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Stacey Jones, an investment counselor, recently had a client inquire about her services as a result of being referred to her by an insurance broker. Last year, Stacey had set up a referral arrangement with this broker whereby Stacey would pay this broker a nominal amount for every client that was sent to her. Which of the following courses of action should Stacey take so that she would be in compliance with Standard VI-C, Referral Fees? I. Since the referral fees paid by Stacey are fixed amounts, and not dependent upon the size of the business, there is absolutely no conflicts and hence disclosure of the referral arrangement to the client is not required. II. A disclosure must be made whenever any form of compensation is transferred as a result of the referral. III. Stacey must consult with the firm's compliance officer to ensure that all her outstanding referral arrangements are acceptable. IV. Disclosure of the existence of the referral fees need only be made once a formal agreement is drafted with the client. A) III and IV only B) I and III only C) II and III only D) I, III and IV only
c. Your answer was a, and was incorrect. Hide Explanation Explanation: Choice I is incorrect because regardless of whether these fees are fixed or dependent on the size of the business, it must be disclosed to the client. IV is incorrect because the disclosure of referral fees must be made before a formal agreement is drafted with the client.
Marie Elliot, CFA, is the head compliance officer at Gonzo Securities. Often times, Gonzo provides investment banking services to the same companies that its analysts are following. In order not to violate any rules or regulations, or Standard II-A, Material Nonpublic Information, Marie should: A) prohibit the research department from making any recommendations while the investment banking division is in possession of material nonpublic information. B) allow the research department to issue recommendations so long as they disclose that the firm is in possession of material nonpublic information. C) allow the research department to issue recommendations so long as there are adequate fire walls around the investment banking division. D) allow the analysts to only release research reports on companies that were prepared before Gonzo Securities came into possession of material nonpublic information about these companies.
a. Your answer was correct! Hide Explanation Explanation: The best way to ensure that Gonzo is not breaching any confidentiality laws, or acting on material nonpublic information, is to temporarily halt recommendations while the investment banking division has possession of inside information
Billy Joe is an analyst primarily responsible for coverage of the defense industry and the companies that operate within that industry. Which of the following procedures are necessary for Billy Joe to comply with Standard V-B, Communication with Clients and Prospective Clients? I. Take into account the objectives and experience of the clients who will most likely invest based on the research II. Distinguish between fact and opinion III. Indicate the basic characteristics of the investment if the report being circulated includes a recommendation for that particular security IV. State the limitations of the analysis and the forecasted conclusions
a. Your answer was d, and was incorrect. Hide Explanation Explanation: Choice I is incorrect because the job of the analyst is to give an objective report about the companies that are being analyzed. It is the responsibility of the client's financial consultant to decide if securities recommended by analysts are suitable to that particular client.
When it comes to fiduciary duties, which of the following duties are Members expected to carry out in order to comply with Standard III-A, Loyalty, Prudence and Care? I. The generation of a reasonable rate of return on the assets is of greater importance than ensuring that the asset values are consistently preserved. II. Members with discretion over client assets should submit to an independent audit at least once a year. III. Members should submit an itemized list of the holdings in a client's account at least once a year. IV. Members would fulfill this Standard by simply following the rules as set out by the governing agency whose jurisdiction the Member works in. A) I, III and IV only B) I and III only C) II only D) I, II, III and IV
c. Your answer was a, and was incorrect. Hide Explanation Explanation: Choice I is incorrect; the primary objective of the fiduciary is to ensure that asset values are consistently preserved - a reasonable rate of return (while an important objective) is not as important as preservation of capital. III is incorrect; an itemized list of the holdings is required quarterly, not annually. IV is not exactly correct because members must follow the rules of the body that has the "highest" set of standards. Hence, a member must be familiar with the rules as set out by legal statutes, governing agencies, employer compliance manuals, and the CFA Institute's Code of Ethics and Standards of Professional Conduct.
David Adair, CFA, writes research reports on small-cap stocks in the medical devices industry. Most of the companies in David's research list are not widely followed on Wall Street. One of his top picks boasts a potentially "hot" new product, but with no Street coverage, the stock is languishing below its IPO price. David attempts to pump up interest in the stock by posting numerous messages on Internet "blogs" and in chat rooms, claiming that this stock could easily double or triple in price. Which of the following Standards of Professional Conduct has David most directly violated? A) Standard V-A, Diligence and Reasonable Basis B) Standard V-B, Communication with Clients and Prospective Clients C) Standard I-C, Misrepresentation D) Standard II-B, Market Manipulation
d. Your answer was a, and was incorrect. Hide Explanation Explanation: Since David's actions were anonymous and intended to affect the capital markets in a broad sense - not specific to an individual client - that are addressed in the Standard under Market Manipulation, II-B.
John Smith just got his first job as an analyst. As he gets ready to submit his first research report to his supervisor, which of the following should he keep in mind so that he doesn't end up violating Standard V-A, Diligence and Reasonable Basis? I. Include all information related to the investment, even that which he may deem as immaterial. II. Be diligent in the research, even if some data may seem obvious. III. If foreign companies are involved, an effort must be made to make the ratios of the foreign companies comparable to that of domestic corporations. IV. The risk and constraints of the investors likely to purchase the recommended investments. A) II and III only B) II and IV only C) I, II, III and IV only D) I and IV only
a. Your answer was correct! Hide Explanation Explanation: Choice I is incorrect - "full disclosure" simply covers all information that an analyst deems to be "material" in describing all risks and opportunities associated with the investment. It would be impractical to include all information, i.e. both material and immaterial. IV is incorrect because John is simply required to produce an objective report about the investment. It is up to the individual consultants, financial planners, etc to decide if the investment is suitable for their clients.
Sally Smith is a portfolio manager with Springfield Investment Counselors. A new client recently transferred $2 million in cash for her to manage. However, the proceeds arrived at Springfield before an investment policy statement was constructed for the client. At the same time, the chief economist at Springfield just issued a strong "buy" recommendation for U.S. stocks. Which of the following would represent the most appropriate course of action for Sally to take now? A) Invest in very short-term Treasury securities irrespective of their yields B) Invest the cash in Treasuries and simultaneously long an S&P futures contract, which by definition, costs nothing C) Invest in the Treasury security that is currently offering the highest yield D) Since equities will most likely make up a portion of the portfolio anyway, Sally should begin to use some of the proceeds to purchase stocks, and then, after the investment policy statement has been constructed, determine if more stocks should be acquired.
a. Your answer was d, and was incorrect. Hide Explanation Explanation: The client's objectives and constraints must be established before any risk-bearing investments are made. Hence, the only asset that fits this interim requirement is the short-term T-bills. If Treasuries are paying higher yields, it's most likely due to the fact that they possess some degree of interest rate risk, and would disqualify these securities as an interim investment.
Mike Smith of Kermit Securities recently finished a research report on ABC Corp. In order not to violate any of the Codes or Standards, Mike must disclose all of the following except: A) whether any of Kermit Securities' employees or officers have any special relationship with ABC Corp. B) whether Kermit Securities acts as a market maker for ABC shares. C) shares of ABC Corp. held by his distant relatives. D) whether Kermit Securities has underwritten shares of ABC Corp. in the past.
c. Your answer was d, and was incorrect. Hide Explanation Explanation: Distant relatives are given the same status as any other client of the firm. Hence, their holdings are not deemed to impair the covered person's independence and objectivity.
Which of the following procedures are intended to ensure compliance with Standard III-B, Fair Dealing? I. An investment recommendation should be communicated to all the firm's clients as simultaneously as possible. II. Even within the firm, the number of people who are aware of pending recommendations should be kept to a minimum. III. If there is a change in opinion, it is very important to only release one comprehensive report, even if it does take longer than just a summary report. IV. A disclosure should be made to clients with respect to differences that may exist in the levels of service provided. A) I, II and III only B) I and III only C) II and IV only D) I only
c. Your answer was a, and was incorrect. Hide Explanation Explanation: Choice I is not entirely correct because an investment recommendation should be communicated simultaneously to all the firm's clients who have a known interest in such an investment and whose risk tolerance allows for such an investment into their portfolios. III is incorrect because if there is a change in opinion, it would be very wise to first issue a brief summary report and then follow that up at a later date with a comprehensive report. In this case, timing is by far the greater issue.
Rennie Asada, CFA, is a portfolio manager with Martek Securities. Rennie just learned that a very influential analyst within his firm is about to issue a sell rating on one of the stocks he owns both for his clients and for his personal accounts. In order to comply with Standard VI-B, Priority of Transactions, which of the following courses of action must Rennie take? I. Allow Martek Securities to carry out its own trades before Rennie executes the trades for his personal accounts. II. Ensure that before the clients' accounts are adjusted, Martek Securities has an opportunity to carry out its own trades. III. Execute the trades for the clients first before Rennie executes any trades for his own personal accounts. IV. Execute a block trade and then determine on a pro-rata basis, how many shares will be affected from the accounts of the clients, the firm and members' personal accounts. A) I, III and IV only B) II and III only C) I and III only D) II and IV only
c. Your answer was d, and was incorrect. Hide Explanation Explanation: The guiding principle behind VI-B is to take care of clients first, and only after the clients have been traded would it be appropriate to take care of personal interests. Both I and III indicate the appropriate priority. A pro-rata distribution of a block order (Choice IV) gives equal priority, while choice II places personal interests first. Both violate the Standard
Bill Frost, CFA, is a portfolio manager with Kermit Counsel. He learns from an insider that when ABC Corp. releases its earnings report in the afternoon, they will be much higher than anticipated. Bill had never heard of ABC Corp. prior to receiving this tip. Nevertheless, he advises his brother to buy as many shares as he can during the morning. Then, after the news release, Bill buys several thousand shares of ABC Corp. for the portfolios that he is managing. According to the Code and Standards, Bill violated all of the following Standards except: A) Standard II-A, Material Nonpublic Information B) Standard V-A, Diligence and Reasonable Basis C) Standard VI-B, Priority of Transactions D) Standard III-E, Preservation of Confidentiality
d. Your answer was correct! Hide Explanation Explanation: Bill is in serious trouble. He has violated many Standards, not to mention exhibiting behavior that grossly violates the Code of Ethics. At the same time, Standard III-E, Preservation of Confidentiality, refers to preserving confidential information about a client or an employer. This issue was not relevant in this case.
Which of the following statements is (are) true with respect to the calculation of returns of composites in accordance with GIPS? I. Only appreciation in asset values must form the basis for calculating returns. II. Returns from cash and cash equivalent securities must also be included in the return calculations. III. Portfolios must be evaluated at least annually. IV. Returns must be calculated net of any trading expenses. A) I and IV only B) I and III only C) II and IV only D) I, II, III and IV
c. Your answer was a, and was incorrect. Hide Explanation Explanation: Choice I is incorrect because total return must incorporate not only changes in asset values, but also any income derived from the assets. III is incorrect because portfolios must be evaluated at least quarterly.
The fixed-income composite of ABC Investment Inc. consists of the following three portfolios: Portfolio Market Value (Beginning) Market Value (Ending) A $235,000 $258,000 B $575,000 $601,000 C $803,000 $770,000 Assuming there were no external cash flows during the period, which of the following would best estimate this composite's return? A) 1.37% B) 1.48% C) 0.99% D) 5.07%
c. Your answer was a, and was incorrect. Hide Explanation Explanation: Sum the beginning and ending values. Total Beginning = A + B + C = $1,613,000, Total Ending = A + B + C = $1,629,000. The period's return is found by Total Ending/Total Beginning - 1, or $1,629,000/$1,613,000 - 1 which is equal to 0.99%.
All of the following procedures would directly support Standard I-D: Misconduct, except: A) Distribute a list of potential violations and the sanctions that will be imposed for anyone who fails to comply with these established rules B) Perform background checks of potential employees to ensure they are eligible to work in the industry C) Prohibit employees from seeking additional employment and from affiliating with certain "banned" organizations D) Adopt a firm-wide Code of Ethics and an employee continuing education program
c. Your answer was a, and was incorrect. Hide Explanation Explanation: Worthwhile procedures can be designed to prevent employee misconduct, but policies do not need to over-reach and attempt to control all outside activities. Procedures need to strike a balance between "appropriate" and "excessive".
Which of the following duties must a Member fulfill while managing a qualified private retirement plan, in order to comply with ERISA (the Employee Retirement Income Securities Act), and consequently Standard III-A, Loyalty, Prudence and Care? I. A manager may not direct more than 20% of plan assets towards the shares or properties belonging to the sponsor. II. A manager may receive normal benefits if she is a plan beneficiary. III. Acquiring the securities of the sponsor and voting against a lucrative takeover (that is otherwise hostile to management) is permitted. IV. A fiduciary can be held jointly responsible for the actions of another if the task that the fiduciary delegated to another party could have been reasonably performed by the fiduciary herself. A) II and IV only B) I only C) III and IV only D) None of the above
a. Your answer was correct! Hide Explanation Explanation: Choice I is incorrect because under ERISA guidelines, unless the plan allows for a higher limit, a manager may not direct more than "10%" of plan assets towards the shares or properties belonging to the sponsor. III is incorrect because the fiduciary's sole loyalty is towards the plan beneficiaries. Hence, if the takeover deal is lucrative to the employees, but hostile towards the employer, the fiduciary is well advised to vote in favor of the takeover.
Brian Smith, CFA, is an investment counselor. A client account may be charged a commission fee that reflects a premium for the research advice that instigated the trade, in all of the following cases, except: A) the research was obtained through third-party sources. B) the proprietary research was conducted in house. C) the premium is higher than average, however the quality of the research if far superior than the average. D) the research benefited the client account as well as the house accounts.
d. Your answer was correct! Hide Explanation Explanation: When both the investment firm and the client stand to benefit from the same research, the fees paid for that research should come from the investment firm's assets.
Jackson recently completed a research report on the Acme Corp., in which he concluded that the stock should be avoided for now and that a better buying opportunity would present itself eventually. At an analyst conference, an old colleague tells Jackson that a secret tender offer for Acme is in the works, and will likely be made public within the next month. This colleague urges Jackson to buy Acme immediately "before it's too late". Jackson immediately executes an order for his personal account, then asks for a block trade for all discretionary accounts. Jackson has potentially violated all of the following Standards EXCEPT: A) Standard II-A, Material Nonpublic Information. B) Standard VI-B, Priority of Transactions. C) Standard VII, Responsibilities as a CFA Institute Member or CFA Candidate. D) Standard V-A, Diligence and Reasonable Basis.
c. Your answer was a, and was incorrect. Hide Explanation Explanation: While Jackson is guilty of violating a number of Standards, he isn't apparently guilty of misusing the CFA designation in any manner.
One of John Smith's clients, who happens to be an old friend of his, has offered John a weekend stay at his Florida home if John can beat the S&P 500 Index by 3% in the coming quarter. Which of the following represents the minimum course of action that John could take without violating Standard IV-B, Additional Compensation Arrangements? A) John must inform his employer of this arrangement in writing and get written permission back from the employer. B) John must first ask the client to state his incentive plan in writing, which John will then use to inform his employer and thus get a written permission back from the employer in writing. C) John need only inform his employer in writing of such an arrangement. While the employer's approval for such an arrangement is required, it is not necessary to ask the employer for this to be in writing. D) Since this client is an old friend of John, the trip may be viewed as a personal matter, in which case no disclosure is required.
c. Your answer was a, and was incorrect. Hide Explanation Explanation: All arrangements leading to compensation (monetary or otherwise) in addition to that provided by the primary employer, must be disclosed in writing to that employer. However, while the employer's reply is recommended to be in writing, it is not mandatory
Bobby Tartaglia, CFA, is an analyst covering the airline industry. There is a tremendous amount of industry information that is available. In preparing a report on the industry, Bobby must acknowledge all sources of information except in the case where: A) the report is submitted to other analysts. B) the report is intended to remain only within the firm. C) the information is obtained from recognized financial and statistical reporting services. D) the conclusions are his own.
c. Your answer was correct! Hide Explanation Explanation: Only data that is published by widely recognized financial and statistical reporting agencies would not need to be acknowledged by the analyst. Otherwise, any use of material prepared by others must be acknowledged as such to avoid plagiarism
Which of the following statements is (are) true with respect to the scope and purpose of verification of claims of compliance with GIPS? I. Verification is an audit process conducted by an independent party to give assurance that what is actually presented by a firm does comply with the Standards. II. A firm can only claim that its performance presentations are verified if in fact an independent verifier has verified that the presentation figures comply with GIPS. III. Verification by an independent party is mandatory in order to claim a compliance with GIPS. IV. The minimum period over which the performance presentations must be verified in order to comply with GIPS is five years. A) II and IV only B) I and IV only C) I, II, III and IV D) I and II only
d. Your answer was a, and was incorrect. Hide Explanation Explanation: Choice III is incorrect because verification by an independent party is "not" mandatory in order to claim a compliance with GIPS. The purpose of verification is simply to provide a greater assurance that the reported performance figures are in fact in compliance with the Standards. IV is incorrect because the minimum period over which the performance presentations must be verified in order to comply with GIPS is one year, not five.
The CFA Institute's Code of Ethics specifically relates to all of the following except: A) Exercise independent judgement B) Being competent C) Relationship with and responsibility to clients and prospects D) Acting with integrity
c. Your answer was d, and was incorrect. Hide Explanation Explanation: Relationship with and responsibility to clients and prospects is addressed in the Standards of Professional Conduct, not the Code of Ethics. Be careful not to confuse the Code with the Standards.
If a firm wanted to claim compliance with GIPS, which of the following are required? I. Disclose the number of accounts and the size of their respective assets that were excluded from the composites. II. Disclose which asset categories were evaluated and which were left out. III. New portfolios that have been managed less than a full measurement period were excluded from the composites. IV. An independent verifier must verify the claims of the firm. A) II, III and IV only B) I, II and IV only C) I and II only D) III only
d. Your answer was correct! Hide Explanation Explanation: For a firm to be compliant, all fee-paying, discretionary accounts must be included in at least one composite. Both I and II indicate that accounts and/or asset classes are excluded - a violation of this standard of inclusion. Choice IV is incorrect because an independent verifier is only recommended, not required.
Which of the following procedures are intended to ensure compliance with Standard VI-B, Priority of Transactions? I. The access person's sibling's accounts should be treated just like other regular client accounts. II. While stocks on a restricted list cannot be traded, the same restriction would not hold on options related to those stocks. III. Restrictions should be placed on Members' ability to participate in IPOs and private placements. IV. Blackout periods should follow the time an investment recommendation is disseminated to clients. A) I and III only B) II, III and IV only C) I, II, III and IV D) II and III only
a. Your answer was d, and was incorrect. Hide Explanation Explanation: Choice II is incorrect; a derivative security (e.g. a call option derived from the investment performance of a stock) is restricted along with that underlying stock. IV is incorrect because blackout periods are intended to restrict trading of securities by access persons while their firm has outstanding orders to buy or sell those same securities. Blackouts are not intented to restrict clients who receive a publicly released report.
Rennie Jackson, CFA, is an analyst currently working at his firm's subsidiary in Country A. However, Rennie's residence and the head office are situated in Country C. The laws in Country C are much more strict than the CFA Institute's Standards; in addition, they explicitly point out that all registered analysts must abide the laws of the jurisdictions that they do business in. It is widely known that Country A's rules are much less strict than the CFA Institute's Standards. In order to avoid a violation of Standard I-A, Knowledge of the Law, Rennie should: A) comply with the Code of Ethics and Standards of Professional Conduct B) comply with Country A's rules and regulations C) comply with any of the widely accepted practices employed in developed countries D) comply with Country C's rules and regulations
a. Your answer was d, and was incorrect. Hide Explanation Explanation: The rule is to adhere to the most strict standards whenever there is an overlap. In this case, the strictest standards are set out by Country C. However, Country C has a clause that makes the member subject to the standards of Country A. Therefore, the choice is then between the standards of Country A or the CFA Institute's Code and Standards. Since the Code and Standards are stricter is this case, Rennie must abide by them.
Which of the following statements is (are) true with respect to the disclosures that must be made in order to comply with GIPS? I. For an equity composite, disclose the beta of each portfolio being included in the composite. II. Since investment performance is always attributable to the firm, a change in investment management personnel would not warrant a disclosure. III. A firm must disclose whether composite returns were calculated using asset weights or equal weights. IV. A firm should disclose any differences that may exist between the composite and the benchmark that it's being measured against. A) I, II, III and IV B) I and III only C) II and III only D) IV only
d. Your answer was correct! Hide Explanation Explanation: Choice I is incorrect: rather than beta, the standard deviation of the individual portfolio returns around the composite aggregate return is the preferred disclosure. II is incorrect; as while it's true that investment performance is attributable to the firm, a change in investment management personnel may potentially have a material impact on a client's decision to do business with the firm, and GIPS has thus required disclosure of key personnel changes. III is incorrect because using asset-weighted returns is mandatory, not a choice that would require a disclosure. The firm may choose to include equal-weighted returns as supplementary information.
Which of the following statements is (are) true with respect to the presentation of composite results in accordance with GIPS? I. The period for which performance presentation must be presented is the greater of ten years or the period since inception of the firm. II. Annual returns for all years must be presented. III. The firm may include the results of its model portfolio with that of the actual portfolios that it manages, only if all the portfolios in the composite share the same investment objectives. IV. A new firm must use the performance results of its past affiliations when it computes the historical returns of its composites. A) I and IV only B) I, II and III only C) II only D) I, II, III and IV
c. Your answer was a, and was incorrect. Hide Explanation Explanation: Choice I is incorrect because the period for which performance presentation must be presented is the "lesser" of 10 years or the period since firm inception. III is incorrect because the firm may under no circumstances include the results of its model (or simulated) portfolio in a composite with that of actual portfolios. IV is incorrect because a new firm cannot use the performance results of its past affiliations when it computes the historical returns of its composites. In this case, the new firm will not have any historical returns to report
John Goodman, CFA, is a resident of Alpha who is currently vacationing in Beta. Beta's markets are officially unregulated. The hotel manager, whose brother is the CFO of Gamma Corp., a company whose stock trades over-the-counter, provides John some material non-public information. John: A) may not trade on this information under any circumstances. B) may trade on this information since the market is unregulated. C) may trade on this information only if such a practice is permitted in Alpha. D) may trade on this information since John is on vacation and he has no fiduciary duties to anyone in this situation.
a. Your answer was d, and was incorrect. Hide Explanation Explanation: Even though the country of Beta has no regulations, John's conduct must always, as a minimum, adhere to the CFA Institute's Code and Standards. No matter the local situation, John is bound by Standard (I), Professionalism.
Which of the following would not constitute a ground for summary suspension imposed by the Professional Standards and Policy Committee (PSPC)? A) A disciplinary sanction or injunction imposed upon the covered person by a regulatory agency B) A felony conviction that is not related to the investment practices C) Failure to complete and submit to the CFA Institute the annual Professional Conduct Statement D) Refusal to cooperate with PSPC as it investigates the covered person's conduct
a. Your answer was d, and was incorrect. Hide Explanation Explanation: A summary suspension is the most severe sanction that may be imposed upon a covered person by the PSPC. Therefore, only the most serious of violations would constitute grounds for such action. A sanction or injunction may or may not be deemed to be all that serious. Depending on the circumstances, the PSPC may elect to impose a less severe sanction, such as public or private censure. On the other hand, all of the remaining acts serve as grounds for summary suspension
An investment management firm votes proxies on behalf of its clients. The firm subscribes to a proxy voting service. Which of the following is the MOST important consideration when deciding how to vote? A) The best interest of the client. B) The stated recommendation of the proxy voting service. C) The vote that the firm believes will be best for the share price over the next year. D) The stated recommendation of company management.
a. Your answer was d, and was incorrect. Hide Explanation Explanation: Appropriate fiduciary duty requires the firm to vote its proxies in the best interest of clients, even if this vote conflicts with management or with the opinion of the proxy voting service.
John Booth, CFA, is the compliance officer at a large brokerage firm. Through the underwriting department, a given sum of shares became available for distribution to clients as a result of a very recent initial public offering. To ensure compliance: A) these shares should be distributed on a pro-rata basis only to the clients who have inquired about this issue. B) these shares should only be distributed to institutional clients because the inherent conflict of interest in selling shares that became available through he firm's own underwriting department would not qualify these block of shares for public distribution. C) these shares should be distributed on a pro-rata basis to all the client account for which these shares would be appropriate. D) these shares should be sold on a first come first serve basis to clients.
c. Your answer was d, and was incorrect. Hide Explanation Explanation: Investment professionals have a fiduciary duty towards all of their clients. Consequently, all clients, for whom these shares would be suitable, should have an equal opportunity at purchasing them. A pro-rata distribution is superior to "first come first serve" as it creates an atmosphere of equality among the client base
James Brown, head of research at Kermit Securities, just hired the most sought after retail analyst in the industry, Gonzo Fry, CFA. Since Gonzo had even more experience than James, it was understood that Gonzo's reports would simply be distributed as soon as he was finished putting them together. Subsequent to the release of one of Gonzo's recent "buy" ratings, the issuer in question lost a major lawsuit, which at the time of the "buy" rating was a pending matter which Gonzo had overlooked. Which of the following statements would best describe James' situation? A) James is not responsible since Gonzo clearly has more experience than him. B) Gonzo is a CFA charterholder, he should have known Standard V-A, Diligence and Reasonable Basis, and thus he alone is responsible for this mistake. C) James would be responsible only if he actually reviewed the material and attached his written approval. D) James violated his duty because he did not have adequate checks and balances to ensure the legitimacy of his firm's research reports.
d. Your answer was correct! Hide Explanation Explanation: Standard IV-C, Responsibilities of Supervisors, was written to address these type of situations. Even if a subordinate is a star analyst, it does not relieve the supervisor from his or her duties. In this case, there was an inadequate compliance system. Since James did nothing about it, he is responsible for this mistake.
Patricia Hayes, CFA, is the manager of sales at a regional bank. This bank has had one of the most successful aggressive small-cap fund performances in the market. However, this fund only represents 2% of the bank's mutual fund assets. In fact, the majority of the bank's other funds have been underperforming fixed-income funds. During sales meetings, Patricia only emphasizes the performance of the small-cap fund, adding that "the return figures of this fund speaks volumes about what we potentially can do for you". According to the Standards of Professional Conduct, Patricia: A) covered herself by simply stating facts and not opinions. B) covered herself by stating that past returns are simply an indication of what "potentially" could happen in the future. C) violated Standard V-A, Diligence and Reasonable Basis. D) violated Standard I-C, Misrepresentation.
d. Your answer was correct! Hide Explanation Explanation: While it is tempting to only report a firm's star performing funds, in this case it crossed the line of misrepresentation. The performance of the small-cap fund is being used to represent the performance potential of the bank's funds at large. Had small caps been the specialty of the bank, comprising most of its offerings, then Patricia's comments would not be misleading. In this case, she would need to disclose the performance of all of the bank's composites in order to give prospects a more complete overview.
Luke Skywalker, CFA, observed the CEOs of two competing firms flying together first class on the same plane that he is on. Luke is aware that there are rumors of these two firms merging. Upon landing, he immediately phones his office and instructs his associate to issue a "buy" rating on the target firm. Which of the following best characterizes Luke's actions? A) Luke violated Standard II-A, Material Nonpublic Information. B) Luke did not violate any Standards. C) Luke violated Standard V-A because he did not have a reasonable basis for issuing a "buy" recommendation. D) Luke violated the Standards because he should have encouraged the two CEOs to disseminate to the public any deal that was pending between the two firms.
c. Your answer was d, and was incorrect. Hide Explanation Explanation: Simply seeing two CEOs flying together should not be the sole basis of an investment recommendation. Furthermore, the rumor does not necessarily corroborate the flight incident. Luke should thoroughly research the fundamental reasons for a possible merger and then issue his recommendation. On the other hand, seeing the two CEOs together does not constitute material nonpublic information. Therefore, Luke is not required to approach the CEOs in an effort to disseminate any information to the public.
Andy Price, CFA, is a portfolio manager with an investment counseling firm. Andy executes most of his client trades through Alpha Securities. Alpha's commission rates are higher than the industry norm, however, its analysts are consistently ranked in the top 5. Andy was recently solicited by Theta Securities, a deep discount brokerage firm. In order to comply with the Code and Standards, Andy: A) obligated to disclose to his clients that while a cheaper medium of trading does exist, he has opted not to use it. B) should switch his trading business to Theta Securities, while attempting to obtain Alpha's research second hand. C) does not have to do anything if he can justify paying the higher commissions in return for the research that Alpha provides. D) is obligated to re-negotiate the commission schedule that he and Alpha had agreed upon previously.
c. Your answer was d, and was incorrect. Hide Explanation Explanation: The CFA Institute does not mandate that the absolute cheapest medium of trading be chosen. In this case, if the value derived from the research justifies the higher commission costs, then Andy is fulfilling his fiduciary duty by staying with Alpha Securities.
A CFA Member or Candidate may be justified in disclosing confidential information received from a client, but not be in violation of Standard III-E, Preservation of Confidentiality. In making such a disclosure, all of the following situations would be justified except: A) This information is outside the scope of the confidential relationship. B) This information is being requested by prosecuting attorneys in a court case involving the client. C) This information is being forwarded to a business associate seeking sales leads. D) This information was only disclosed following written authorization by the client.
c. Your answer was d, and was incorrect. Hide Explanation Explanation: While acknowledging the importance of preserving confidentiality (and sensitivity of financial information disclosed), the Standards of Practice Handbook discusses a number of exceptions to its rule - such as if the client authorizes a disclosure, or if such disclosure is legally required, or if the information is not material. On the other hand, Standard III-E is intended to prevent situations such as business associates sharing sales leads.
Joanne Bume, CFA, is the head of research at large brokerage firm. Currently, her airline analyst has a "market-underperform" rating on Universal Airline Company. Joanne is contacted by Bill Smith, who is not only the head of the corporate finance department for the firm but he is also vice-chairman. It seems that Bill is soliciting some business from Universal however, the current rating imposed by the airline analyst is hampering his efforts. Bill asks Joanne to persuade her airline analyst to revisit the facts about Universal, since "there is so much at stake here". In order not to violate the Standards of Professional Conduct, Joanne should: A) assign a different analyst to prepare a new report on Universal. B) ask Bill to submit, in writing, what he is instructing Joanne to do, and then execute his instructions. C) cease rating Universal Airlines and instead only provide factual statements about the company. D) go ahead and ask the airline analyst to revisit the facts again, so long as no pressure is applied in order to influence the rating.
c. Your answer was d, and was incorrect. Hide Explanation Explanation: The proper course of action would simply be to place Universal Airlines on a restricted list until the investment banking relationship with that company comes to an end. However, during the period in which that relationship is active, the research department may only release factual information about Universal. No ratings should be released
Which of the following statements is (are) true with respect to the verification procedure that must be followed in order to comply with GIPS? I. Verification by an independent third party is only recommended, not required. II. Level II verification applies to all firm composites. III. For a composite to receive verification, no portfolio that fits with the composite's management style must have been excluded from the composite. IV. It is possible for a firm to claim that their performance presentations are verified, if they have done the verification internally in accordance with GIPS. A) II, III and IV only B) II only C) II and III only D) I and III only
d. Your answer was correct! Hide Explanation Explanation: Choice II is incorrect - under GIPS, there no longer exists different levels of verification. IV is incorrect because a firm may claim that its performance presentations have been verified only if the verification was conducted by an independent (third-party) verifier
York Co. happens to be one of the companies covered by Ray Vanelli, CFA. During a golf tournament, John Franklin, CFA, an analyst friend of Ray, who also covers York Co. for a different brokerage firm, told Ray to "just watch and see" how York Co.'s new product is going to dominate its market. Soon after that exchange, Ray changed his rating for York Co. from "market-perform" to "strong buy". Ray: A) violated the Standards because he effectively plagiarized someone else's research B) did not violate any standards because his friend is a practicing analyst who also happens to be a CFA charterholder C) violated Standard V-A, Diligence and Reasonable Basis D) violated the Standards because he did not disclose to his employer the possible conflict of interest arising from using his friend’s opinion
c. Your answer was d, and was incorrect. Hide Explanation Explanation: Under the guidelines of Standard V-A, a member cannot issue or change a recommendation without having a reasonable basis for doing so. Hearing a comment on a golf course, even those made by other analysts, does not constitute reasonable basis.
John Smith has recently been hired to head the research division of Kermit Securities. According to Standard IV, Duty to Employer, which of the following duties is John obligated to carry out with his new employer? I. Inform the new employer, in writing, of his obligation to comply with the Code and the Standards II. Disclose to the employer all matters that could impair his ability to exercise independent judgment III. Implement a compliance system so that none of his subordinates can ever commit fraud IV. If he is doing independent work that at times may be in competition with his employer, he will need a written consent from both the employer and the client that he is doing the work for. A) I, II and IV only B) II and IV only C) I, II, III and IV D) IV only
b. Your answer was d, and was incorrect. Hide Explanation Explanation: Choice I is incorrect: following a revision to the Code and Standards taking effect in 2006, John is not required - only encouraged - to inform his employer about the existence (and obligation to comply with) the Code and Standards. III is incorrect, as it is acknowledged that there is no one system that can completely eliminate fraud. John's obligation is to implement reasonable procedures in order to detect violations.
Which of the following is not a requirement of GIPS with respect to the composite construction that may be used in the computations? A) The historic performance of portfolios that are no longer under management cannot be deleted from the historic performance of the firm as a whole. B) If a portfolio is switched from one composite to another for valid reasons, the historic performance of the composite may not be readjusted retroactively to reflect this re-shuffling. C) All actual, fee-paying discretionary and non-discretionary portfolios must be included in at least one composite. D) If a single asset class is carved out of a balanced fund to be included in a single asset composite, then the firm must also allocate a certain percentage of the cash that exists in the balanced fund to that single asset composite.
c. Your answer was d, and was incorrect. Hide Explanation Explanation: Only actual, fee-paying discretionary portfolios must be included in at least one composite. Non-discretionary portfolios do not truly reflect management's performance capabilities, and hence, should be left out of the presentation computations.
Johnson Counselors routinely uses soft dollar brokers to execute trades for one of its biggest clients. Which of the following actions should the firm take so as to not violate Standard III-A, Loyalty, Prudence and Care? I. Avoid soft dollar payments all together since they are a violation of securities laws. II. Disclose the practice to clients. III. Document that the services paid helped the manager make better informed decisions with regards to all managed accounts at the firm. IV. Document that the manager sought out the best reasonable price given the services that were provided. A) II and IV only B) I only C) III and IV only D) II, III and IV only
a. Your answer was correct! Hide Explanation Explanation: Choice I is incorrect - under soft dollar standards, trading is permitted so long as the soft dollars earned solely benefit the accounts that generated the commissions. Thus choice III is a violation as well since the commissions generated by one plan are benefiting a multitude of plans.
Jeff Richardson, CFA, is an investment relations consultant, with a clientèle primarily of small-cap firms seeking greater exposure to institutional investors. He also volunteers as the program chair for the local society of the CFA Institute, arranging speakers for the monthly luncheon. Jeff views the monthly engagements as a convenient way to promote his clients to his fellow analysts. Which of the following statements is true? A) Jeff must resign his position within the society. B) Jeff violated Standard I-C, Misrepresentation, since he was not honest about his true intentions. C) Jeff did nothing wrong; his society responsibilities were as an unpaid volunteer. D) Jeff violated Standard VII, Responsibilities as a CFA Institute Member, since he used his position within the local society to give himself an advantage professionally.
d. Your answer was correct!
Mike Garraway is a junior analyst in the corporate finance department. During his usual fact-finding research on one of the firm's pharmaceutical clients, he discovers that the Food and Drug Administration just approved their experimental drug. What must Mike do so that he is not in violation of Standard II(A), Material Nonpublic Information? A) Seek the advice of legal counsel with respect to how to disassociate from this situation B) Encourage the firm to disseminate this information as soon as possible C) Cease coverage of this client D) Neither take any action, nor communicate this fact to anyone other than the direct supervisor
d. Your answer was a, and was incorrect. Hide Explanation Explanation: Mike received this information in the course of his duty. Therefore, unless this disclosure constitutes a breach of duty towards the shareholders, Mike need not do anything.
In order to comply with GIPS, return calculations require all of the following steps except: A) Quarterly portfolio valuations, which must then be linked geometrically B) Deduction of trading fees C) Incorporating returns from cash and cash equivalents D) Use of cash basis to account for accrued interest and dividends
d. Your answer was c, and was incorrect. Hide Explanation Explanation: Under GIPS, the accrual basis must be used to account for any accrued interest earned from a fixed-income security, as well as any pending dividends from common or preferred stock.
Which of the following disclosure items is not a requirement of GIPS? A) For composites that are indexed to a particular benchmark, the percentage of the composites that's invested in countries not included in the benchmark B) A list of the composites not included in the performance presentations C) The currency in which the performance figures are presented D) Whether settlement date was used rather than the trade date when computing for current market values
b. Your answer was d, and was incorrect. Hide Explanation Explanation: All composites must be included in the firm-wide presentation. An exclusion of even one composite deprives the firm of the claim that they are in compliance with GIPS.
Which of the following statements is (are) true with respect to managing assets for charities or endowments, in order to comply with UMIFA (the Uniform Management of Institutional Funds Act), and consequently Standard III-A, Loyalty, Prudence and Care? I. The standards set out for fiduciaries under this act are not as high as the standards set by the Prudent Man Rule. II. Under UMIFA, the burden of proof lies on the fiduciary to justify his or her actions. III. The board of trustees may delegate the responsibility of setting overall policy, only if they do so in a prudent manner. IV. The duties of a fiduciary in this case more so resemble that of corporate directors as opposed to a trustee. A) II and IV only B) III only C) III and IV only D) I and IV only
d. Your answer was a, and was incorrect. Hide Explanation Explanation: Choice II is incorrect because under UMIFA, the burden of proof lies on the accusers to prove that the fiduciary breached his or her duty towards the plan. III is incorrect because the board of trustees are not allowed to delegate the responsibility of setting overall policy. In other words, it is their duty alone.
Which of the following would not constitute a ground for disciplinary action by the Professional Standards and Policy Committee (PSPC)? A) In an effort to preserve client confidentiality, the covered person refuses to disclose confidential information to the PSPC as they conduct an investigation. B) Pleading to a lower count of felony C) Being barred indefinitely by a regulatory authority D) Conviction of a misdemeanor
d. Your answer was correct! Hide Explanation Explanation: A misdemeanor conviction in itself is not enough to bring forth a disciplinary hearing. However, repeated misdemeanor convictions would be indicative of a disrespect for the law by the covered person and those actions might very well lead to disciplinary action. All of the other choices are specifically mentioned as a basis for disciplinary action
All of the following activities would constitute a violation of Standard II-B, Market Manipulation, except: A) An analyst reduces earnings estimates for the upcoming quarter, so that when that firm does release its earnings, it will give the impression that the firm beat its estimate by a wide margin B) Trading between accounts owned by the same person or entity, in an effort to boost daily volume C) After an announcement of disappointing sales, buying that stock aggressively even when the price is falling D) Spreading false rumors in order to depress the value of a stock that a manager wishes to purchase
c. Your answer was a, and was incorrect. Hide Explanation Explanation: Standard II-B is intended to prevent inappropriate and manipulative activities that affect the integrity of the capital markets. It does not preclude trading activities simply because they might be contrary to current opinion. Indeed, contrarian trading strategies are a legitimate practice.
A brokerage firm wishes to build a "firewall" between its research and investment banking operations to avoid a violation of Standard II-A, Material Nonpublic Information. All of the following elements are vital to building an effective firewall, EXCEPT: A) Interdepartmental communications are filtered through the legal or compliance department. B) Employees in possession of material nonpublic information must immediately place this stock on a restricted trading list. All departments are bound by this list. C) Employees may be permitted to work in both departments, so long as they are willing to promise (in writing) not to communicate sensitive information to the wrong department. D) Employee trading records must be forwarded to the compliance department.
c. Your answer was a, and was incorrect. Hide Explanation Explanation: A typical firewall would prohibit any employee from working in both the research and investment banking departments. Promising to "keep quiet" about sensitive information is insufficient to ensure compliance.
Sunny Day Investment Consultants has enjoyed growth in new accounts and as a result, has hired several new analysts, all of whom have the CFA designation. It wishes to promote this fact by pointing to the presence of so many CFA charterholders, which translates into superior research, which (in turn) translates into superior returns. Which of the following statements is most accurate? A) Violation of Standard I-C, Misrepresentation, because of the misleading statements regarding the capabilities of the new staff members. B) No violation, though it comes close to violating Standard III-D, Performance Presentation. In this case, the firm is covered since it did not specifically quote performance numbers. C) Violation of Standard VII-B, which covers how the Chartered Financial Analyst designation is represented. Stating that CFA charterholders provide "superior" research is not a dignified use, but instead attempts to exaggerate. D) No violation. Sunny Day is promoting the worthiness of the CFA designation and indirectly, promoting the values of the CFA Institute.
c. Your answer was a, and was incorrect. Hide Explanation Explanation: Standard VII-B is designed to prevent undignified use of the CFA designation, e.g. promising "superior" research, returns, etc. simply because the analysts are CFA charterholders
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