CFA Level 1 Ethics (Reading 4 & 5)

1. Firms that claim to present investment performance in compliance with GIPS are required to: A. document the procedures and policies they use to ensure GIPS compliance. B. clearly disclose any calculations or other aspects of a presentation that are noncompliant with GIPS. C. calculate total firm assets as the fair value of all fee-paying discretionary portfolios managed by the firm.

1. A is correct. GIPS Section 0, "Fundamentals of Compliance," states that firms must document their procedures for remaining in compliance with GIPS. Firms which state that they are in compliance with GIPS must comply fully and may not claim partial compliance. GIPS defines total firm assets as the fair value of all portfolios managed by the firm, including discretionary and non-discretionary, fee-paying and non-fee-paying portfolios. (LOS 5.a)

1. Which of the following statements most accurately describes the parties that GIPS are intended to apply to and serve? GIPS apply to: A. consultants who serve their existing and prospective clients. B. firms that issue securities and serve investment management firms. C. investment management firms and serve their existing and prospective clients.

1. C is correct. GIPS apply to investment management firms. They are intended to serve prospective and existing clients of investment firms and consultants who advise these clients. (LOS 4.a)

2. Which of the following definitions of a firm would violate GIPS? A. Investment firm that has been in existence for less than five years. B. Regional branch of an investment management firm marketed under the name of its parent. C. Entity registered with the national regulator that oversees its investment management activities.

2. B is correct. The definition of a firm for GIPS-compliant performance presentation should include all geographical offices marketed under the same name brand. (LOS 5.b)

2. For a composite to be constructed in compliance with GIPS, the portfolios included in the composite must: A. have been managed by the firm for the full performance reporting period. B. be selected immediately after the last business day of the period for which the composite's performance will be presented. C. include all fee-paying, discretionary portfolios that are managed according to the same strategy, mandate, or investment objective.

2. C is correct. To comply with GIPS, a composite must include all fee-paying, discretionary portfolios managed according to the same investment objective, strategy, or mandate. The composite or composites in which a portfolio will be included must be determined on an ex-ante basis (i.e., before the period for which the composite's performance will be calculated). A GIPS-compliant composite must include terminated accounts. (LOS 4.b)

3. If a country has regulations in place that conflict with GIPS, firms that wish to claim GIPS compliance: A. may not do so because GIPS do not permit exceptions or partial compliance. B. must establish a subsidiary in a location where local law does not conflict with GIPS. C. must comply with local regulations and disclose the nature of the conflict in the presentation.

3. C is correct. Firms must always comply with the laws and regulations of the country in which they reside. In cases where local regulations conflict with GIPS, a firm can still claim GIPS compliance if they disclose the conflict fully in an otherwise compliant presentation. (LOS 5.c)

3. Verification of compliance with GIPS: A. may be performed on single composites. B. is required for a firm to claim GIPS compliance. C. requires the verification report to be issued for the entire firm.

3. C is correct. Verification of GIPS compliance is optional, but if a firm chooses to seek third party verification, the report must be issued with respect to the whole firm. GIPS verification cannot be carried out for a single composite. (LOS 4.c)

4. Which of the following includes only sections of the Global Investment Performance Standards? A. Disclosure, Public Equity, Presentation and Reporting. B. Real Estate, Calculation Methodology, Fundamentals of Compliance. C. Input Data, Composite Construction, Wrap Fee/Speculative Margin Account (SMA) Portfolios.

4. B is correct. The nine major sections of GIPS are (0) Fundamentals of Compliance; (1) Input Data; (2) Calculation Methodology; (3) Composite Construction; (4) Disclosure; (5) Presentation and Reporting; (6) Real Estate; (7) Private Equity; and (8) Wrap Fee/Separately Managed Account (SMA) Portfolios. The incorrect choices misstate at least one of these sections. Neither "Public Equity" nor "Speculative Margin Account" is a section of GIPS. (LOS 5.d)