CFA 2-3: Ethics
By removing the frozen fixed assets from the performance presentation, the adviser would be violating Standard III(D), Performance Presentation, which requires CFA Institute members and CFA candidates to make reasonable efforts to ensure that it is fair, accurate, and complete. These assets still are part of the clients' portfolio and thus should be included in the performance presentations despite their lower-than-market returns dragging down performance.
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Referral Fees are to notify clients at least quarterly, not semiannually
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You must keep information about current, former, and prospective clients confidential unless:
1. The information concerns illegal activity 2. Disclosure is required by law (if law says keep info guarded even with illegal shiit, then you must do that too) 3. The client or prospective client permits disclosure
How long do you have to keep records
7 years
After undertaking investigations based on an anonymous report, McGuinn confirms that several Forster fund managers were witnessed being wined and dined over the past few weeks by large brokerage firms trying to get Forster's business. The same employees have not notified him about these dinners, a violation of Forster's internal policies. McGuinn notifies the employees in writing that they have been violating the company policy. In the letter of notification, he requires the employees to abide by the policy in the future. With regard to the fund managers under investigation, the most appropriate additional action McGuinn should take is to: monitor their future actions. report the misconduct up the chain of command. require a statement stating the behavior will cease
A is correct. As a supervisor, under Standard IV(C)-Responsibilities of Supervisors, McGuinn has a responsibility after he notices and investigates the violation to monitor the employees to ensure that the errant behavior has changed and conforms to the Code and Standards. Reporting the violation up the chain of command along with requiring a statement from the employees stating the behavior will not be repeated is not enough.
Recommendation 1: Firms should require prior approval for employees participating in initial public offerings. Recommendation 2: Firms should implement effective supervisory and review procedures to ensure compliance with personal investment policies." Do the recommendations Watson outlines in the second scenario most likely apply to Standard I(B): Independence and Objectivity? Yes. No, with regard to Recommendation 1. No, with regard to Recommendation 2.
A is correct. Both Recommendation 1 ("Firms should require prior approval for employees participating in initial public offerings.") and Recommendation 2 ("Firms should implement effective supervisory and review procedures to ensure compliance with personal investment policies.") apply to Standard I(B): Independence and Objectivity. Standard I(B) states Members and Candidates must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities. Members and Candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another's independence and objectivity. The recommended procedures for compliance suggest investments be restricted and require prior approval for employee participation in IPOs. The recommended procedures also suggest review procedures be implemented to ensure compliance with policies relating to their personal investment activities.
Fitzgerald's best friend received the email about the CEO's nervousness. He had recently gotten married and Fitzgerald was the best man in the wedding. When helping to plan for the occasion, Fitzgerald wanted to do something special for his friend. He knew the CEO of HorizonGale had a personal home in Paris. At the end of a lunch meeting with the CEO to discuss HorizonGale's outlook after the asset sale, Fitzgerald had inquired if he would be willing to let his friend use the home for his honeymoon. He explained how important his friend was to him and that they had not gone on a honeymoon because they had to pay for all of their wedding expenses. Which CFA Institute Standards of Professional Conduct did Fitzgerald most likely violate during his lunch with the CEO following the asset sale? Standard I: Professionalism and Standard III: Duties to Clients Standard I: Professionalism and Standard II: Integrity of Capital Markets Standard II: Integrity of Capital Markets and Standard III: Duties to Clients
A is correct. Fitzgerald has most likely violated Standard I: Professionalism and Standard III: Duties to Clients by asking whether his best friend could use the HorizonGale CEO's personal home in Paris for his honeymoon. More specifically, he has most likely violated Standard I(B): Independence and Objectivity, which requires that members and candidates not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another's independence and objectivity. He has also most likely violated Standard III: Duties to Clients—more specifically Standard III(A): Loyalty, Prudence, and Care, which requires that members and candidates act for the benefit of their clients' interests before their employer's or their own interest. Soliciting the use of the CEO's home even though it is for his friend could compromise Fitzgerald's independence and objectivity as well as his loyalty to his clients.
The DO's report highlighted that Fitzgerald emailed the chief financial officer (CFO) of the two companies a copy of his earnings model applicable to that company. Fitzgerald noted in his response he did this to elicit comments from the CFO prior to publishing his earnings estimates and distributing his recommendations to investors. Did Fitzgerald most likely violate the CFA Institute Standards of Professional Conduct regarding his emails to the chief financial officers of the two companies under his coverage? No Yes, regarding Standard III(B): Fair Dealing Yes, regarding Standard V(A): Diligence and Reasonable Basis
A is correct. Fitzgerald most likely did not violate any of the CFA Institute Standards of Professional Conduct by emailing his earnings estimates to the CFOs of the companies under his coverage. He simply sent the CFOs his earnings model for their review and asked for comments. There is no evidence his earnings estimates do not reflect his investment recommendation or opinion about the earnings potential of the companies under his coverage.
Three years ago, the firm hired Daniel Singh, PhD, CFA, a well-known finance professor. Singh created the Artificial Trading Model (ATM), a comprehensive model that captures and processes a substantial amount of publicly available information (company financial data, news, and industry information) and then makes investment decisions largely without human interaction. ATM has three components: an Alpha Model, a Risk Model, and an Optimizer. The Alpha Model evaluates public companies based on their earnings and valuation. The Risk Model identifies stock-specific risk and common factor risks (industry specific, country specific, and stock fundamental risks). The Optimizer takes the output from the Alpha and Risk Models, balances them against one other, and recommends an optimal client portfolio based on the client's chosen benchmark. Singh uses the ATM model exclusively for QH's institutional clients and does not mention it when talking with his high-net-worth individual clients. Singh and his team of programmers update the Alpha and Risk components of the ATM on a quarterly basis. On an annual basis, consistent with QH's guidelines for all computer-based models, Singh reviews the Optimizer component and conducts extensive scenario tests with the overall model Does Singh violate the CFA Institute Code and Standards by using the ATM model exclusively for QH's institutional clients? No Yes, because the model may be suitable for some non-institutional clients Yes, because he must at least mention the model when talking to high-net worth individuals
A is correct. It is not a violation of Standard III(B): Duties to Clients-Fair Dealing to use different investment models when working with different types of clients. The ATM model may be suitable only for institutional clients because of the size of their portfolios, among other factors. Standard III(B) requires members and candidates to treat all clients fairly when disseminating investment recommendations; making material changes to prior investment recommendations; or when taking investment action with regard to general purchases, new issues, or secondary offerings. Each client has unique needs, investment criteria, and investment objectives, so not all investment opportunities are suitable for all clients.
Jacobs has a fee-sharing arrangement with his former colleagues at Brightman Partners (BP) when they refer clients to JRA. The annual investment fee stated in JRA's marketing brochure is higher than the fee most of its clients pay because Jacobs offers a discount on the investment fee to clients who are referred by BP lawyers. This discount encourages the BP lawyers to market JRA's services to their clients. In return, JRA shares a portion of the client's' annual investment advisory fee with the referring lawyer. The lawyers at BP disclose this fee-sharing arrangement with the clients that they refer to JRA. JRA discloses all of this information in the JRA investment management agreement that individuals sign at the time they become clients. Does Jacobs violate the CFA Institute Code and Standards in his disclosure of referral arrangements to his clients? Yes No, because the lawyers disclose to their clients the discount that JRA offers No, because the discount and the fee-sharing arrangement is disclosed to individuals at the time they sign the investment management agreement
A is correct. Jacobs is in violation of Standard VI (C): Conflicts of Interest-Referral Fees, which states, "Members and candidates must disclose to their employers, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services.... 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 from the recommendation of any services provided by the member or candidate." In this case, the disclosure does not occur until the time the individual signs the investment management agreement, which is too late.
recently, JRA hired Mufid Othan, an investment adviser and CFA charterholder who previously worked at JRA's largest competitor, Sack International. To attract Othan and his large "book of clients," JRA offered him $500 for each client he "brought over" from Sack. While at Sack, Othan was allowed to connect with all of his clients through his personal social media platforms. This not only enabled him to build an electronic database containing the names, addresses, phone numbers, and email addresses of all his clients but also helped him to provide superior client service by "following" his clients' personal and professional lives. When Othan tendered his resignation from Sack, he was immediately escorted out of the building. Othan spent the following weekend contacting all of his clients via social media to tell them about his resignation and to encourage them to join him at JRA. Did Othan violate the CFA Institute Code and Standards by contacting his Sack International clients via social media after leaving Sack? No Yes, because he is using client confidential information Yes, because the client information he is using belongs to Sack
A is correct. Othan is not in violation of the CFA Institute Code and Standards. According to Standard IV(A): Duties to Employers-Loyalty, "Members and candidates should understand and abide by all applicable firm policies and regulations as to the acceptable use of social media platforms to interact with clients and prospective clients. This is especially important when a member or candidate is planning to leave an employer." In this case, Sack allowed Othan to use his personal social media platforms to connect with clients. In addition, he did not contact his former clients via social media to inform them about his departure until after he resigned from Sack
Matheson completed the email and sent it as well as the evidence she had gathered to the appropriate email address at the CFA Institute. She then met with AM&C's CEO to update him about the complaint and discuss what she should do next. He made the following recommendations: Recommendation 1: Consult with the firm's securities attorney. Recommendation 2: Wait for the PCP to provide her with additional information. Recommendation 3: Inform the local CFA Society about the complaint. Which of the CEO's recommendations regarding what Matheson should do next is her best course of action to avoid violating any CFA Standards of Professional Conduct? Recommendation 1 Recommendation 2 Recommendation 3
A is correct. Recommendation 1 regarding what Matheson should do next, "Consult with the firm's securities attorney," would be Matheson's best course of action. Standard I(A), Knowledge of the Law, requires that CFA Institute members and CFA candidates must not knowingly participate or assist in and must dissociate from any violation of such laws, rules, or regulations. By terminating LaRue, the firm has moved to dissociate from him. T given LaRue's violations, Matheson should consult with their legal and compliance advisers for guidance. Once the complaint is filed, it becomes an issue between LaRue and the CFA Institute. The PCP is unlikely to contact Matheson and would not provide her with any further information. She also should not inform her local CFA Society because the issue is undecided and no sanction has been issued, and even if one is issued, it may not be public. Notifying the local society could be considered a breach of confidentiality, and Matheson could be at risk of violating CFA Standards of Professional Conduct. Also, Matheson should not simply wait to see if anything comes of her complaint, especially if reporting the violation to her governmental or regulatory organization is mandatory. Matheson's best course of action is to consult with their legal and compliance advisers for guidance.
Singh decides to leave QH. He interviews with QH's largest competitor, Algos-R-Us (ARU). During his interview with ARU's hiring committee, Singh shows them a proprietary model that he has been developing for the past two years in his spare time (nights and weekends). His new model, which he calls StockStar, is based on years of academic research at his university, and Singh considers it to be his life's work. In addition to back-testing the model, Singh has used StockStar to manage his personal portfolio and the portfolios of his family in order to generate actual performance results. Impressed by Singh and his model, the hiring committee not only offers him a job but also offers to pay him a special licensing fee for the use of his StockStar model. Singh accepts the offer and returns to QH to tender his resignation Did Singh violate the CFA Institute Code and Standards with respect to his duties to his employer, QuantHouse, in developing his StockStar model? No Yes, because the model was developed while he was working at QH Yes, because he invests his personal and family portfolios using the model
A is correct. Singh is not in violation of the CFA Institute Code and Standards, Standard IV(A): Duties to Employers-Loyalty. In this case, Singh developed the StockStar model in his spare time (on nights and weekends) and used the model to manage only his personal and family portfolios. In addition, he has not been compensated for the model.
Three years ago, the firm hired Daniel Singh, PhD, CFA, a well-known finance professor. Singh created the Artificial Trading Model (ATM), a comprehensive model that captures and processes a substantial amount of publicly available information (company financial data, news, and industry information) and then makes investment decisions largely without human interaction. ATM has three components: an Alpha Model, a Risk Model, and an Optimizer. The Alpha Model evaluates public companies based on their earnings and valuation. The Risk Model identifies stock-specific risk and common factor risks (industry specific, country specific, and stock fundamental risks). The Optimizer takes the output from the Alpha and Risk Models, balances them against one other, and recommends an optimal client portfolio based on the client's chosen benchmark. Singh uses the ATM model exclusively for QH's institutional clients and does not mention it when talking with his high-net-worth individual clients. Singh and his team of programmers update the Alpha and Risk components of the ATM on a quarterly basis. On an annual basis, consistent with QH's guidelines for all computer-based models, Singh reviews the Optimizer component and conducts extensive scenario tests with the overall model Prior to the performance concerns voiced by QH's institutional clients, did Singh violate the CFA Institute Code and Standards in the updating of the ATM model components? Yes No, because he updates the model's Alpha and Risk components on a quarterly basis No, because he followed the firm's guidelines and annually reviews the Optimizer and conducts scenario testing on the overall model
A is correct. Singh violated Standard V(A): Investment Analysis, Recommendations, and Actions-Diligence and Reasonable Basis. Members and candidates must understand the statistical significance of the model results they recommend and must be able to explain these results to clients. Singh did not take adequate care to ensure a thorough review of the model was taking place with appropriate frequency. Although the Alpha and Risk components are updated quarterly, he reviews the Optimizer, which links the two prior components, and the overall model itself on only an annual basis. Singh should have tested each of the model's components, and their combined interactions, with the same quarterly frequency.
That same day, Colleen Collins, a research analyst, approaches McGuinn, concerned that she may be in possession of insider information. Collins relates that she was at a party the night before and overheard a conversation between two CEOs of competing, publicly listed manufacturing companies. The CEOs discussed, but did not express their opinions on, the validity of a recent article published in an online industry newsletter, which was speculating on the benefits of a merger between their two companies. The newsletter is available by subscription only. One of these companies is on Forster's recommended buy list. Did Collins most likely receive insider information as defined by the CFA Institute Code and Standards? No, because the information is considered non-material. Yes. No, because the information is considered public.
A is correct. When determining whether information is considered "insider," the source of the information must be assessed as required by Standard II(A)-Material Nonpublic Information. Having an industry or trade newsletter speculate on the benefits of a merger between two companies does not necessarily mean the two companies are actually merging. The two CEOs are overheard discussing the newsletter but never provide their perspectives or opinions on the article, so the information is only related to the newsletter. Thus, the information is not considered material. B is incorrect because an industry or trade newsletter that speculates on the benefits of a merger between two companies does not necessarily mean the two companies are actually planning on merging C is incorrect because the newsletter is only available via subscription and is selectively disclosed, so the information contained in it could not be considered public.
A research analyst makes a presentation to a small group of investors. Prior to the start of the meeting, the analyst chatted with several individuals outside the meeting room. The analyst commented that she had just gotten off the phone with the CFO of a company she follows where they talked about a recently announced merger by a competitor. The analyst starts the presentation and discusses her research process and her published investment recommendations on the companies under her coverage. She mentions her call with the CFO as well as the comments she made during an interview on a major television network relating to the merger. In the first scenario Watson discusses, did the research analyst most likely violate any CFA Institute Standards of Professional Conduct? No. Yes, with regard to the presentation. Yes, with regard to the discussion prior to the presentation.
A is correct. While a merger would be considered material information, this merger had already been announced so the information is public. Additionally, no details were given about the merger and no company names were disclosed, so it is unclear which companies she is discussing. There is no evidence she violated Standard III(B): Fair Dealing or Standard V(B): Communication with Clients and Prospective Clients in her discussion of her research process and published investment recommendations or in the comments she made about the merger during an interview on a major television network. There is no evidence to indicate she treated the clients in the meeting differently than any other clients. She simply talked about the research process and her research recommendations and opinions that had already been published.
Procedure 1: When a research report, ours or theirs, cites specific quotations as attributable to "leading analysts" and "leading experts," I require the analyst who wrote the report to name the specific references. Procedure 2: When a research report contains statistical estimates of forecasts prepared by others (such as economists) and identifies the source, I require the analyst who wrote the report to remove any qualifying statements or caveats that may have been used. Procedure 3: When a research report contains charts and graphs prepared by others, I require the analyst who wrote the report to cite their sources." Which of Bashar's procedures regarding the use of third-party research mostly likely violates the CFA Institute Code and Standards? Procedure 1 Procedure 2 Procedure 3
B is correct. Bashar violated Standard I(C): Misrepresentation by asking the analyst who wrote the report to remove qualifying statements or caveats from reports that include the presentation of statistical estimates of forecasts prepared by others. According to the guidance for Standard I(C), when presenting statistical estimates of forecasts prepared by others, the source should be identified along with the qualifying statements or caveats that may have been included.
One manager, Enrique Bustamante, CFA, was worried about the suitability of HorizonGale for the firm's clients and asked Fitzgerald about the company's risk profile. Fitzgerald commented, "Other managers have told me HorizonGale is appropriate for many of their client portfolios." Given Fitzgerald's comments during the meeting, Bustamante returned to his office and placed an order to buy HorizonGale for all the firm's clients. During or after the meeting with the investment manager regarding HorizonGale, who most likely violated CFA Institute Standard III(C): Suitability? Fitzgerald Bustamante Fitzgerald and Bustamante
B is correct. Bustamante most likely violated Standard III(C): Suitability, which requires that members and candidates in an advisory relationship with a client must determine that an investment is suitable to the client's financial situation and consistent with the client's written objectives, mandates, and constraints before making an investment recommendation or taking investment action. It appears Bustamante entered the buy order for all of the firm's accounts given Fitzgerald's comment that HorizonGale was appropriate for other asset managers' client portfolios. The firm advises a wide variety of accounts with a wide range of investment horizons, and it is unlikely the purchase of HorizonGale is appropriate for all accounts. A and C are incorrect. Fitzgerald has not violated Standard III(C) Suitability because he is neither in an advisory relationship with the managers' clients nor in a position to determine suitability. His statement referring to other asset managers does not address the suitability of HorizonGale for Bustamante's clients. It is ultimately the responsibility of Bustamante, who is in an advisory relationship with his clients, to determine whether an investment is suitable for their investment portfolios.
Carlyle initiates coverage of Paladin with a "Strong Buy" recommendation for accounts with a high risk tolerance over the next six months. In the report, she identifies the main factors she utilized in determining her recommendation. She does not mention the previous relationships Woodstock had with Paladin as they no longer exist. The report was approved by her supervisor before being disseminated to all clients with a high risk profile including Marietta Investments (Marietta), the asset management division of Woodstock Brothers. Scott Robinson, CFA, is a portfolio manager for Marietta. He started at Marietta as a junior analyst, working his way up to his current position as a portfolio manager. When he first joined the portfolio management group, he worked with the high growth equity team. Robinson now specializes in managing small cap value stocks for US pension funds and a few high-net-worth individuals. Robinson knew Carlyle from his previous days in the research department. Based only on Carlyle's recommendation, Robinson reviews the accounts under his management and purchases Paladin stock where suitable. By purchasing Paladin stock for his client accounts, did Robinson most likely comply with the CFA Institute Standards of Professional Conduct? No, because he is familiar with Woodstock's research methodology. No, because he based his purchase on Carlyle's analysis. Yes.
B is correct. Robinson relied solely on Carlyle's "Strong Buy" recommendation to make the investment decision to purchase Paladin's stock and thus did not comply with Standard V(A)-Diligence and Reasonable Basis. Even though he is familiar with Carlyle and Woodstock's investment methodology, Standard V(A) requires that he make a reasonable and diligent effort to determine whether her research is sound, her assumptions are reasonable, the analysis is timely, and her recommendation is objective
During an interview with a potential employer, Cadler describes a time when quick thinking was rewarded with big returns for her clients: "We did our own extensive research and also received broker-sponsored company research. One time, we had just completed a research report on a large-cap company offering a competing product to one of the small-cap companies in which we had heavily invested. We determined it was time to sell the small-cap company, as it would likely lose considerable market share on its most popular product. In order to execute as quickly as we could before the market made the same determination, we sold 100% of the holdings in the small-cap company and bought the large-cap company for all of our discretionary clients. To expedite the small-cap trades, we utilized a few stockbrokers not yet on our approved broker list because our existing brokers told us they were unable to complete all of the trades requested in a timely manner. We found that it is critical to act fast when trading in small-cap shares. As a result, we were able to obtain incredible returns for most of our clients." Cadler's quick-thinking action most likely violated Standard V(A): Diligence and Reasonable Basis because: outside parties influenced their investment action. of the timing and execution of the small-cap share trades. of an inappropriate swap of small-cap to large-cap shares.
B is correct. Selling the small-cap shares through non-approved brokers shows a lack of diligence in that the brokers had not gone through the firm's due diligence process to determine the overall appropriateness of utilizing the brokers' services. In addition, Voeltz's clients could be subject to further risk if the unapproved brokers were not able to offer best execution in a timely manner for the small-cap share trades. Standard V(A) requires Members and Candidates to exercise diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions as well as have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action. Cadler's comments indicate the Voeltz team had a reasonable basis for which to swap out of the small-cap holding into the large-cap shares. There is also no evidence Voeltz abandoned their extensive research process nor solely relied on outside parties when reaching their investment decision, both reflecting their independence.
The Standard least likely to provide guidance for Telline when working with the clients' investment policy statements would be the Standard relating to: suitability. fair dealing. loyalty, prudence, and care
B is correct. Telline is not likely to receive appropriate guidance on developing or revising investment policy statements from the Standard relating to Fair Dealing. Standard III(B) provides members with guidance on treating clients fairly when making investment recommendations, providing investment analysis, or taking investment action. Telline could obtain guidance from the Standards relating to Loyalty, Prudence, and Care and Suitability. Both Standard III(A) and (C) provide guidance for members in determining client objectives and the suitability of investments.
Forster's finance director, who also serves as the firm's compliance officer, has given notice that he will retire in one month's time. Forster's managing director asks Terry McGuinn, CFA, if he would be interested in being the compliance officer after the finance director retires. McGuinn, an independent compliance consultant whose clients mostly include pension funds, agrees to meet the managing director to discuss the position. At the meeting, McGuinn is told, "Forster adopted the CFA Institute Code and Standards 10 years ago. The outgoing finance director assured us at the time that we adopted the Code and Standards that all of Forster's policies and procedures met the requirements most of the recommendations as well. As a result, we mention compliance with the Code and Standards in all of our marketing material. We encourage you to implement new changes, but the implementation will need to be coordinated through the human resources department." After agreeing on written specific duties and responsibilities for the role, McGuinn accepts the offer to act as Forster's compliance officer on a part-time consultancy basis. Is McGuinn's proposed compliance officer structure most likely consistent with the CFA Institute Code and Standards? No, with regard to authority and responsibility. Yes. No, with regard to policies and procedures.
C is correct. Forster's adoption of the CFA Code and Standards does not necessarily imply that they currently have in place proper policies and procedures to ensure compliance with the Code and Standards and local legal and regulatory requirements. According to Standard IV(C)-Responsibilities of Supervisors, if a compliance system is non-existent or if an existing compliance system is inadequate, a member should not accept supervisory responsibility until the firm adopts reasonable procedures to allow adequate exercise of supervisory responsibilities. McGuinn should thus undertake a review prior to accepting the position, ascertaining that proper policies and procedures are in place. McGuinn's authority and responsibility appear to have been clearly defined through his written terms of reference, and he was given authority to implement needed changes. McGuinn would be required, however, to supervise and coordinate the implementation through the human resources department.
Mercer informs Ong that she is unfortunately not able to meet him for dinner because of a previous engagement. She subsequently says to Ong, "I'm wondering how you would respond to a situation whereby a regulator chooses not to implement extensive policies and regulations regarding the integrity of capital markets I recommended. They say my suggested policies and regulations related to market manipulation, material nonpublic information, and protecting client interests are too complicated, and they do not have the judicial competency to back them up. Consequently, they have requested I recommend just one primary rule."Thereafter, Mercer seeks out Daniel Ngyue, a CFA candidate, to ask for his version of what happened with his investors. Ngyue responds, "What actually happened was I got sick in a restaurant after having an adverse reaction to some medication. People uploaded photos to social media and stated I was falling over drunk. Subsequently, I wrote a letter to the investors explaining the situation and assuring them I had found another highly qualified fund manager after several weeks to take over until such time I had fully recovered. When I could, I looked at the fund when I was in the hospital for a week, but the fund needs close supervision, so that's why I wanted to find another manager. One investor commented, 'Key-person risk was not identified in the fund's prospectus.' Within one week we sent out a revision to the prospectus identifying key-person risk." During the conversation between Ngyue and Mercer, Ngyue revealed he had most likely violated which CFA Institute Standards of Professional Conduct? Standard I: Professionalism Standard V: Investment Analysis, Recommendations, and Actions Both Standard I: Professionalism and Standard V: Investment Analysis, Recommendations, and Actions
C is correct. It is apparent Ngyue revealed he had violated both Standard I: Professionalism and Standard V: Investment Analysis, Recommendations, and Actions. Specifically, he likely violated Standard I(C): Misrepresentation by making an omission when key-person risk was absent from the fund prospectus. Standard I(C): Misrepresentation requires members and candidates to not knowingly make any misrepresentations relating to investment analysis, recommendations, or actions or other professional activities. Ngyue also violated Standard V(B): Communication with Clients and Prospective Clients in that key-person risk was not initially identified as a significant risk in the prospectus sent to investors. Standard V(B): Communication with Clients and Prospective Clients requires members and candidates to disclose to clients and prospective clients significant limitations and risks associated with the investment process. It appears Ngyue was the only manager, such that another manager needed to be found to replace him while he was recovering from his illness. This type of key-person risk should have been disclosed in the prospectus.
Several days after their meeting, Tao brings to Johnson's attention the details of a phone call he received. He explained that a very upset client called to lodge a complaint. The client had received a promotional letter in the mail from a company called SedgeFin offering a variety of financial services. Tao explained to the client the firm was unaware of the letter and that SedgeFin was a new subsidiary of Sedgwick Investment Management's parent company. After some checking, Tao learned the letter targeted Sedgwick's clients, both domestic and international. Tao reassured the client that his only contract was with Sedgwick and absolutely no investment information had been provided to SedgeFin. Did a violation of the CFA Institute Standards of Professional Conduct most likely occur as a result of the SedgeFin promotional letter? No Yes, with regard to Standard VI: Conflicts of Interest Yes, with regard to Standard IV: Duties to Employers
C is correct. Standard IV: Duties to Employers was violated; specifically, a violation of Standard IV(C): Responsibilities of Supervisors occurred as a result of the SedgeFin promotional letter. Standard IV(C) states, "Members and Candidates must make reasonable efforts to ensure anyone subject to their supervision or authority complies with applicable laws, rules, regulations, and the Code and Standards." Confidential client information, which includes a client's mailing address, was released to a sister company, which is a violation of CFA Standard III(E): Preservation of Confidentiality. Someone in a supervisory position should have reviewed the information before it ever was forwarded to SedgeFin to prevent the release of confidential client information. As a result, both Standard III(E) and Standard IV(C) have been violated.
Which is the volunteer commmittee: Professional Conduct Program (PCP) Or Disciplinary Review Committee (DRC)
DRC
T/F you can RECEIVE nonpublic info you just can't act on it
true
Test potential: Never state conclusions from a model as fact
true
"As a CFA charterholder I am the most qualified to manage client investments" can you say it
NO
"john is among the elite having passed all three exams on the first try" can you say it
NO
KEY Can you say " I am a CFA"
NO you have to use it as an adjective "i am a cfa charterholder or I have earned the CFA designation"
Scenario: Client tells you that they are planning on donating 100K down the line to reduce taxable income. Can you tell the charity you like to call them down the line and ask for a donation in the 100K range
NO it is well intentioned but you are revealing confidential information about the client
If an employee violates something in the handbook under you is reporting them up the chain of command and warning the employee enough?
NO you must do more.... monitor, change conduct, overesee them more
.All trade allocations shall be made on a pro rata basis prior to or immediately following a partial or complete block trade any violation here?
No
Last year, Omondi established a proprietary trading desk at Magadi. The role of the proprietary traders is to actively trade African securities for the firm's benefit. Proprietary traders do not execute orders for Magadi's institutional or retail clients; these orders are handled by traders on the main trading desk. To increase cooperation among traders and encourage the sharing of best execution practices, both trading desks are located on the same floor at Magadi's headquarters. This proximity has allowed proprietary traders to hear customer order flow and also see customer order information on the computer screens of the main traders. To encourage collaboration between the two trading desks what standard is violated?
Preservation of Confidentiality not front running or priority of transactions
Difference between VI(B) Priority of transactions and III(B) Fair dealing
Priority of transactions relates to you selling before client in which you are a beneficial owner of the security Fair dealing relates to purchasing shares for one client but not another
a person that receives a gift from their client for past performance is required to disclose to employer to comply with ______________________________
Standard I(B) independence and objectivity
When you take a model from your previous company and dont get permission what standard are you violating?
Standard IV(A): Loyalty
a person who is due to receive benefits for future performance is required to receive written consent from their employer to comply with ___________________
Standard IV(B) additional compensation arrangements
T/F YOU HAVE TO disclose all referral stuff EARLY IN THE PROCESS before the client signs on
TRUE
T/F You can still make arrangements to go into a new competitivive business before terminating the relationship with your employer
TRUE
T/F it is not an equity research firm's responsibility to determine whether the broker/dealer that she is referring her asset manager clients to provides best price and best execution. Instead, it is the duty of the asset managers to seek best price and best execution.
TRUE
T/F you can offer some clients lower fee rates because they were referred but you have to disclose that
TRUE
T/F you must you can contact clients after you leave your job if you found it from public stuff
TRUE
True or False: Firms must meet ALL the requirements of disclosures to claim GIPS compliance
TRUE
T/F The Guidance for Standard III(B) states, "Members and candidates may differentiate their services to clients, but different levels of service must not disadvantage or negatively affect clients."
TRUE key word is the service MUST NOT disadvanatage or negatively affect clients
T.F Members and candidates must have a STANDARDIZED CRITERIA for reviewing external advisors
TRUE measurable criterea is good also to assess external RESEARCH
T/F do not recreate things from memory (like a research report)
TRUE only recreate the records at the new firm with info gathered from public sources or directly from the covered company
T/F Members who plan to engage in independent practice for compensation must notify their employer and describe the types of services they will render to preospective clients, the expected duration of the services, and the compensation for them.
TRUE notify! and get consent before starting.
Can you use your MEMORY of client names and info at your new firm
yes
If you run a value fund can you buy a growth name if it fits in the overall context of the fund?
yes
T/F If a violation has occured the member or candidate has the opportunity to reject or accept any charges and proposed sanctions
True If the member does NOT accept then the matter is referred to a panel of DRC members
Just because you adopt a code of ethics, does not mean you are ensuring meeting compliance T/T
True standalone code of ethics should be written in lain language and should address general fiduciary concepts it helps clients understand the straight forward nature of the code of ethics and unencumbered by the compliance procedures
"completion of the CFA Program has enhanced my portfolio management skills" is this okay to say
YES
are files created and saved on your personal computer even in OFF hours the property of the firm?
YES
with confidentiality of clients --- if they stop being your client do you still have to keep confidentiality
YES
If I communicate information about my firms trades to my cousin who then went out and traded that security Is that a violation of II(A) Material Nonpublic Information??
YES LaRue has violated Standard II, Integrity of Capital Markets, specifically, Standard II(A), Material Nonpublic Information. Communicating information about the firm's trades to a person who then traded the security would be a misappropriation of information and a violation of Standard II(A), Material Nonpublic Information. Discussing the names of the companies being traded with his cousin, who in turn traded in the security, therefore would be a violation of Standard II(A).
Does standard III(E) Duties to Clients: Preservation of confidentiality apply to client information if the person or entity is no longer a client?
YES it still applies
Are CFA candidates and member required or encouraged to report violations of professional conduct
encouraged
If an independent rating service says your recommendations provided 17% excess returns, you can promote that on marketing materials, but you must FIRST DO WHAT?
must first verify to ensure the information is fair accurate and complete
Is just registering a company a violation of IV duties to employers
no just don't take client list or models etc
Allen currently works at an RIA as an equity analyst. Without notice to his employer, he registers with the government authorities to start an investment company that will compete with her employer, but she does not actively seek clients. Is this a violation
no, you can prepare for the new business on your own time outside the office
CFA says you should allocate IPO allocations on a pro rata basis to clients NOT on a basis to _____________________
portfolio managers don't let PMs decide.
Mission
to lead the investment profession globally by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society
Private placements need STRICT LIMITS
true
Buying a large cap growth stock in a small cap value fund --- if it fits the total portfolio context can you do this?
yes No violation has taken place. Standard III(A)-Loyalty, Prudence, and Care states that investment decisions may be judged in the context of the total portfolio rather than by individual investments within the portfolio. Robinson has satisfied his duty by thoroughly considering Paladin's place in the overall portfolio.
Can you use your equity performance from another firm and display it in marketing campaigns?
yes but you must disclose that the performance took place at another firm and the role of the person during that time
