bonds in China. Craig Drucker, CFO of Telthion Corp., contacts Chin Yang, the manager of a rating agency in China, to rate the bond. Chin informs Craig that the bond will be given a rating of BBB, a less favorable rating, as Telthion's financial position is not strong. Craig offers a deal to Chin, informing him of some of the accounting assumptions to meet the financial requirements for a better rating and agreeing to pay a higher commission to Chin. Which of the following actions of Chin will not violate the standards? A. Chin accepts the deal based on current financial statements and offers an AAA rating. B. Chin accepts the deal based on current financial statements and offers a BBB rating. C. Chin accepts the deal based on current financial statements and negotiates for an AAA rating.

B. Chin accepts the deal based on current financial statements and offers a BBB rating. Chin should accept the deal based on current financial statements and give a rating that reflects the actual status of the company. Otherwise, his opinion will not be independent and will mislead the market. He will be violating Standard I(B) related to independence and objectivity.

Which of the following is NOT part of the CFA Institute Code of Ethics? A. Competence B. Contractual provisions C. Independent judgment

B. Contractual provisions The second choice is correct. Contractual provisions are not part of the Code of Ethics.

A charterholder believes there are extremely serious violations taking place at her firm. According to the CFA Standards of Professional Conduct would the charterholder necessarily be required to resign their position? A. Yes B. No C. Maybe

B. No Just knowing serious violations are taking place does not necessarily require someone to resign their position. The charterholder should however report the violations to a supervisor and depending on the severity of the situation, may be required to resign.

Jessica Brinson is the newly hired compliance officer at Alpha Investments. The firm has no formal compliance system in place. As a first step in designing a compliance program at the firm, the Standards of Professional Conduct recommended compliance procedure is to: A. Establish a zero-tolerance policy for violating the CFA Standards of Professional Conduct. B. Encourage executive management to develop a firm-wide code of ethics. C. Report any prior violations to the CFA Professional Conduct Program.

B. Encourage executive management to develop a firm-wide code of ethics. As a first step, members should encourage their employers to develop or adopt a firm-wide code of ethics to serve as guiding principles for their compliance and general business practices. Members are not required to promote the CFA Standards of Conduct specifically, but may recommend them as a basis for their firm's ethical guidelines and procedures.

Which of the following will most likely be consistently true? A. Courts always follow laws to the letter when determining the outcome of a case. B. Ethical judgment will resolve issues more quickly than legislative or administrative solutions. C. Legal frameworks will typically create more confusion than ethical frameworks among the general population.

B. Ethical judgment will resolve issues more quickly than legislative or administrative solutions. Ethical decision making is not subject to the lag in recognizing a problem, creating a solution, and implementing the solution.

Which of the following statements about ethics in the investment profession is least likely correct? A. Ethics involves making good choices. B. Ethics involves a set of moral and legal principles. C. Situational influences can shape individual ethical behaviors.

B. Ethics involves a set of moral and legal principles. Ethics is a set of moral principles that are established without consideration of legal principles.

Which of the following falls under Standard III Duties to Clients? A. Misrepresentation B. Fair dealing C. Disclosure of conflicts

B. Fair dealing The second choice is correct. This falls under Duties to Clients.

Which of the following statements clearly conflicts with the recommended procedures for compliance with Standard I(D): Misconduct? A. Firms should develop a code of ethics that makes it clear that personal behavior that reflects poorly on the individual, the institution, or the industry will not be tolerated. B. Firms should not attempt to list potential violations and sanctions due to the difficult nature of capturing the wide variety of misconduct possible at modern financial institutions. C. Firms should check the references of individuals to ensure they are of good character and not ineligible to work in the industry due to past misdemeanors.

B. Firms should not attempt to list potential violations and sanctions due to the difficult nature of capturing the wide variety of misconduct possible at modern financial institutions. Standard I(D) recommends that firms disseminate to all employees a list of potential violations and associated disciplinary sanctions, up to and including dismissal from the firm.

Which of the following situations is most likely to lead to a violation of Standard III(E): Preservation of Confidentiality? Disclosure of client information: A. In cooperation with an investigation by the CFA Institute Professional Conduct Program B. In an attempt to introduce the client to new business contacts C. Having gained client permission to disclose the information

B. In an attempt to introduce the client to new business contacts Standard III(E): Preservation of Confidentiality states that confidential client information should not be disclosed unless the information concerns illegal activities on the part of the client, disclosure is required by law, the client gives permission for disclosure, or the member or candidate is cooperating with an investigation by the CFA Institute Professional Conduct Program.

Mike Brown is an investment adviser who has a referral agreement in place with a local mortgage broker. Brown has disclosed to his employer that a referral agreement is in place and that he will receive compensation every time the mortgage broker gains a customer on his referral. Brown is: A. In compliance with Standard VI(C): Referral Fees B. In violation of Standard VI(C): Referral Fees since he should also disclose the nature and value of the compensation C. In violation of Standard VI(C): Referral Fees since he should have obtained consent from his firm before entering into the referral fee agreement

B. In violation of Standard VI(C): Referral Fees since he should also disclose the nature and value of the compensation Standard VI(C) states that the member or candidate must disclose the nature of the consideration or benefit—for example, flat fee or percentage basis, one-time or continuing benefit, performance-based, benefit in the form of provision of research or other non-cash benefit—together with the estimated dollar value. Consideration includes all fees, whether paid in cash, in soft dollars, or in kind. The third answer is incorrect since the standard requires disclosure, not prior approval.

According to Standard III (C) Suitability, when members and candidates are in an advisory relationship with a client, they must: A. Make a reasonable inquiry into a client's marital status. B. Judge the suitability of investments in the context of the client's total portfolio. C. Determine that an investment is suitable to a client without adherence to the client's written objectives.

B. Judge the suitability of investments in the context of the client's total portfolio. The second choice is correct. This statement is true.

Liza Thomson, an investment advisor, quoted certain economic details taken from the website of the US Statistics Department in her marketing materials, but did not give any acknowledgment for that. Which of the following statements is most accurate? A. Lisa has violated Standards I(B) Independence and Objectivity and I(C) Misrepresentation. B. Lisa has not violated Standard I(C) Misrepresentation. C. Lisa has not violated Standard I(C) Misrepresentation, but she has violated I(B) Independence and Objectivity.

B. Lisa has not violated Standard I(C) Misrepresentation. Analysts can refer to external research material, but they have to ensure the credibility of the research and give credit to the source of information. General public information about statistics and economic details need not be cited.

Which one of the following requirements is least likely to help to ensure the establishment of an information barrier (firewall)? A. Physically separate departments and their files. B. Monitor employees working for more than one department at any one time. C. Limit proprietary trading when a firm has access to material nonpublic information.

B. Monitor employees working for more than one department at any one time. Firewalls are intended to block the dissemination of material nonpublic information. Ideally, employees should work for one only department at any one time, so the second choice is the best answer.

Patrick Cobb, CFA, works as a portfolio manager at Paradiso Asset Management (PAM), which manages investments for large, institutional investors. PAM's minimum account size is $20 million. Twice a week, Cobb volunteers to serve meals at a local homeless shelter, Hospitality at the Heart (HH). The chair of the HH board has asked Cobb to manage the charity's portfolio, valued at $8 million, in return for compensation of 0.06% of assets under management annually. Domingo Rivera, another portfolio manager at PAM, overheard Cobb discussing details for this potential arrangement and accused his colleague of being disloyal to his employer and engaging in independent practice. Has Cobb most likely violated the Standards? A. No, because HH's account is too small for PAM B. No, because he has not accepted the offer from HH's board C. Yes, because he has not received written permission from PAM

B. No, because he has not accepted the offer from HH's board. According to Standard IV(A) - Loyalty, "In matters related to their employment, Members and Candidates must 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." Cobb's work as a portfolio manager for PAM is related to the work that he has been asked to do on behalf of HH, for which he would receive compensation. Therefore, Cobb would violate this Standard if he accepted the offer without receiving written consent from PAM after having provided a detailed description of the arrangement with HH. However, Cobb does not violate this Standard merely by having received an offer and discussing it. The fact that the value of the HH account is less the minimum size of accounts managed by PAM does not relieve Cobb of the obligation created by this Standard.

Paula Nye, CFA, is an investment banker in the corporate finance division of a larger brokerage firm. As part of her sales presentation to Omega Consolidated seeking to underwrite their next securities issue, she provides assurance that her firm's research department will provide full coverage of the company. Has Nye violated the Standards of Professional Conduct by making such a pledge? A. Yes, provided that the research reflects favorably on the company. B. No, provided that the research is unbiased and reflects the analyst's true opinion. C. No, provided that the research presents only factual information.

B. No, provided that the research is unbiased and reflects the analyst's true opinion. Nye may assure a company that it will provide coverage for the new issue, but she cannot guarantee that the research will reflect positively on the company.

Mary Wagner has been a vice president at a commercial bank for the past three years. Before her current job, she was working as a derivatives trader at an investment company. As a trader, she was a member of CFA Institute but since joining the bank she let her membership lapse. A brochure prepared for her division at the bank lists her name without the CFA designation but states that she had been a charterholder in the past. Does the brochure violate the Standards of Professional Conduct? A. Yes. B. No, reference to her past membership is permissible under the Standards. C. No, use of the designation is independent from maintaining membership.

B. No, reference to her past membership is permissible under the Standards. According to Standard VII(B) members may make reference to past membership in CFA Institute, including their status as charterholders, as statements of fact. However, they are prohibited from continuing to use the designation next to their name or to make reference to themselves as charterholders unless their membership is reinstated.

When Justin Chua, CFA, was hired as a portfolio manager by One World Bank, a global investment bank, he was required to sign an employment contract that includes a noncompete clause, prohibiting him from working in the same industry for five years after leaving the bank. One year following his appointment, Chua was laid off due to downsizing. After a three-month job search, he received an offer for the same position by another investment bank in a country where noncompete clauses are considered a violation of human rights and hence illegal. According to the CFA Institute Code of Ethics, Chua should: A. Accept the job offer since the noncompete clause is not enforceable in that country. B. Not accept the job offer because it is a violation of Standard I(D) Misconduct. C. Accept the job offer because Chua did not resign voluntarily and the noncompete clause is unfair to him.

B. Not accept the job offer because it is a violation of Standard I(D) Misconduct. The second choice is correct. Under Statement I(D), members 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. Though the noncompete clause is illegal in the country for the new position and may be unfair to him, Chua should still adhere to the commitment he made to his former employer and, therefore, should not accept the job offer.

Anthony Lim, CFA, is working in the branch office of a U.S.-based investment company in Poland. Polish law prohibits portfolio managers from accepting referral fees. Lim is a Chinese citizen, and in China, a portfolio manager is not required to disclose referral fees. He has been offered a deal with a referral fee. Which country's requirements should he follow? A. China B. Poland C. CFA Institute

B. Poland The second choice is correct. Under Standard I (A) Knowledge of the Law, when applicable law and the Code and Standards require different conduct, members and candidates must follow the stricter of the applicable law or the Code and Standards. In this case, Polish law is the strictest.

The compliance statement of a firm claiming to comply with the GIPS standards is contained in what provision of the GIPS standards? A. Provision 0 - Fundamentals of Compliance B. Provision 4 - Disclosure C. Provision 5 - Presentation and Reporting

B. Provision 4 - Disclosure Provision 4—Disclosure deals with the claim of compliance that a firm claiming compliance with the GIPS standards must make

The CFA Standards of Professional Conduct—Professionalism does not include which of the following items? A. Knowledge of the law. B. Representation. C. Misconduct.

B. Representation. CFA Standards of Professional Conduct—Professionalism includes misrepresentation, not representation as a major category.

Sally works for an investment management firm as a client consultant. Her firm's CIO produces a quarterly research report that is presented at every client meeting. Because Sally is making the presentation, she believes it is appropriate to put her name on the CIO's research report as well. Sally has most likely violated Standard: A. 1(A) B. 1(B) C. 1(C)

C. 1(C) Sally has violated 1(C) Misrepresentation (plagiarism) by putting her name on a report she did not write.

Rafi Binder is an oil industry analyst at a brokerage firm. He recently read an article in the Wall Street Journal describing a research study that analyzed global oil reserves. Binder thinks this study would provide insight into the long-term movement of oil prices and wants to quote the study in a research report he is preparing. Using the Journal article to identify the author as Dr. Rangoon of State University, Binder obtained a copy of the original research study and used several excerpts in his oil industry report. In citing the source of the excerpts, Binder must credit: Wall Street Journal The Original Study A.Yes No B.No Yes C.Yes Yes A. Row A B. Row B C. Row C

B. Row B Binder must give credit to the original author of the study. Simply because he first learned of the study in the Wall Street Journal does not require him to cite it as a source.

Anna Bolsky is a well-known biotech analyst with Solid Analytics. As a speaker at a professional society luncheon, she was asked about her opinion of Protoplasm Bio. She responded by saying, "Its recent drug trials have disappointed and there's not much left in the pipeline. I'll be downgrading my rating on the stock in my report next week. You can check that out for details." Several of the attendees are institutional clients of Solid Analytics. Did Bolsky violate the Standards of Professional Conduct announcing the downgrade or the impending report? Downgrade Report A.Yes Yes B.Yes No C.No Yes A. Row A B. Row B C. Row C

B. Row B Bolsky violated the Standard by disclosing the change in her recommendation to a select group of clients who may then act upon it before her other clients. Advising that the report itself is about to be released is not a violation because the content of the report will be available to all once it is released.

Jennifer Wagner is the director of sales for a boutique research firm. Her travel expenses are reimbursed by the company. Wagner has arrangements with her hairdresser, dry cleaner, and certain local restaurants to provide her with backdated receipts that she submits as part of her travel reimbursements. Upon discovering the padded expenses, her boss terminates her employment. He also considers reporting her to the CFA Institute Professional Conduct Program. Did Wagner Violate the Standards? Is Her Boss Required to Report Her to CFAI PCP? A.Yes Yes B.Yes No C.No Yes A. Row A B. Row B C. Row C

B. Row B Deceptively filing false or misleading expense reports for personal gain is an act of dishonesty, which is a violation of the Standards. While her boss is well justified in reporting her actions to the CFA Institute Professional Conduct Program and is encouraged to do so, the Standards do not require him to file a report.

Anita Schultz, CFA, is the managing director of Echo Investments. The firm's website includes biographical information about the firm's principals, including Schultz. The descriptions were actually written by the firm's marketing coordinator, Lucas Feldman, based on interviews with each director. Schultz's bio includes a reference to her as a PhD in economics. Although she did serve as adjunct faculty at a university, she never completed her dissertation to qualify for a doctoral degree. Does this discrepancy constitute a violation of the Standards of Professional Conduct by: FeldmanSchultz A.Yes No B.No Yes C.Yes Yes A. Row A B. Row B C. Row C

B. Row B Feldman did not violate the Standards because the misstatement was unintentional, and he may reasonably rely on information provided by Schultz. Schultz, however, is expected to explain her background and credentials without misrepresentation. Furthermore, Schultz would be expected to review the publication and correct any inaccuracies. Not doing so constitutes a violation of the Standards.

Pepper Tibbs is a portfolio manager with Albacor Asset Management. One of her wealthy clients, Walter Parks, offers to pay Tibbs a bonus if his portfolio outperforms the S&P 500 index return by more than five percent in any given year. According to the Standards of Professional Conduct, Tibbs may accept the offer if she obtains written consent from: Albacor All Her Clients A.Yes Yes B.Yes No C.No Yes A. Row A B. Row B C. Row C

B. Row B Receiving a bonus payment from a client can create a conflict of interest by encouraging preferential treatment. Members are not prohibited from accepting bonus incentives from clients but must first obtain written consent from their supervisors.

The Code of Ethics requires members to: Maximize Their Clients' Wealth Strive to Improve the Competence of Their Peers A.Yes No B.No Yes C.Yes Yes A. Row A B. Row B C. Row C

B. Row B The Code of Ethics require covered persons to: act with integrity and competence, place the integrity of the profession and clients' interests ahead of their own, use reasonable care and independent judgment, be a credit to the profession, promote the integrity of the capital markets, maintain their own competence and improve others within the profession. It does not require the maximization of clients' wealth.

Mary Kline is a technology analyst appearing on an investing television show. During an interview with the show's host, Kline makes the following statements. Statement 1: "Online advertising revenue will grow at 30 percent for the foreseeable future, which means the earnings multiples of this sector are way too low." Statement 2: "Traditional players, like Microsoft, are likely to continue to acquire Internet companies. If that plays out, the entire sector could get an additional boost in prices." Taken in isolation, does either of these statements violate the Standards of Professional Conduct? Statement 1 Statement 2 A.Yes Yes B.Yes No C.No Yes A. Row A B. Row B C. Row C

B. Row B The Standard requires members to clearly distinguish fact from opinion. Statement 1 claims that advertising will grow and multiples are too low, which are opinions. However, they are stated as unqualified facts. Statement 2 proposes that traditional players are likely to continue acquisitions and this activity might cause prices to rise. The use of contingent statements implies that these are opinions.

Kim Sung is a new investment manager at Dai Investments. Sung's supervisor tells him that the firm subscribes to research services from two third-party providers, Kamp Research and Perk Advisors. While acquainting himself with these firms, Sung reviews each firm's recommendations history and compiles a list of questions for their representatives. He notes that Kamp regularly issues sell recommendations and is very forthcoming when questioned. Perk, on the other hand, rarely issued a sell recommendation and is reluctant to discuss its sources of compensation. According to the Standards of Professional Conduct, may Sung rely on research from: Kamp? Perk? A.Yes Yes B.Yes No C.No Yes A. Row A B. Row B C. Row C

B. Row B The use of third-party research is acceptable under the Standard as long as the source is credible and cited. Kamp bears all the characteristics of a credible source, but Perk seems questionable.

Which of the following is least likely required of fiduciaries that are responsible for pension plans? A. Judging investments in the context of the total portfolio. B. Supporting the sponsor's management during proxy fights. C. Acting solely in the interest of plan participants.

B. Supporting the sponsor's management during proxy fights. The second choice is correct. Under Standard III (A) Loyalty, Prudence, and Care, fiduciaries must evaluate management's proposals during proxy fights to see if they are in the best interest of the plan participants. If management's ideas are justifiable and reasonably ensure plan participants' betterment, then fiduciaries can support them. If management is only trying to further its own objectives, especially at the cost of plan participants, then fiduciaries must vote against management in proxy fights.

Ted Lee, an investment manager, discovered that his client Jake Brown was involved in drug activity in the locality, which is a serious illegal activity according to the local law. Which of the following is the best recommended action for Ted that will least likely result in violation of the standards? A. Ted informs the legal counsel department of the company about his client's illegal activity and dissociates with Jake. B. Ted ignores the fact about Jake, as it does not affect his professional ethics. C. Ted discusses the issue with his manager, and both decide to continue doing business with Jake, as he is a very important client.

B. Ted ignores the fact about Jake, as it does not affect his professional ethics. As per Standard I(A), members and candidates must understand and comply with all applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct) of any government, regulatory organization, licensing agency, or professional association governing their professional activities. In this case, Jake's illegal activity does not have any effect on his professional activities.

Which of the following is NOT explicitly listed in the Code of Ethics with regard to interactions with covered persons? A. The public B. The SEC C. Colleagues in the investment profession

B. The SEC The SEC is not explicitly listed in the Code of Ethics. The Code of Ethics explicitly lists how covered persons should interact with to the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets.

Ricardo Plum is a portfolio manager at a money management firm. He also serves on the board of a private hospital where his wife is a physician. The position includes a small compensation package. In notifying his employer of his participation on the board, which of the following is Plum least likely to disclose? A. The duration of his service and the average monthly time required. B. The fact that his wife is also a physician at the same hospital. C. The amount of compensation he receives for his service.

B. The fact that his wife is also a physician at the same hospital. The fact that his wife is a physician at the hospital does not appear relevant to the facts and would not likely contribute to any conflict of interest with Plum's money management employment.

Joshua Horne has just been awarded a CFA charter. His employer, AEB Investments, decides to change their marketing literature since they now employ three CFA charterholders in the company. Which of the following is an acceptable statement for the firm to include in its brochure? A. The credibility of the firms' investments services is underlined by its employment of three CFAs. B. The firm is committed to the highest ethical standards, supported by our three CFA charterholders. C. We have decided to rename the firm AEB Chartered Financial Analysts Corp. to reflect our commitment to our employees studying for the CFA designation.

B. The firm is committed to the highest ethical standards, supported by our three CFA charterholders. CFA is an adjective, not a noun. A firm's name should not include the CFA designation, and the CFA designation should not be used to claim superior investment skills. Statement B is acceptable; CFA charterholders should be committed to the highest ethical standards.

A violation of the Code and Standards has occurred in a department of a financial firm. Which of the following statements is most likely to be accurate with regard to Standard IV(C): Responsibilities of Supervisors? A. The supervisor of the department is in violation of the Standards. B. The supervisor of the department may possibly be in violation of the Standards. C. The supervisor of the department is not in violation of the Standards.

B. The supervisor of the department may possibly be in violation of the Standards. At a minimum, Standard IV(C) requires that members and candidates with supervisory responsibility make reasonable efforts to prevent and detect violations by ensuring the establishment of effective compliance systems. If the supervisor has done this, then they have fulfilled their obligations under Standard IV(C). Should the violation have occurred due to an inadequate compliance system, however, then the supervisor will be in violation of Standard IV(C).

Which of the following is part of the Code of Ethics? A. Use reliable data and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities. B. Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities. C. Use extreme care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.

B. Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities. The second choice is correct. The Code of Ethics states that Members must "use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities."

Commonwealth Investments reports performance for the past 10 years that shows consistent alpha for their multiasset class product that has remained consistent in its investment process. However, in some years they used the S&P 500 as their benchmark, and in other years they used a mix of S&P 500 and Barclays Aggregate Bond Index, depending on the fund's performance. This use of different benchmarks most likely violates Standard: A. 1(A) B. 1(B) C. 1(C)

C. 1(C) Standard 1(C) Misrepresentation covers performance reporting. In this instance Commonwealth Investments is deceiving its investors about the true alpha generated by changing benchmarks to meet their own best interests.

Pedro Martinez is an analyst covering the communications industry. He visited the headquarters of Clam Shell Cellular where the CEO demonstrated the key features of the company's sleek new cell phone design. When asked about sales forecasts, the CEO would only state that "we're pleased with our initial sales numbers." Martinez also visited several retailers where he found that the phones were selling well and, in some cases, on backorder. On a shopping trip to the local mall, he noticed quite a few teenagers with the new Clam Shell phones. After performing fundamental analysis, Martinez decides that Clam Shell's next quarter earnings will likely beat consensus estimates. Based on this information, can Martinez recommend the stock as a "buy"? A. No. B. Yes, based on the mosaic theory. C. Yes, based on the CEO's comments.

B. Yes, based on the mosaic theory. The mosaic theory describes the accumulation of immaterial, nonpublic information to form a picture of the potential of an investment. It is not predicated on any individual material fact or discovery that was sourced from an insider.

Peter Jenkins is a Level II candidate. He was having particular difficulty remembering a formula from the curriculum. A colleague suggested a mnemonic (word association) that might help jog his memory. Knowing that formula sheets are not permitted in the exam center, he instead wrote the mnemonic on his hand and used it to recall the formula for a question. Did Jenkins violate the Standards of Professional Conduct? A. No. B. Yes, because he failed to follow the spirit of the exam center rules. C. Yes, because he plagiarized his colleague's mnemonic.

B. Yes, because he failed to follow the spirit of the exam center rules. Candidates may not bring any study aides into the exam center. Writing a memory aid on his hand gave him an unfair advantage over other candidates who followed the exam center rules. Therefore, Jenkins is in violation of the Standard.

Robert Duggan is a financial advisor with Atticus Investments. He has been recruited to join Benedict Advisors and provides notice of his resignation to Atticus, which will be effective in two weeks. Prior to leaving the firm, Duggan contacts several of his clients, informs them of his pending departure, and asks their permission to call on them once he moves to Benedict. Did Duggan violate the Standards of Professional Conduct? A. No. B. Yes, by soliciting his employer's customers. C. Yes, by informing clients of his pending departure.

B. Yes, by soliciting his employer's customers. Duggan must perform his duties on behalf of Atticus until his departure. Soliciting clients is not acting in his employer's interest and is a violation of the Standard. He may not solicit clients until after he leaves and without taking any records that belong to Atticus.

Black Box Advisors has developed a valuation model that combines fundamental analysis with technical trading indicators to rank stocks. Back-testing of the model shows promise for above average returns. The firm sets up a subscription website that publishes a weekly list of buy and sell recommendations. The advertising section of the website provides the results of simulated portfolios, but describes the source of recommendations only as "a proprietary analytical process." Has the owner of Black Box violated the Standards of Professional Conduct? A. No. B. Yes, she must provide a general description of the investment approach. C. Yes, she must disclose the proprietary algorithms used in the model.

B. Yes, she must provide a general description of the investment approach. The Standard requires members to communicate the basic methods or theoretical approach used to produce their recommendations so that clients and prospects can judge their credibility.

Lyndon Price is a financial planner advising private wealth clients. One of his clients, Shaun Mulligan, is a retired technology entrepreneur with an interest in social causes supporting education. Price sits on the board of a charitable foundation dedicated to providing computers to underprivileged high school students. As part of the foundation's fund raising efforts, Price compiles a list of names of potential donors, including Mulligan's, to the outreach chairperson. Did Price violate the Standards of Professional Conduct? A. No. B. Yes, unless he first obtains permission from Mulligan. C. Yes, even if he first obtains permission from Mulligan.

B. Yes, unless he first obtains permission from Mulligan. Lyndon Price is a financial planner advising private wealth clients. One of his clients, Shaun Mulligan, is a retired technology entrepreneur with an interest in social causes supporting education. Price sits on the board of a charitable foundation dedicated to providing computers to underprivileged high school students. As part of the foundation's fund raising efforts, Price compiles a list of names of potential donors, including Mulligan's, to the outreach chairperson. Did Price violate the Standards of Professional Conduct?

Which of the following is most likely to be considered a situational influence? A. Your opinion that your firm's analysis is the best in the capital markets B. Your colleague's need for a bonus, driven in part by your commissions, to pay for a relative's surgery C. Recently learning that a company would outperform analyst earnings estimates and deciding to invest on that basis

B. Your colleague's need for a bonus, driven in part by your commissions, to pay for a relative's surgery Having to help a colleague earn a bonus to pay for someone's medical care is a situational influence. The situation could result in violating ethical principles to elevate one's status with the colleague. The other choices are examples of biases.

Richard Frizell, CFA, worked as part of a three-member team that recently completed a research report on Lukesrun that includes a "buy" recommendation for the company's stock. The team submits this report to his firm's review committee, which approves it for distribution to clients. Before the approved version of the report can be sent to clients, Frizell receives revised economic data from a government statistics agency that he believes will result in significantly lower earnings for companies in Lukesrun's sector than he had previously forecast. In order to comply with the Standards, Frizell should most likely: A. have his name removed from the report before it is sent to clients. B. act to prevent the report from being sent to clients until the authors consider this new information. C. send a supplementary report with his assessment of this new information to all clients who receive the original report.

B. act to prevent the report from being sent to clients until the authors consider this new information. Standard V(A) - Diligence and Reasonable Basis requires members and candidates to exercise "diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions." In this example, Frizell has an obligation to act to prevent clients from receiving a report that he believes should be updated in light of the new information he has received. It is not sufficient for him to send a supplementary report or have his name removed from the report before it is sent to clients. He is required to take steps to prevent the report from being sent to clients in its current form.

Ricardo Vaughn is a portfolio manager for Brilliant Asset Management (BAM). One of his accounts is owned by his parents. Vaughn's sister is named as a beneficiary on the account, but Vaughn is not. BAM has an opportunity to participate in an oversubscribed IPO that is appropriate for his parent's portfolio. According to the Standards of Professional Conduct, Vaughn's best course of action is to: A. allocate shares to his parent's account only after other client accounts. B. allocate shares to his parent's account concurrently with other client accounts. C. allocate no shares to his parent's account to make them available to other clients.

B. allocate shares to his parent's account concurrently with other client accounts. The Standard defines beneficial interest as accounts owned by the member, his or her spouse, children, and immediate family members residing with him or her. Family client accounts are any that are owned by family relatives that do not meet the preceding characteristics. Family client accounts should be neither advantaged nor disadvantaged because of the familial relationship. Therefore, Vaughn's parent's account should be allocated concurrently with the rest of his clients.

Maxine Wong is the director of business development at Brilliant Asset Managers (BAM). She is working hard to win a contract as the alternative asset manager for a large university endowment. The president of the university explains that a significant piece of legislation is pending in the legislature that would benefit students and faculty. He suggests a donation to the political action campaign in support of the proposed law would improve BAM's chances of winning the bid. According to the Standards of Professional Conduct, Wong's best course of action is to: A. make only a small donation to the campaign, provided that she agrees with the cause. B. decline to make any donation, citing the Standards of Professional Conduct prohibition. C. withdraw BAM's bid for the contract, citing the Standards of Professional Conduct.

B. decline to make any donation, citing the Standards of Professional Conduct prohibition. While Standard I(B) does not require that BAM withdraw from the bidding process, they do not permit Wong to make a donation (personally or via the firm) even if she agrees with the legislation because of the appearance of a conflict of interest.

Pedro Ramirez is a portfolio manager at Iberian Advisors, a small asset management firm with $250 million under management. Iberian provides services exclusively to individual private wealth clients. Ramirez has been approached by the board of Baldwin State University to serve as a member of its endowment investment committee, a $2 billion pool of assets. Because it is an unpaid position, Ramirez does not believe notification to his employer is required. According to the Standards of Professional Conduct, Ramirez must: A. decline the position with the endowment due to potential conflicts of interest. B. discuss the position and duties with his employer prior to accepting the new role. C. list the position in his employer's next annual disclosure notification document.

B. discuss the position and duties with his employer prior to accepting the new role. By participating in the endowment's board, Ramirez could be subjected to conflicts arising out of the positions held by the endowment and his private clients. He could also come into possession of material nonpublic information. Therefore, he must discuss the position with his employer before accepting.

Jim Joyner, CFA, a portfolio manager with Breakstone Asset Management, works with individual investors. CFA Institute's Disciplinary Review Committee (DRC) recently ruled that Joyner had violated the Standards, and affirmed the Profession Conduct Program staff's recommendation that his membership be suspended for two years. Which of the following statements is most accurate? Joyner: A. may appeal the DRC's ruling. B. may continue to work with clients while his suspension is in effect. C. must not engage in any professional activities while his suspension is in effect.

B. may continue to work with clients while his suspension is in effect. The range of sanctions that CFA Institute may impose on members and candidates who violate the Standards does not include a prohibition on professional activities. In this example, Joyner may continue to work with clients during his suspension, but he must not use the CFA designation until such time as his membership is reinstated. Joyner may not appeal the ruling issued by the DRC, which is the final authority on such matters.

Martha Graham was an investment banker and CFA charterholder for 10 years before she was asked to join a political campaign. After her team won the election, she joined the administration of the new official. During that period, she allowed her membership in CFA Institute to lapse. Two years later, she returned to banking. According to the Standards of Professional Conduct, Graham may resume using the CFA designation: A. immediately upon her return by sending a dues payment to CFA Institute. B. only after paying dues and filing her Professional Conduct Statement. C. only after paying dues and passing CFA Institute's reinstatement exam.

B. only after paying dues and filing her Professional Conduct Statement. Standard VII(B) stipulates that when a member allows their membership to lapse, they may not use the CFA designation until they have resumed paying dues, filed their Professional Conduct Statement, and completed the CFA Institute reinstatement procedures.

Richard Pulaski is an equity research analyst who wants to purchase shares in Technical Enterprises for his personal account. His supervisor has also asked him to write a recommendation for the stock, but Pulaski is concerned that the firm's reaction to his recommendation will drive up the share price. According to the Standards of Professional Conduct, Pulaski must: A. purchase shares for his personal account before making the recommendation. B. purchase shares for his personal account after making the recommendation. C. refrain from ever purchasing any shares for his personal account.

B. purchase shares for his personal account after making the recommendation. The Standard requires that members place the interests of their clients first, their employers second, and then their own last. Pulaski, while not prohibited from investing alongside his clients or employer, must first satisfy their entire orders before purchasing shares for himself.

Which of the following statements is most accurate? Members and candidates who receive compensation for referring clients and prospective clients to other service providers should update their employer about the nature and amount of compensation received at least: A. monthly. B. quarterly. C. annually.

B. quarterly. According to the recommended procedures for compliance with Standard VI(C) - Referral Fees, "[E]mployers should have investment professionals provide to the clients notification of approved referral fee programs and provide the employer regular (at least quarterly) updates on the amount and nature of compensation received."

Which of the following is a violation of Standard I (D) Misconduct? A. A member's investment recommendation on a few stocks has been wrong, and it has caused clients' losses. B. A member negotiates with his employer for a salary increase based on a job offer by a rival firm. C. An intoxicated CFA Level I candidate is removed from a restaurant for disturbing other customers.

C. An intoxicated CFA Level I candidate is removed from a restaurant for disturbing other customers. The third choice is correct. Public intoxication and disturbing other customers are considered activities that reflect adversely on a member's professional reputation, integrity, or competence and therefore violate Standard I (D) Misconduct.

The mosaic theory states that: A. Analysts should never use material non-public information B. Analysts can use material non-public information as long as it is combined with material public information to reach any conclusion C. Analysts can use nonmaterial non-public information

C. Analysts can use nonmaterial non-public information The mosaic theory states that an analyst may use material public information and nonmaterial non-public information in creating a larger picture than shown by any individual piece of information and the conclusions the analyst reaches become material only after the pieces are assembled.

George is an emerging markets equity manager who lives in the United States but does all of his business in Venezuela with individual clients, a country with less strict securities laws. Which set of guidelines should George follow in dealing with his clients? A. United States Law B. Venezuelan Law C. CFA Standard of Professional Conduct

C. CFA Standard of Professional Conduct Because George's clients live in Venezuela and their laws are less strict, he must follow the CFA Standards of Professional Conduct.

Leslie Prist is the marketing director for Xion Investments. Xion manages a variety of open- and closed-end mutual funds. A brochure Prist sent to prospective investors stated, "Our funds have beaten their benchmark indices by an average of five percentage points over the last ten years." Which of the following practices would violate the Standards of Professional Conduct? A. Failing to list the funds' benchmarks in the brochure. B. Using a geometric mean instead of an arithmetic mean. C. Changing fund benchmarks on an ex post basis.

C. Changing fund benchmarks on an ex post basis. The Standards do not require compliance with the Global Investment Performance Standards (GIPS). However, performance presentation must be clear, accurate, and complete. Changing the fund's benchmark after the fact would be a misrepresentation of its performance. Benchmarks must be stated in advance of the performance period and should only be changed if the fund's investment mandate or strategy changes in a way that renders the old benchmark obsolete.

The Asset Manager Code of Conduct does not provide guidelines in which of the following areas? A. Loyalty to client. B. Investment process. C. Client fees.

C. Client fees. The Asset Manager Code of Conduct does not address how managers should charge their clientele.

Which of the following is the most accurate statement of a limitation imposed by the Fair Dealing standard? A. Member and candidates are allowed to disclose referral fees within three months after the service agreement is executed. B. CFA charter holders should offer clients a different level of service selectively. C. Clients should not be discriminated against when disseminating investment recommendations and taking investment action.

C. Clients should not be discriminated against when disseminating investment recommendations and taking investment action. The third choice is correct. Standard III (B) Fair Dealing states that the dissemination of information and recommendations to clients must be handled fairly. The other choices are related to Standard VI (B) Priority of Transactions and Standard VI (C) Referral Fees.

John Alley, CFA, routinely performs background checks on the job applicants with respect to their character and past violation of laws. Alley has: A. Violated the Code of Ethics. B. Complied with Standard I (A). C. Complied with Standard I (D).

C. Complied with Standard I (D). The third choice is correct. Background checks are encouraged for new hires to prevent general misconduct under Standard I (D).

"Priority of Transactions" is included as a sub-section to which CFA Institute Standard of Professional Conduct? A. Duties to Clients B. Investment Analysis, Recommendations and Actions C. Conflicts of Interest

C. Conflicts of Interest Standard VI(B): Conflicts of Interest relates to Priority of Transactions.

Referral fees are an issue discussed under which portion of the Standards of Professional Conduct? A. Integrity of Capital Markets. B. Duties to Clients. C. Conflicts of Interest.

C. Conflicts of Interest. Referral fees are discussed under Conflicts of Interest in the Standards of Professional Conduct.

Steve Blair, the marketing head of Rento Advisory Inc., was having a discussion with David Williams, the fund manager, about the presentation of investment performance to clients. Steve was afraid that clients may not be happy with the current performance of the investments. Steve asked David to include a few high-performance composites that were terminated previously to show improved results. David refused to agree with Steve and did not alter the presentation. Which of the following is most accurate? A. David performed his duties to his employer. B. David maintained confidentiality at work. C. David maintained his independence at work.

C. David maintained his independence at work. David has maintained his independence at work by not giving in to interdepartmental pressure. He has complied with Standard I(B) related to independence and objectivity.

Analyst Debora Jones was working on a report about the software industry. She entered the growth rate of the sector as 9% instead of 6% by mistake. She did not notice the error and the report was sent to the clients. One of the team members noticed the mistake and informed Debora. Debora decided not to make changes in the report, as the report was already sent to the clients and correcting the mistake at this point would bring undue attention to the error. Which of the following is most accurate?' A. Debora has not violated the standards, as it is an unintentional mistake. B. Debora has violated the standards by making an error in the report. C. Debora has violated the standards by not correcting the error in the report.

C. Debora has violated the standards by not correcting the error in the report. Debora has violated Standard I(C) related to misrepresentation by not correcting the error in the report. She should have immediately stopped the circulation of the report.

Which of the following measures is most likely consistent with the recommendations for compliance with Standard II(A) - Material Nonpublic Information? A. Increasing the number of employees with knowledge of which stocks are on the firm's restricted list B. Establishing a firewall to ensure that information shared with buy-side analysts is not also shared with sell-side analysts C. Designating a compliance officer for research analysts to consult about which information should be shared with members of the investment banking department

C. Designating a compliance officer for research analysts to consult about which information should be shared with members of the investment banking department According to the recommendations for compliance with Standard II(A) - Material Nonpublic Information, firewalls should be established to prevent communication of material nonpublic information, for example, between research analysts and members of a firm's investment banking department. It is further recommended that a compliance officer be designated to "review and approve communications between departments." Firewalls should not be used to prevent information shared with buy-side analysts from also being shared with sell-side analysts. Rather, firms should adopt disclosure policies designed with the intention of sharing information fairly with all analysts. It is recommended that firms use a restricted list and place companies on it when they are in possession of material nonpublic information. However, broad distribution of this list is not desirable, as such a practice "often triggers the sort of trading the list was developed to avoid."

If a member or candidate does not accept the charges and proposed sanction levied by the CFA Institute under the Professional Conduct Program, the matter is referred to a panel composed of A. the Board of Governors B. Senior CFA Institute executives C. Disciplinary Review Committee members

C. Disciplinary Review Committee members If the member or candidate does not accept the charges and proposed sanction levied by the CFA Institute under the Professional Conduct Program, the matter is referred to a panel composed of DRC members. The panel reviews materials and presentations from Professional Conduct staff and from the member or candidate. 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.

Sarah determines that members of her research team have come across material nonpublic information according to Standard II(A) of the Code and Standards. Which of the following actions is she not required to do? A. Encourage the dissemination of the information B. Report to appropriate supervisory authorities C. Disseminate the information herself

C. Disseminate the information herself Per Standard II(A) of the Code and Standards, Sarah is not required to disseminate the information herself.

Shelly recently started at a Texas based institutional consulting firm that provides manager search and selection services. During the Christmas holiday she received gifts of chocolates, popcorn, and other holiday food items from numerous investment managers. With respect to Standard 1(B) of the Professional Code of Conduct, what must Shelly do? A. Report the gifts. B. Return the gifts. C. Do nothing.

C. Do nothing. Gifts of this nature cannot reasonably be expected to influence Shelly during the manager search and selection process, especially given the gifts were from numerous, not a select few managers. She is not required to report the gifts.

Kevin Dudman, CFA, has just been offered an exciting new position with Walton Asset Management and decides that he will resign from his current position with Trust Asset Management. Before he resigns, he decides to ensure that he can use some of the skills and materials he has developed at Trust Asset Management. He is least likely to violate the Code and Standards if he takes: A. Internal contact information on Trust Asset Management's major clients. B. Stock market analysis prepared by Dudman when he was working at Trust Asset Management. C. Experience in pricing unlisted securities, which he gained while attending training courses that were paid for by Trust Asset Management.

C. Experience in pricing unlisted securities, which he gained while attending training courses that were paid for by Trust Asset Management. Client contact details should not be taken from his employer, although he is not prohibited from collecting client information from outside sources. Models and research that he worked on when employed by Trust Asset Management belong to Trust Asset Management (unless there is a specific arrangement that states otherwise). However, skills and experience gained at Trust Asset Management can be used in his new job, so the third choice is the correct answer.

Which of the following statements is consistent with the recommended procedures for compliance with Standard VI(C): Referral Fees? A. Firms should completely restrict such fees. B. Firms may completely restrict fees or enforce procedures that require disclosure of agreements prior to any payments taking place. C. Firms may completely restrict fees or enforce procedures that require disclosure of agreements before entering into such arrangements.

C. Firms may completely restrict fees or enforce procedures that require disclosure of agreements before entering into such arrangements. Standard VI(C) states the responsibility of members and candidates to inform their employer, clients, and prospective clients of any benefit received for referrals of customers and clients. Appropriate disclosure means that members and candidates must advise the client or prospective client, before entry into any formal agreement for services, of any benefit given or received for the recommendation of any services provided by the member or candidate.

Floren Advisory Inc. issues marketing materials to its clients stating that it has a highly qualified research team who are Chartered Financial Analysts (CFAs) and were educated at prestigious institutions. Currently, most of its research members are not CFAs or educated at prestigious institutions, as many of the researchers have left the firm. Which of the following actions will least likely result in a violation of standards? A. Floren need not disclose the qualifications of the research team to the prospective clients, as the respective researchers are ex-employees of the firm. B. Floren should disclose the qualifications of the research team to the prospective clients after they invest with the firm. C. Floren should disclose the qualification of the research team to the prospective clients before they invest with the firm.

C. Floren should disclose the qualification of the research team to the prospective clients before they invest with the firm. Floren Advisory will violate Standard I(C) related to misrepresentation if it does not disclose the qualifications of the research team to the prospective clients before they invest with the firm.

Nicky Odair, CFA, is the investment manager of MTR Capital in Japan, specializing in high-tech equity investments. He places trades for the fund with Global Brokerage, which has invited Odair to attend their high-tech investment conference in Germany and offered to pay for Odair's airfare, meals, and accommodations for the trip. What should Odair do to comply with the Code and Standards? A. He may attend but he must disclose the arrangement to MTR's clients and prospects. B. He may attend only if his employer gives consent. C. He may attend at his or his employer's expenses.

C. He may attend at his or his employer's expenses. The third choice is correct. Under Standard I (B), members must not accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another's independence and objectivity. As the offer by Global Brokerage may influence Odair's objectivity in selecting the right brokerage firm for the clients, he should decline to accept the offer.

Henry William, an investment advisor at Richard Corp., was sent for a seminar by his firm. He was eligible to claim $5,000 for his travel expenses, but he incurred only $2,000 as his expenses. He submitted a few taxi bills that were incurred for his personal purposes to claim the entire per diem for the trip. Which of the following is most accurate of Henry's action? A. Henry has violated Standard I(C) pertaining to misrepresentation, as he presented fake bills. B. Henry has not violated Standard I(D) pertaining to misconduct, as his action is not concerned with professional ethics. C. Henry has violated Standard I(D) pertaining to misconduct, as his action reflects poorly on his personal integrity as a professional.

C. Henry has violated Standard I(D) pertaining to misconduct, as his action reflects poorly on his personal integrity as a professional. Henry has violated Standard I(D) pertaining to misconduct as his action reflects poorly on his personal integrity as a professional.

Which of the following bases of clients' trust in financial advisors would most likely be violated if the advisor misrepresents the investment performance of an asset in a client's investment portfolio under management? A. Information asymmetries B. Client-advisor relationships C. The intangible nature of investment products

C. Investment products and services are intangible goods that cannot be directly experienced with the senses. Therefore, clients must be assured that the numbers appearing on their monthly statements are a correct and fair representation of their portfolio's performance.

Charles Marvel, CFA, is a research analyst covering Ruby Mining Inc., a gold mining company in Africa. Ruby's major producing mine is located in a remote part of Congo, reachable in 12 hours by car from the nearest airport. However, Ruby has a corporate helicopter that the company executive normally uses. Marvel contacts Ruby's management to gather information on the company, and Ruby's CFO, Lily Redfox, invites Marvel to visit its mine in Congo with her. Redfox offers to send the corporate helicopter to pick up Marvel from the nearest airport and to fly him back in the evening. Marvel estimates that it would require three days for him to complete the visit using commercial travel. If Marvel accepts Redfox's offer and makes the trip to Ruby's mine in Congo using a corporate helicopter, Marvel A. Is in violation of the Standards unless he discloses the use of the corporate helicopter in his report on Ruby. B. Is in violation of the Standards unless he reimburses Ruby for the use of the corporate helicopter. C. Is not in violation of the Code and Standards.

C. Is not in violation of the Code and Standards. The third choice is correct. Standard I (B) states the responsibility of CFA Institute members to maintain independence and objectivity so that their clients will have the benefit of their work and opinions unaffected by any potential conflict of interest or other circumstance adversely affecting their judgment. In this case, since the travel by car is so time consuming and the company CFO is going with him, the ride on the corporate helicopter is reasonable as long as Marvel can maintain his objectivity.

In accordance with Standard I (A) of the CFA Institute Standards of Professional Conduct, members shall not knowingly participate or assist in any violations of laws, rules, or regulations. A member: A. Must report all legal violations to the proper regulatory authorities. B. Is required to leave the firm when he is aware of any violation. C. Is not responsible for violations by others when he/she is or reasonably expected to be unaware of the facts resulting in the violation.

C. Is not responsible for violations by others when he/she is or reasonably expected to be unaware of the facts resulting in the violation. The third choice is correct. A member is not responsible for the violation if he/she is not aware of all the facts giving rise to the violations. However, if members suspect someone is planning or engaging in illegal activities, the member should: - Determine the legality of the activities. - Consult your supervisor and legal counsel. - Take appropriate action. - Disassociate, attempt to persuade the perpetrator to stop.

According to the Standards of Professional Conduct, when writing material for circulation to the public: A. Members may copy or use charts or graphs without stating the sources and members may orally, for example, in a group meeting, without acknowledgment, use excerpts from articles or reports prepared by others. B. Members may not copy or use charts or graphs without stating the sources, but members may orally, for example, in a group meeting, without acknowledgment, use excerpts from articles or reports prepared by others. C. Members may not copy or use charts or graphs without stating the sources and members may not orally, for example, in a group meeting, without acknowledgment, use excerpts from articles or reports prepared by others.

C. Members may not copy or use charts or graphs without stating the sources and members may not orally, for example, in a group meeting, without acknowledgment, use excerpts from articles or reports prepared by others. Standard I(C) prohibits plagiarism, whether it is a written or oral form of communication of another's work. Other parties' research (charts, graphs, articles, reports, etc.) may be quoted, but the research must be attributed to the original author.

US Trust Management Company operates in Oregon and follows state regulations instead of the CFA Standards of Professional Conduct on many occasions throughout the year. What does this imply about the strictness of Oregon state securities law? A. Less strict B. Comparable C. More strict

C. More strict The only time a charterholder can deviate from the Standards of Professional Conduct is when local regulations are stricter.

James Heil, CFA, is updating his investment firm's compliance manual, which contains the following policy: "Research analysts must not knowingly omit or misrepresent information or give a wrong impression of this firm or any security, in oral representations, advertising, electronic communications, or publicly disseminated written materials." Is this policy most likely consistent with the recommendations for compliance with the Standards? A. Yes B. No, because Standard I(C) - Misrepresentation only references written materials C. No, because Standard I(C) - Misrepresentation includes written materials, whether publicly disseminated or not

C. No, because Standard I(C) - Misrepresentation includes written materials, whether publicly disseminated or not According to Standard I(C) - Misrepresentation Members and Candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities. This Standard applies to all forms of communication, including written materials.

Susan Jackson manages the pension fund for Elgin Manufacturing. Elgin's management is concerned about the rising pension expense of the underfunded plan. The company's CFO suggests that Jackson add riskier assets to the portfolio in the hopes of increasing the return and reducing the firm's pension expense. Based solely on this request, should Jackson increase the risk profile of the plan assets? A. Yes. B. No, because short-term volatility is bad for pension plans. C. No, because her fiduciary duty is owed to the plan beneficiaries.

C. No, because her fiduciary duty is owed to the plan beneficiaries. Members must know their fiduciary duties and to whom they are owed. As plan manager, Jackson owes a fiduciary duty to the plan beneficiaries (employees) and not the plan sponsor (Elgin). Increasing the plan's risk profile might benefit Elgin in the short-term through lower pension expense, but it might also risk the plan's long-term soundness to the detriment of the beneficiaries by exacerbating the underfunded status.

Maria Gomez, CFA, is the marketing director for Regal Asset Managers (RAM). She is reviewing a promotional brochure for an upcoming conference and exhibition. The brochure highlights the fact that all four of the firm's portfolio managers are charterholders who passed the three exams in succession on their first attempts. It goes on to imply that this achievement will ensure RAM's funds will perform in the top of their peer groups. Is the brochure compliant with the Standards of Professional Conduct? A. Yes. B. No, it may not make reference to the fact that RAM's managers passed on the first attempt. C. No, because it implies that its CFA charterholders will achieve superior investment returns.

C. No, because it implies that its CFA charterholders will achieve superior investment returns. Standard VII(B) allows members to make statements of fact as to their participation in the CFA Program but prohibits implying that investors can expect superior investment performance by virtue of the CFA designation. The implication that passing the exams on the first attempt somehow makes one charter more valuable than another is also a violation of this Standard.

James Brungo is a portfolio manager with Harvest Advisors. He has one large client portfolio and several small client accounts. Advantage Brokers offers to provide commission-free trades for his large client account if he places all trades from the smaller accounts through them. Brungo believes that this will enhance the returns for his large client, ensuring he retains it and possibly attracts more large clients. Advantage has higher than average transaction fees and does not provide research services. May Brungo enter this arrangement with Advantage? A. Yes. B. No, because Advantage does not provide research. C. No, because it is unfair to the smaller clients.

C. No, because it is unfair to the smaller clients. Brungo cannot enter an arrangement that disadvantages certain clients to the benefit of others. To do so is effectively a transfer of wealth from one group to another.

A client offers their fund manager the use of their private yacht should the manager outperform the S&P500 index by 10 percentage points or more. According to Standard IV(B): Additional Compensation Arrangements, the manager should: A. Refuse the bonus B. Obtain consent from their employer to receive the bonus before it is received C. Obtain consent from their employer to enter into the arrangement regardless of whether any bonus is eventually received

C. Obtain consent from their employer to enter into the arrangement regardless of whether any bonus is eventually received Standard IV(B): Additional Compensation Arrangements relates to the existence of the arrangements themselves rather than the payments that may result from such arrangements.

The CFA Standards of Professional Conduct III (Duties to Client) does not include which of the following items? A. Fair dealing. B. Suitability. C. Priority of transactions.

C. Priority of transactions. Priority of transactions is covered under the Conflicts of Interest section of the CFA Standards of Professional Conduct.

Steve uses the mosaic theory to find alpha opportunities in equity markets. He regularly talks to company management, reads research reports, watches television, and attends conferences, among other activities. On one occasion a client asked Steve to see all the underlying research supporting his mosaic theory for an equity recommendation, and Steve gave a verbal description of the research. Which Standard of Professional Conduct is Steve violating? A. Suitability III(C) B. Responsibilities of Supervisors IV(C) C. Record Retention V(C)

C. Record Retention V(C) Steve violated Standard V(C) because he has failed to keep appropriate records relating to his use of the mosaic theory. Providing verbal descriptions of the research process is insufficient.

According to the Code of Ethics, when practicing in a professional and ethical manner the goal is to: A. Resolve conflicts between clients and employers. B. Ensure that clients and employers work in harmony. C. Reflect credit on the investment profession.

C. Reflect credit on the investment profession. The third choice is correct. The Code states that a member shall "practice and encourage others to practice in a professional and ethical manner that will reflect credit on members and their profession."

Which of the following is not a concept covered by the CFA Institute Code of Ethics? A. Competence. B. Integrity and diligence. C. Remuneration levels of investment professionals.

C. Remuneration levels of investment professionals. Remuneration of investment professionals is not explicitly covered in the Code of Ethics. Disclosure of compensation is stipulated in Standard IV(B): Additional Compensation Arrangements and in Standard VI(C): Referral Fees.

Lisa Koch, CFA, is the managing partner of an investment banking firm specializing in underwriting debt instruments. Her firm has underwritten a mortgage-backed issue that is over-weighted with subprime loans. Recent changes in the credit markets have significantly increased the risks of such issues, and Koch's firm may suffer significant losses if it does not sell off the bonds. Koch meets with the directors of sales and research to coordinate an effort to push the bonds to the firm's investment clients. As a result of the sales strategies discussed with Koch, the director of research, Ken Jones, instructs his analysts to portray the issue in the most attractive terms possible. Which of the following likely violated the Standards of Professional Conduct? KochJones A.Yes No B.No Yes C.Yes Yes A. Row A B. Row B C. Row C

C. Row C Both Koch and Jones are conspiring to misrepresent the quality of the issue. Selling the bonds is not a violation in and of itself. But, the risks must be properly disclosed and the issue should only be offered to investors for whom it is suitable.

Sandy Dixon is a portfolio manager for a major manufacturer's pension fund. Two years ago she began accumulating shares in AccuTech based on favorable recommendations from several analysts. After completing the fund's large position, she advised several friends and family members to also buy shares. Based on more recent reports provided by third-party analysts, Dixon decides to sell the fund's entire holding in AccuTech very quickly. Realizing that the large block sale would likely have a detrimental effect on the stock price and because the smaller holdings are unlikely to impact the price, she advises her friends and family to liquidate their positions ahead of the fund's imminent sale. Did Dixon's recommendations violate the Standards of Professional Conduct with respect to the: Buy Sell A.Yes Yes B.Yes No C.No Yes A. Row A B. Row B C. Row C

C. Row C In the first instance, Dixon purchased the entire allotment of shares for the fund and then recommended it to others. Any impact from her fund's trading into the position would have already been reflected in the price of the shares. In the second instance, Dixon advises others to exit the stock ahead of the fund's trades. This is tantamount to front-running where her friends and family will benefit from exiting their positions before the price impact of the fund's trades are reflected. However, the fund will likely receive a lower average price for its shares because of the price impact from the other trades.

Nancy Jenkins holds a large number of shares in Small Tech Corp (STC), a thinly traded stock whose growth prospects have dimmed. She wants to sell out of her position but is afraid that the order would cause a steep decline in the share price, adding to her already sizeable losses. In order to sell the shares, she recruits several friends to discuss rumors of an STC acquisition by a large competitor in online chat rooms and social media sites. Jenkins also spreads her shares among several accounts and has her friends repeatedly buy and sell shares in the hopes of attracting other investors to the stock. Over the next few months, Jenkins sells off her position without further price deterioration. Jenkins violated the Standards of Professional Conduct with respect to intentionally manipulating the stock's: Price Volume A.Yes No B.No Yes C.Yes Yes A. Row A B. Row B C. Row C

C. Row C Jenkins violated Standard II(B) by trying to manipulate both the price and volume of STC shares. Spreading false rumors that an acquisition is in the offing is an attempt to increase the share price. Having her friends repeatedly trade the stock is an attempt to give the appearance that the stock is more liquid than it actually is.

Marie Tipoli is a portfolio manager for NQA Investments. She is assigned to manage the portfolio of Anthony Barito. Barito's income seems to be derived from a variety of businesses in which he has a minority interest. A police detective approaches Tipoli and explains that Barito is being investigated for alleged money laundering. Tipoli immediately discusses the matter with her supervisor and her personal attorney without contacting Barito. Did she violate the Standards of Professional Conduct by discussing Barito's affairs with her: Supervisor?Attorney? A.Yes Yes B.Yes No C.No No A. Row A B. Row B C. Row C

C. Row C The Standard does not require members to withhold information from legitimate authorities as required by law. Furthermore, consulting with her supervisor and attorney may be both prudent and required in order to adequately perform her duties.

Paula Kester is the controller for a small manufacturing company, Gizmo Mfg., which trades on the pink sheets. One of the firm's competitors approached Gizmo's CEO with an offer to purchase the company at a substantial premium to its current market price. Kester mentioned in confidence to her sister, Marie, that she is concerned about losing her job after the takeover. Marie shared those concerns with Becker, her husband and a stockbroker, who began accumulating shares of Gizmo stock for himself and advising certain clients to do the same. Did Kester or Becker violate the Standards of Professional Conduct? Kester Becker A.Yes Yes B.Yes No C.No Yes A. Row A B. Row B C. Row C

C. Row C The Standard prohibits members from trading or encouraging others to trade on material, nonpublic information. The information about the potential acquisition is both material and nonpublic. However, Kester did not share the information with her sister with the intent to encourage her to trade, only to express concern over her employment situation. Nor was it reasonable to foresee that it would be shared with anyone else. Becker knew or should have known that the offer was nonpublic, making his actions a violation of the Standard.

Kevin Wang is a portfolio manager at A-Plus Advisors. He makes asset allocation decisions based on third-party economic reports and the investment policy statements of each client. A-Plus maintains client records by scanning documents into an electronic database and has a policy to purge records after five years. Wang is diligent in ensuring that client investment policy statements are scanned but relies on third-party vendors to archive economic reports. Did Wang violate the Standards of Professional Conduct with respect to: Client Records? Economic Reports? A.Yes Yes B.Yes No C.No Yes A. Row A B. Row B C. Row C

C. Row C The Standard requires that Wang maintain his own records in support of his investment decisions. By relying on the vendors to retain the economic reports, he has failed to meet his obligations under the Standard. Storing client records in electronic forms is acceptable under the Standard. Only in the absence of explicit company policies does the Standard recommend that records be retained for seven years.

Patricia Chan is a finance professor at a local university and a CFA charterholder. She had a conversation with two of her colleagues, Dr. Yi and Dr. Smith, about the placement of the CFA designation after their names. Each made the following statements: Chan: "Members are required to list the CFA designation before their PhD." Yi: "Members are required to list the CFA designation after their PhD." Smith: "Members may choose to list the CFA designation before or after their PhD." Which of the professors' statements is correct? A. Chan is correct. B. Yi is correct. C. Smith is correct.

C. Smith is correct. Standard VII(B) does not specify the order in which the CFA designation must appear among other credentials following a member's name. The professors may place "CFA" either before or after "PhD" as they choose.

An analyst, William Duff, at Reed Consultancy Inc.—a metallurgical research firm—plans to visit a mining site owned by Auro Minerals Inc. The mining site is inaccessible through commercial transportation, so Auro management offered William the use of the corporate jet for transportation. Which of the following statements is most accurate about William's decision? Statement I: William cannot accept the offer, as he will violate Standard I(B) related to independence and objectivity. Statement II: If William pays for the transportation, he will violate Standard I(B) related to independence and objectivity. Statement III: William can accept the offer, as this is the only means of transportation to the site; he will not violate Standard I(B) related to independence and objectivity. A. Statement I B. Statement II C. Statement III

C. Statement III William can accept the offer as this is the only means of transportation to the site. Also, he can accept if his firm is paying for the transportation; he will not violate Standard I(B) related to independence and objectivity.

The Code of Ethics requires members and candidates to act with integrity, competence, diligence, respect and in an ethical manner when dealing with: A. Clients and prospective clients only. B. The public and clients and prospective clients only. C. The public, clients and prospective clients, employers, employees, colleagues in the investment profession, and participants in global markets.

C. The public, clients and prospective clients, employers, employees, colleagues in the investment profession, and participants in global markets. The first component of the Code of Ethics is: "Act with integrity, competence, diligence, respect and in an ethical manner with the public, clients, prospects, employers, employees, colleagues in the investment profession and other participants in the global capital markets."

Jack Thomas, an investment advisor in the United States, has clients in an Asian country where the securities laws are less strict than U.S. laws. Assuming U.S. laws are stricter than the Code and Standards, Thomas should conduct his business according to: A. the laws in the Asian county B. the Code and Standards C. U.S Laws

C. U.S Laws Jack should conduct his business according to U.S. laws. According to Standard I(A) pertaining to knowledge of law, members and candidates should always adhere to the strictest rules that are applicable to the business activities.

Jack is an equity research analyst who covers biotech firms. One of the firms he follows offers free travel, lodging, and attendance at a corporate conference. Which of the following activities would Jack need to perform to justify accepting this trip? A. View the laboratories. B. Meet with some of their scientists. C. Visit with the CEO.

C. Visit with the CEO. Accepting travel and lodging from a firm must produce benefits to Jack's clients that exceed the savings he experienced from the free trip. Meeting with the firm's CEO is a rare opportunity and can provide Jack with valuable insights that can benefit his clientele.

Albert Wonghi, CFA, is a fund manager with Prospect Asset Management. At a lunchtime party, hosted by a brokerage firm to whom he directs 50% of his transactions, Wonghi has too much to drink and behaves embarrassingly before returning to his office. Other fund managers attend the party. Wonghi's personal behavior at the party is most likely to violate Standard I(D) of the Code and Standards because: A. Wonghi breaks the local laws regarding behavior in public. B. Wonghi should not drink any alcohol during business hours. C. Wonghi's behavior reflects poorly on him and the investment industry.

C. Wonghi's behavior reflects poorly on him and the investment industry. With reference to Standard I(D): Misconduct, Wonghi's excessive drinking will inhibit his ability to work in the afternoon and reflects badly on the profession. The best answer is the third choice.

Jim Soltis, a CFA candidate, is an investment banker working on an initial stock offering for ChemCo. After filing a prospectus with the governing regulatory agency, ChemCo's CFO informs him that the income statement in the filed report slightly overstated the last two quarters' earnings. Soltis consults with his firm's legal department. The general counsel advises that the error is minor and the result of a relatively obscure accounting rule that will likely go unnoticed. Furthermore, even if detected, it will only require a restatement of the last two quarters. Therefore, the attorney instructs Soltis to let it go, which he does. Did Soltis violate the Standards of Professional Conduct? A. No, because he is following legal advice of competent counsel. B. No, because he was unaware of the error at the time he filed the report. C. Yes, because seeking legal counsel does not remove his duty to correct the error.

C. Yes, because seeking legal counsel does not remove his duty to correct the error. While the Standards do advise seeking the advice of legal counsel, doing so does not remove the responsibility for ensuring that all communications are true and accurate. Soltis should file a revised prospectus and inform any prospective investors of the corrected report.

Karl Lender, CFA, is a money manager for high net worth individuals. In addition to portfolio management services, Lender also distributes an investment newsletter to all his clients. The newsletter is based on several proprietary research services that Lender purchases from brokerage firms. Lender summarizes the proprietary reports, adds his own commentary, and distributes the newsletter as solely his own work. Has Lender violated the Standards of Professional Conduct? A. No. B. Yes, by distributing third-party research to his clients. C. Yes, by presenting the newsletter as his own work.

C. Yes, by presenting the newsletter as his own work. Lender is effectively taking credit for the work of others. Summarizing third-party research does not necessarily violate the Standards, but the sources of those summaries must be cited and never presented as his own work.

Joanne Pang is part of a team that publishes research via a company blog. Access to the website is restricted to subscribed users who pay for the team's recommendations. Pang also maintains a well-followed personal blog apart from the team's website that mixes family news, reviews, and other opinions. Her personal blog is not password-protected and is broadly accessible by any search engine. Pang often provides additional commentary about the team's recommendations on her personal blog, especially when her opinion is dissenting. Do Pang's posts to her personal blog violate the Standards of Professional Conduct? A. No. B. Yes, she should remove her name if she disagrees with team recommendations. C. Yes, because she is misappropriating her firm's resources for personal benefit.

C. Yes, because she is misappropriating her firm's resources for personal benefit. Standard IV(A) was violated when Pang disclosed confidential information through her personal blog. Her firm's blog is subscriber-based, while her personal blog is open-access. Furthermore, she has used company research to prepare commentary on her personal blog. Finally, the firm's clients might not be aware of Pang's personal blog, which provides additional information that they might want to know, and her personal blog readers do not have access to the subscriber recommendation. They have no means of comparing the two in order to make an informed judgment as to which is supported.

John Fields is a portfolio manager in charge of several mutual funds. In one fund, he had accumulated a position in several thinly traded stocks that were not performing well. Fields found that by trading the stocks between the funds he could increase the closing price and volume. Fields hopes that the apparent increased liquidity will make it easier to exit the positions and minimize his losses. Did Fields violate the Standards of Professional Conduct with respect to market manipulation? A. No. B. Yes, because trading the same stock between funds is always a violation. C. Yes, because the transactions were intended to alter the price and volume data.

C. Yes, because the transactions were intended to alter the price and volume data. Market manipulation is defined as attempting to distort price or volume data. In this case, Fields executed trades between two funds that he controlled with the intent to impact the price and volume data for the stock.

Alex Ortiz manages a passive equity index fund designed to mimic the returns of the 30-stock Dow Jones Industrial Average. Ortiz is convinced that he can achieve better returns by simply excluding stocks in the index that he considers to be grossly overvalued. Without notifying clients or prospects, he excludes five stocks and beats the index the following year. Did Ortiz violate the Standards of Professional Conduct? A. No, because he acted in his clients' best interest in pursuing higher returns. B. No, because his decision actually beat the index the following year. C. Yes, by failing to notify clients and prospects of the change in approach.

C. Yes, by failing to notify clients and prospects of the change in approach. As an index fund manager, Ortiz has held his fund out as a passive investment in the index. Removing certain stocks from the index, effectively tilting the portfolio away from certain stocks, represents a change in mandate toward active management. Ortiz must inform his clients of this change.

Stephanie Boss is preparing a presentation of her firm's socially conscious equity composite (SCE) to prospective clients. After reviewing the performance records of each portfolio in the composite, she notes that two portfolios were terminated last year because of client redemptions following poor performance. Boss includes those portfolios in the SCE performance history. She also found that several stocks eligible to SCE's portfolios were found in portfolios contained in the firm's equity growth composite (EG). Since those portfolios had above average returns and contained some stocks that would be eligible for inclusion, Boss added them to the SCE composite performance record for her presentation. Did Boss violate the Standards of Professional Conduct? A. No. B. Yes, by including terminated portfolios in the SCE composite's record. C. Yes, by manipulating portfolios included in the SCE composite.

C. Yes, by manipulating portfolios included in the SCE composite. The Standard requires that performance presentation be accurate and complete. Adding portfolios to the SCE composite that were not part of the composite before the measurement period is a misrepresentation of its performance.

Lisa Thyme is vice president of research at Global Equity Insights. One of her staff analysts, Chad King, has been following Magic Tracks, a bicycle manufacturer involved in a major product liability lawsuit. King prepares a flash memo stating that a "confidential source" informed him that the plaintiff has irrefutable evidence that Magic's product was dangerously defective. With the trial scheduled to begin the next day, Thyme immediately approves the memo for distribution to clients without further inquiry. Did Thyme violate the Standards of Professional Conduct? A. No. B. Yes, by not waiting for the evidence to be presented at trial. C. Yes, by not evaluating the source of the information.

C. Yes, by not evaluating the source of the information. Without confirming the source of the information, Thyme is effectively authorizing a rumor to be spread that might or might not prove to be accurate. She must identify the source in order to ascertain credibility of the information and to determine whether the information qualifies as material and nonpublic, in which case it may not be disseminated.

Eric Dickens, CFA, is a salesman with Jeta Investments. Jeta provides asset allocation and attribution analysis using an internally developed proprietary model. Jeta has one equity analyst on staff that primarily reviews third-party research reports for certain inputs used in the allocation model. During a presentation to a group of portfolio managers, Dickens is asked about his firm's stock selection methodologies. Dickens refers to the firm's team of analysts researching fundamental factors to identify stocks with above-average return prospects. Did Dickens violate the Standards of Professional Conduct? A. No B. Yes, by using third-party research reports C. Yes, by overstating his firm's capabilities

C. Yes, by overstating his firm's capabilities By stating or implying that the firm has a team of researchers on staff performing fundamental analysis, Dickens is misrepresenting his firm's capabilities. While the lone analyst evaluating third-party research might be adequate to perform the required tasks, Dickens must not overstate the firm's capabilities or resources.

Peter Olson operates a stock market recommendation website called Independent-Researchers.com. Olson has contracts with several companies that trade on the pink sheets to provide research coverage for their stocks. He is compensated with a flat fee and stock options on the covered companies. Olson bases all his recommendations on projections provided by the companies' managements, none of which is verified. He lists no "sell" recommendations on his site. Most of his recommendations show a significant, if short-lived, increase in price following initiation of coverage. Has Olson violated the Standards of Professional Conduct with respect to market manipulation? A. No. B. Yes, by making recommendations over the Internet. C. Yes, by promoting stocks based on questionable information.

C. Yes, by promoting stocks based on questionable information. The Standard prohibits manipulating security prices. Using questionable research to temporarily pump up the price of stocks would qualify as a market manipulation.

Nancy Kraus is a Level III candidate. At the end of the morning session of the exam, the proctor announced that the exam is over and all writing should immediately cease. Kraus had only just begun the final question when her pen ran out of ink and she had to continue writing in pencil as quickly as she could. A nearby proctor reminded her that time has been called and she should stop writing but had not yet collected Kraus' answer booklet. Kraus continued writing until the booklet was collected. Did Kraus violate the Standards of Professional Conduct? A. No. B. Yes, by writing an essay in pencil. C. Yes, by writing past time was called.

C. Yes, by writing past time was called. The exam center rules require that candidate follow the instructions of the proctors and to cease writing in their exam booklets when time is called. By writing past time, Kraus took an unfair advantage over other candidates who followed the rules.

Cecil Hernandez is a money manager for Indigo Investors. After purchasing bonds for several accounts, he neglected to allocate the trades to the affected client accounts right away. Two days later, some of the bonds have increased in value, while others declined. Hernandez allocates the appreciating bonds to his two largest clients, and the declining bonds are spread across his smaller accounts. Did Hernandez violate the Standards of Professional Conduct? A. No. B. Yes, he should have allocated losing trades to the largest and winners to the smallest accounts. C. Yes, he should have allocated shares prior to executing the trades or done so systematically.

C. Yes, he should have allocated shares prior to executing the trades or done so systematically. The Standards do not specify how trades are to be allocated. However, members may not favor certain clients over others. Having neglected to allocate the bonds prior to their price change, Hernandez must now find a fair allocation method to distribute the bonds among all the relevant clients.

Pam Jenell is a research analyst specializing in the highly fragmented business services industry. She promised her supervisor that a comprehensive report would be completed in two weeks. Her firm uses a complex statistical model to forecast sales. Because her department is understaffed and the forecast model is labor-intensive, she models the three largest firms and forecasts the remaining firms' sales based on their market caps relative to the largest firms. Later, she models all of the firms and sends out revised recommendations. Did Jenell violate the Standards of Professional Conduct in preparing her report? A. No. B. Yes, she should have used the subject firms' management estimates. C. Yes, she should have only included those firms that she could model.

C. Yes, she should have only included those firms that she could model. The release of incomplete analysis would constitute a violation of the Standard, particularly if the report did not explain the preliminary nature of the results.

Sandy Lane is an investment advisor specializing in individual retirement accounts. Mark Pico is the general partner at a regional brokerage firm. In exchange for client referrals, Lane agrees to place all her trades through Pico's firm. When a prospective client calls Lane based on Pico's recommendation, Lane must disclose the terms of the referral arrangement: A. upon request. B. before executing any trades. C. before signing the client to a service agreement.

C. before signing the client to a service agreement. The Standard does not prohibit referral fees or arrangements but requires that they be disclosed before entering into a service agreement so that the client can make an informed judgment as to the motivations of the providers.

Douglas Chamberlain, CFA, manages portfolios for several high net worth individuals. In the most recent semiannual letter updating clients on his investment process, Chamberlain reveals that he has retained Lucy McGill, as an external advisor, to assist him in choosing international equities for their portfolios. The letter includes a personal note from McGill, who mentions that she has developed a strong professional relationship with Chamberlain over the 15 years since they graduated as part of the same business school class and that she has enjoyed her first three months in her new advisory role. Neither Chamberlain or McGill disclosed that his cousin is engaged to marry her niece. Chamberlain has most likely violated the Standards with respect to: A. disclosure of conflicts. B. diligence and reasonable basis. C. communication with clients and prospective clients.

C. communication with clients and prospective clients. Standard V(B) - Communication with Clients and Prospective Clients requires members and candidates to disclose "the basic format and general principles of the investment processes they use to analyze investments, select securities, and construct portfolios." Members and candidates are further required by this Standard to "promptly disclose any changes that might materially affect those processes." In this example, Chamberlain has violated this Standard by waiting to inform his clients that he has retained an external advisor until three months after this important change to his investment process has been implemented. There is no suggestion that Chamberlain has violated Standard V(A) - Diligence and Reasonable Basis by choosing to retain McGill. There is no evidence to suggest that Chamberlain did not use a thorough process in selecting an external advisor. His long-standing professional relationship with McGill and the relationship between two members of their non-immediate families are not conflicts that are required to be disclosed in accordance with Standard VI(A) - Disclosure of Conflicts.

When communicating recommendations to clients, the Investment Analysis, Recommendations, and Actions Standard requires members to: A. disclose the detailed specifications of any financial models used in the analysis. B. retain and make all research documentation available to clients upon request. C. disclose any material changes to the member's investment selection methodology.

C. disclose any material changes to the member's investment selection methodology. Investors choose managers based on a variety of characteristics. One common factor is the investment style or methodology employed by the manager. If the manager changes that methodology, the client should be informed so that he can make a reasonable decision as to whether the manager still meets his needs. Conflicts of interest are a common dilemma for investment professionals. The Standards of Professional Conduct provide guidance on handling them. First, members should anticipate the sources of conflicts and avoid them. Second, if it is unavoidable, you should disclose the conflict to the affected clients in enough detail that they might make an informed decision as to whether it might prove to disadvantage them. The Standards do not categorically prohibit gifting, bonuses, or referral fees. They do, however, require formal disclosures to employers and clients.

Shelly Swain is a money manager dealing with private wealth clients. Her client, Thomas Wells, is averse to investing in international securities, which he considers too risky. Swain is aware of the diversification benefits of adding international equities to domestic-only portfolios. Wells is scheduled to meet with Swain to review his investment policy statement (IPS). Swain's best course of action is to: A. add international equities to the portfolio prior to the meeting. B. insist that Wells remove the constraint on her asset management. C. educate Wells about the diversification benefits and alter the IPS.

C. educate Wells about the diversification benefits and alter the IPS. While managers should make investment decisions from a portfolio perspective, they must also follow the directives and mandates imposed by the client. However, part of the manager's duty is to educate the client about diversification and the benefits of adding low correlation assets to his portfolio. Swain may only add the international exposure after convincing Wells to adjust the IPS.

According to the Professionalism Standard, members must not, under any circumstances: A. accept, solicit, or offer any gifts in the course of their professional duties. B. apply the Standards in place of governing civil rules, regulations, or laws. C. engage in any act of deceit, dishonesty, or that damages their professional reputation.

C. engage in any act of deceit, dishonesty, or that damages their professional reputation. The Professionalism Standard covers: A. Knowledge of the law, B. Independence and objectivity, C. Misrepresentation, and D. Misconduct. By engaging in any act of deceit, fraud, or illicit activity, a covered person is in violation of Standard I Professionalism—D. Misconduct.

Royal Insight is a money management firm handling institutional portfolios. Royal recently landed a contract with Mega Bank to provide investment advisory and portfolio management services. Ken Paine, a research analyst at Royal, currently has a hold recommendation on Mega's stock. Further research and improving economic conditions have caused Paine to consider upgrading his recommendation to buy. According to the Standards of Professional Conduct, Paine must: A. maintain the hold rating for the duration of the contract. B. provide only factual information about Mega Bank. C. issue a buy rating with disclosure of the client relationship.

C. issue a buy rating with disclosure of the client relationship. The Standard recognizes that conflicts are sometimes unavoidable and, therefore, requires that they be disclosed.

Nicole Plott is a hedge fund manager specializing in biotechnology companies. She subscribes to a service that describes itself as an expert network. The service provides information about what biotech firms are working on, what pharmaceutical companies are looking for, and technical developments in the industry. Plott has taken a large position in Beta Miracle Cures (BMC) whose latest cancer drug is in final trials with the federal drug agency. Plott calls her contact at the expert network, Charles Tucker, to get his opinion and is told, "... the federal agency did not approve the drug, but BMC is appealing for more time. Get out now before they announce it. The new drug is dead." With respect to the Standards of Professional Conduct, Plott's best course of action is to: A. sell all her shares in BMC as advised by Tucker. B. hold all her shares until the federal agency announces its findings. C. make further inquiry into the source of the information provided by Tucker.

C. make further inquiry into the source of the information provided by Tucker. Plott must be careful in utilizing the services of expert networks. If the information Tucker provided is an opinion based on expert conjecture, it does not likely violate Standard II(A). If, however, the source is someone directly involved in the drug trials, the regulatory agency, or management of the company, trading on the information is likely a violation.

Peter Candor is the head of the trading desk at Better Brokerage. During a weekly meeting with the firm's research analysts he learns of several strong buy recommendations that will be issued to the sales team and clients on the following day. According to the Standards of Professional Conduct, Candor should accumulate shares for the firm: A. immediately after the meeting. B. concurrently with the release of the reports. C. only after clients have had a chance to act on the reports.

C. only after clients have had a chance to act on the reports. The Standard requires that members delay acting on updated recommendations until the information is disseminated to clients. Realizing that clients need time to read and formulate their actions, it also requires that clients be given a reasonable amount of time to act on the information.

Rogelio Pocasangre is a broker and has been assigned to sell a bond issue for Americon Corp. The issue was underwritten by Tex Investments, which assumed all legal liability for the issue. After speaking with one of the investment bankers at Tex, Pocasangre is told that Americon utilizes special purpose entities to move much of its debt off its balance sheet. The prospectus makes no mention of its use of this off-sheet financing technique. Pocasangre meets with his supervisor to express his discomfort with promoting the debt issue without disclosing the practice, which he suspects may violate securities laws. The supervisor tries to ease his concerns by pointing out that any liability rests with Tex and not Pocasangre. According to the Standards of Professional Conduct, Pocasangre's most immediate course of action is to: A. continue to sell the issue after confirming liability rests with Tex. B. report the potential breach of law to the governing regulatory agency. C. refuse to participate and ask to be reassigned to another issue.

C. refuse to participate and ask to be reassigned to another issue. Pocasangre has an ethical duty not to misrepresent and to fully disclose relevant information to clients and prospects. If he feels that the firm's actions are contrary to the spirit of the Standards, his first course of action is to disassociate from the activity by requesting reassignment. The reaction of his supervisor might require further action on Pocasangre's part up to and including resigning from the firm.

Kevin Ruhl is a technology-savvy broker who has embraced social media as a means of communicating with clients and prospects. What started out as updates on personnel changes, special events, and articles of interest has drifted toward solicitations for business and promotion of specific investments. The designated regulatory agency for brokerage firms issued a new rule effective before Ruhl shifted his usage patterns that strictly limit sales and marketing to investors via social media. The new rules were not well-publicized in the major media and financial press. Ruhl's recent activities: A. do not violate the Standards because the rule change has not been well-publicized. B. violate the Standards because he is expected to be an expert in compliance. C. violate the Standards because he is expected to inquire about those regulations prior to use.

C. violate the Standards because he is expected to inquire about those regulations prior to use. If Ruhl is going to use new technology in his business, there is an expectation that he will seek out advice as to what the rules governing that technology might be and to stay abreast of changes to those rules as the technology evolves. When technology is new, the rules governing it can change rapidly. Standard I(A) implies that it is the member's responsibility to be particularly sensitive to staying informed about them.

Before entering an arrangement involving additional compensation from a party other than your employer, the Duties to Employers Standard requires written consent be received from: Your Employer The Other Party A.Yes No B.No Yes C.Yes Yes

C.Yes Yes Standard IV Duties to Employers requires that additional compensation arrangements be disclosed to your employer and that written consent is received from both parties.