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CFA Level 1 Ethics Investopedia Qs
colin_andersen

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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


Which of the following is not a goal of GIPS? A) Enhance the professionalism in the industry B) To accurately measure performance which can later be used as a benchmark for such things as calculating bonuses for portfolio managers C) Improve the level of service to clients in the investment management industry D) Achieve greater uniformity among performance presentations


b. Your answer was a, and was incorrect. Hide Explanation Explanation: The objective of GIPS is to set standards for presenting performance results, as well as facilitating industry-wide ethical goals (comparability, service, professionalism). Obviously, calculating bonuses is not a primary intention.


You are the head of research for a regional brokerage firm. According to Standard I-C, Misrepresentation, which of the following acts by your department's analysts would constitute a violation of this Standard? I. Use of factual information published by a widely known financial and statistical reporting firm without actually acknowledging that source. II. Attributing quotes to "leading experts" without actually acknowledging who these experts are. III. In an oral discussion with a prospective client, an analyst cites a statistical finding from a recent journal article without acknowledging the source. IV. An analyst makes some revisions to a global research report to conform with his jurisdiction's securities laws and publishes the revised report as his own. A) I, II and IV only B) I, II, III and IV C) II and IV only D) II, III and IV only


d. Your answer was a, and was incorrect. Hide Explanation Explanation: All outside sources used by the analyst must be acknowledged. The only exception to this rule is if the analyst is using financial or statistical facts that are published by a widely recognized reporting service.


To claim compliance with GIPS, a firm must: I. Comply with at least half the recommended standards II. Include each portfolio in at least one composite calculation III. Use average asset value in its calculations of composite returns IV. Have an independent third party verify its performance presentations A) III and IV only B) I, II, III and IV C) II, III and IV D) II only


d. Your answer was correct! Hide Explanation Explanation: Choice I is incorrect because it is not mandatory to follow any standards that are classified as "recommended", in order to be in compliance. Choice III is a violation since beginning of period asset values must be used in calculating composite returns. IV is incorrect because an independent third-party verifier is recommended, but not mandatory.


Which of the following duties must a member fulfill while managing a trust account in order to comply with Standard III-A, Loyalty, Prudence and Care? I. The Prudent Man Rule mandates that the prime objective in managing a trust is to preserve the value of the corpus of the trust, and only then to focus on generating a reasonable return. II. The Prudent Man Rule and the Prudent Investor Rule are similar in that they both view an investment in the context of a bigger portfolio. III. As long as a manager adopts a conservative stance in order to preserve capital, even a relatively inferior performance would meet the requirements of the Prudent Man Rule. IV. Paying above-average commissions to a broker for research and other services is strictly prohibited under any condition. A) I only B) I, II and IV only C) I, II, III and IV D) II only


a. Your answer was d, and was incorrect. Hide Explanation Explanation: Choice II is incorrect because only the Prudent Investor Rule views an investment in the context of a bigger portfolio. The Prudent Man Rule, on the other hand, would view an investment only based on its merits as a stand-alone instrument. III is incorrect because being very conservative is not an excuse for underperformance; in other words, the manager did not fulfill her duties. IV is incorrect because paying above-average commissions to a broker for research and other services may be justified if the fiduciary can prove that the value provided from these services warrant the extra costs associated with it.


Mike Elliot, CFA, was recently hired as an investment manager of a large financial institution that primarily manages pension assets. Which of the following must Mike keep in mind in order to be within the guidelines of Standard III-A: Loyalty, Prudence and Care? I. Act only in ways that are in the best interests of the firm. II. Make sure that earning a reasonable risk-adjusted return is the primary objective when managing pension assets, as opposed to aiming for just absolute levels of return. III. Proxies must be voted in a manner as to benefit the plan sponsors, who are the ultimate clients of the firm. IV. If soft dollars are used, no other account must benefit from the resulting services other than the plan from which the dollars originated. A) IV only B) II only C) I and II only D) I, II and III only


a. Your answer was d, and was incorrect. Hide Explanation Explanation: Choice I is incorrect because the question tests fiduciary duty owed to clients, i.e. Mike's duty to his employer is addressed in a separate Standard. Choice II is incorrect; as a fiduciary, the primary objective should be to preserve the value of the assets with which Mike has been entrusted. Choice III is incorrect, as fiduciary duty is owed to plan participants, not plan sponsors, and proxies must be voted in a way which benefit those plan participants. Choice IV is correct as it indicates an appropriate use of soft dollars.


All of the following are violations of Standard I-C, Misrepresentation, except: A) Summarizing an original report belonging to someone else, and publishing the summary as proprietary research B) Indicating that the trailing P/E ratio on a stock is 14.5 without acknowledging the source of this figure C) An analyst attributing a quote to the original source, but omitting the caveats of the original author, which the analyst deems as irrelevant D) Attributing some statements to an "inside source", without actually stating the name of the source


b. Your answer was d, and was incorrect. Hide Explanation Explanation: Communicating statistical financial information does not need to be attributable to a particular source.


At Epstein Securities, it is very common for clients to reward the managers for outstanding performance. These rewards are in addition to the performance bonuses that the managers automatically receive from the employer. Susan Williams, CFA, is concerned that this practice may violate Standard IV-B, Additional Compensation Arrangements, and she volunteers to draft a disclosure document for her compliance department. What information would not be necessary in this type of disclosure? A) The nominal value of the compensation B) If the compensation is non-monetary, the items and services being received instead C) The duration of the agreement D) The objectives and risk tolerances of the clients willing to make these extra payments


d. Your answer was correct! Hide Explanation Explanation: Under this scenario, the issue being addressed is disclosure of additional compensation to the manager. Consequently, the objectives and risk tolerances of the clients willing to make these extra payments were already determined when the accounts were originally set up, and the employer does not need to be informed once again.


All of the following are compliance methods designed to prevent insider trading rules violations except: A) Prevent employees of an investment banker from becoming directors of companies that issue securities. B) Review client accounts for any unusual trading activity. C) Have separate support staff for the retail and corporate finance divisions. D) Urge issuer to disseminate information if there has been a breach.


a. Your answer was d, and was incorrect. Hide Explanation Explanation: Employees of an investment bank are not necessarily prevented from becoming directors of companies that issue securities. However, in this case, there are specific "conflict of interest" disclosures to which they must abide


Which of the following statements is false with respect to the procedures related to professional conduct? A) A private censure is a more serious sanction than a public censure. B) A summary suspension will automatically become a revocation of the right to use the CFA designation and the right to be a member if the covered person does not petition for a review within five years of the summary suspension date. C) The disciplinary review subcommittee has the authority to dismiss the sanctions that are proposed by the designated officer. D) A designated officer may only impose a private censure. For more serious sanctions, the matter must be referred to a hearing panel.


a. Your answer was d, and was incorrect. Hide Explanation Explanation: A private censure would only publish the act that is deemed as a violation, whereas a public censure will publish both the act and the name of the violator, thus making it a more serious sanction.


A computer hardware firm invites Williams to an analyst conference in which the firm pays for all air and hotel expenses, and also gives each analyst its latest and greatest laptop computer model, which it hopes will create favorable buzz for the innovative new product. Williams views this gift as excessive and a potential conflict of interest to writing an objective company research report. How should Williams proceed to remain in compliance with the Code and Standards? A) Give back the laptop computer but accept the hotel and air fare since those expenses are a necessary part of doing business. B) Discontinue all coverage of this company and report the transaction to the compliance department. C) Give back the laptop and pay for all hotel and air fare (or reimburse the firm if those expenses were previously paid). D) Keep the laptop but give an honest and thorough critique in a research report.


c. Your answer was d, and was incorrect. Hide Explanation Explanation: In order to avoid any conflict of interest or the appearance of conflict, acceptance of gifts must be strictly limited. At the same time, there is no reason to overreact and discontinue all coverage. Simply returning the gifts is the most appropriate course of action.


Which of the following procedures are intended to ensure compliance with Standard V-B, Communication with Clients and Prospective Clients? I. Members must indicate the limitation of the analysis and distinguish between fact and opinion. II. Verbal discussions about an investment are not subject to the same stringent rules governing written research reports. III. If a Member comes across information that she deems to be unimportant, she may omit that fact from her research report. IV. A research report must contain the basic characteristics of an investment that is being recommended. A) III and IV only B) I, III and IV only C) I and III only D) I, II and IV only


b. Your answer was d, and was incorrect. Hide Explanation Explanation: Choice II is incorrect because the definition of a research report does include verbal recommendations, be it in person or over the phone. Therefore, verbal discussions about an investment are subject to the same stringent rules that govern written research reports.


The Global Investment Performance Standards apply to all of the following parties except: A) Mutual fund companies B) Pension fund managers C) Plan sponsors D) Private wealth management firms


c. Your answer was d, and was incorrect. Hide Explanation Explanation: GIPS applies to those entities which "manage" assets. In general, plan sponsors simply contribute funds to the plan; it is the job of the pension fund managers to manage those funds. Thus, it is the latter group (and all the other answer choices) to which GIPS would be applicable.


Which of the following statements is (are) true with respect to the creation and maintenance of composites in accordance with GIPS? I. All fee-paying discretionary portfolios must be included in only one composite that is representative of investment objectives of the portfolio. II. As soon as a new portfolio becomes activated, it must be included in the composite calculations. III. Even portfolios that are no longer under management must be included in the calculations of the historical composite results. IV. Convertible bond returns should be included in the equity composite calculations unless the firm and the client decide otherwise. A) I, II and III only B) I, II and IV only C) III and IV only D) I, II, III and IV only


c. Your answer was d, and was incorrect. Hide Explanation Explanation: Choice I is incorrect - GIPS requires all fee-paying, discretionary portfolios to be included in at least one composite. However, a firm may choose to include a particular account in more than one composite, depending on how the firm defines its criteria for inclusion. II is incorrect because new portfolios may not be included in composite calculations until they have been managed for one full measurement period.


Which of the following statements would constitute a violation of the intent of GIPS? A) To meet the spirit of GIPS, firms will have to do more than just meet the minimum requirements of the Standard. B) In order to claim compliance, firms must meet all the requirements of GIPS, including calculations, composites, presentation and disclosure. C) If there is one requirement that has not been met, a firm can simply state that they are in compliance with GIPS with the exception of that one requirement. D) The CFA Institute will take action against companies who make a false claim with respect to their compliance with GIPS.


c. Your answer was a, and was incorrect. Hide Explanation Explanation: GIPS does not provide for "partial" compliance. A firm either complies fully or it makes no reference to its degree of compliance


Randy Cross, CFA, is the head of research of a very large investment advisory firm. Upon review of the all the reports produced by his analysts, which of the following circumstances would not represent a violation of Standard I-C, Misrepresentation: A) Use of excerpts from a fellow analyst's report without acknowledgement B) A table that is used with the reference given, but without the disclosure items that were presented with the original table C) Making reference to a quote made "by a leading expert" without actually acknowledging who this expert was D) A detailed graph, produced by a widely recognized statistical service, is used without acknowledgement


d. Your answer was correct! Hide Explanation Explanation: All facts and statistics, other than those that are obtained from widely recognized statistical services, must be acknowledged to their source.


Carla Sullivan, CFA, intends to leave her current employer and start her own consulting firm. At the present time, her intentions are confidential and unknown to either her clients or her firm. However, she expects that a number of her clients are loyal to her and will follow her to the new affiliation. Under the guidance of Standard IV-A, Duty of Loyalty, would Carla be in violation if she approaches her current customers? A) No, so long as she continues to actively manage those accounts and the firm continues to draw its quarterly fee. B) No, since she doesn't have a binding contract and the clients don’t have binding contracts, then she hasn’t broken any laws. C) Yes, Carla's duty to her current employer takes precedence over her intended move; she could not mention her intentions until after resigning her current position. D) No, as long as Carla notifies her supervisor, in writing, of her actions.


c. Your answer was a, and was incorrect. Hide Explanation Explanation: In this circumstance, the duty of loyalty to one's employer takes precedent over personal considerations. Until her intentions are clearly communicated, Carla could not approach current customers.


Which of the following is not a requirement of GIPS with respect to the types of data that may be used in the computations? A) Portfolios should be valued at least quarterly. B) Valuation of fixed-income instrument must be conducted using the accrual method. C) Firms must use trade-date accounting as opposed to settlement-date accounting. D) The portfolio value used to compute the beginning-of-period value should be computed using the cost basis.


d. Your answer was correct! Hide Explanation Explanation: Portfolio values must be calculated using their market values, at least quarterly (with monthly valuation recommended). Cost basis should not be used


Which of the following statements is (are) true with respect to the Standards of Professional Conduct? I. All client activities, legal and illegal, must be kept confidential. II. Communicating that the mere possession of the CFA charter is an assurance of better investment performance is strictly prohibited. III. Members must disclose to clients any regular compensation arrangements that they may have with their employer. IV. If there are any referral fees, its terms must be disclosed to clients in writing. A) I, II and IV only B) II and IV only C) II, III and IV only D) I, III and IV only


b. Your answer was a, and was incorrect. Hide Explanation Explanation: Choice I is false, since a Member is required to disclose to his or her supervisors any client activities that may be deemed a violation of any laws. III is untrue because Members must only disclose to clients compensation arrangements with the employer that may be deemed in conflict with client interests. Regular compensation arrangements need not be disclosed


Which of the following does not represent a violation of the Code and Standards? A) An analyst attending a very important conference held at a resort that is fully paid for by an issuer. B) Acquiring shares for personal accounts ahead of a pending order to sell that exact same stock. C) A broker acquiring shares, at market price, of an oversubscribed IPO. D) An investment counselor guaranteeing the performance of a stripped Treasury security if it's intended to be held until maturity.


b. Your answer was a, and was incorrect. Hide Explanation Explanation: While all efforts must be made to avoid front-running, in this case, the covered person is doing the opposite of the pending order. It would only be unethical in this case if the covered person sold the shares ahead of the client selling. In other words, dispose of the shares before their price drops


Which of the following would constitute a violation of the proper use of the CFA designation: I. A supervisor illustrating to new employees how CFA charterholders on average earn a higher degree of compensation than non-charterholders. II. Mailing a factual survey to prospective clients which indicate that firms who employ a high proportion of CFA charterholders, such as themselves, generate above average returns for their clients. III. An individual passing the Level II exam and indicating that she is a Level III Candidate without first having registered for next year's exam. IV. A CFA charterholder mailing a five-page letter to clients indicating his interpretation of what it means to have a CFA charter. A) II and III only B) I only C) I, II, III and IV D) II, III and IV


d. Your answer was c, and was incorrect. Hide Explanation Explanation: Choice I is not a violation because the CFA Institute frequently publishes findings of studies comparing the compensation levels of investment professionals with varying backgrounds. II would constitute a violation since the firm would be linking the CFA designation to better performance. III is a violation since a candidate must register for that level exam in order to claim to be a Candidate for that particular level. IV is a clear violation since any description about the designation must be concise and factual.


Anna Jones, a portfolio manager at XYZ Securities, has handled the retirement fund of ABC Industrial, a large institutional client, for several years. ABC now wishes to hire Anna as a consultant and advisor for its strategic planning. Anna likes working at XYZ Securities and feels she can handle the consulting work in her spare time. Which of the following statements regarding Standard IV-A, Loyalty, is true? A) Anna must inform both interested parties, in writing, describing the type of service to be rendered, the duration of services and expected compensation. B) Anna may take the compensation work for ABC Industrial, so long as she formally documents that she is working a minimum of 40 hours a week for her primary employer. C) While she is encouraged to make full disclosure, Anna has no formal obligation to inform XYZ of her consulting work since there is no conflict of interest. D) Anna must refuse all consulting work out of loyalty to XYZ.


a. Your answer was d, and was incorrect. Hide Explanation Explanation: The "duty of loyalty" to one's employer requires full and formal disclosure. Once provided with the information, the employer can then make a sensible judgment as to whether the outside relationship compromises this loyalty


Which of the following statements related to Standard IV-D, Responsibilities of Supervisors, is true? A) Jones delegates all trading responsibility to Smith, yet is still listed as a supervisor on the organizational chart. Jones is no longer responsible for Smith’s conduct. B) Jones delegates a number of responsibilities to Smith but is still listed as a supervisor. Jones regularly covers the Code and Standards with Smith in order to prevent a violation. C) Jones may not delegate any responsibility to Smith, unless Smith joins the local CFA society. D) Smith is not a member of the CFA Institute. Jones, Smith’s supervisor and a CFA member, is not responsible if Smith violates the Code and Standards.


b. Your answer was d, and was incorrect. Hide Explanation Explanation: Under Standard IV-D, Jones retains responsibility for Smith's conduct, and is required to develop compliance procedures to avoid any violations. Scheduling regular meetings to cover the Code and Standards is an appropriate procedure for compliance.


Carter works as a marketing associate for Wealthy Investment Advisors. On Monday, Wealthy's research department publishes a negative research report on the ABCD Co. On Tuesday, Carter's best customer calls in an order to buy 50 shares of ABCD in an account where the volume of trading is high. How should Carter handle this situation? A) Take the order only after obtaining a signed written authorization. B) Take the order based on the customer’s verbal authorization. C) Refuse to take the order. D) Take the order but first advise the client of the negative research.


d. Your answer was correct! Hide Explanation Explanation: Clients are free to make their own decisions and trade a stock that is negatively viewed, so long as all relevant issues are appropriately communicated to the client prior to taking the order


John Courneya, CFA, is a research analyst within a large brokerage firm. One day, he discovers that one of his fellow analysts, Janet Smith, CFA, was spotted going through some files inside the investment banking division. In order to comply with the Standards of Professional Conduct, John should: A) consult with the company's own compliance officer and ensure that he completely disassociates himself from Janet's actions. B) report this activity to the relevant regulatory bodies. C) consult with counsel outside the firm to ensure objectivity. D) report this activity to the relevant regulatory bodies as well as the investigative branch of the CFA Institute.


a. Your answer was d, and was incorrect. Hide Explanation Explanation: John is simply required to consult with the company's own compliance officer and ensure that he completely disassociates himself from Janet's actions.


Which of the following statements is true with respect to the use of inside information? A) If the issuer reveals material information at a closed-door analyst meeting, and the analysts relay this information to clients, the information is deemed as public. B) In the U.S., violation of insider trading rules may carry a maximum jail time of three years. C) Mosaic theory states that a violation would only take place if the information acted upon relates to a tender offer. D) Traditional theory asserts that a violation is deemed to have taken place only if the individual initiating the trade has a fiduciary duty towards the issuer.


d. Your answer was correct! Hide Explanation Explanation: Two theories are used to determine if an accused has committed securities fraud: Traditional Theory (which questions whether there is a fiduciary duty owed) and the Misappropriation Theory (where the presence of fiduciary duty is not relevant).


Which of the following disclosure items is not a requirement of GIPS? A) The total assets under the management of the firm during each period B) Minimum portfolio values, below which the results of the affected portfolios are excluded from the composite computations C) Whether the weights used to compute composite returns were derived using the portfolio values at the beginning or the end of the evaluation period D) The definition of what is meant by firm-wide


c. Your answer was d, and was incorrect. Hide Explanation Explanation: The computation of weights is neither a choice nor a disclosure item. It is explicitly stated that the weights be determined by measuring the beginning-of-period values of the portfolios.


All of the following statements are true with respect to GIPS except: A) Even accounts that are no longer under management must be included as part of the historic performance of the firm's composites. B) A dollar-weighted return methodology must be used when presenting performance. C) Returns must be calculated net of any trading costs. D) Returns of simulated portfolios must be kept separate from the returns of actual fee-paying portfolios.


b. Your answer was d, and was incorrect. Hide Explanation Explanation: Only the time-weighted return methodology may be used when presenting performance. Dollar-weighted return computations are not allowed.


In an effort to attract more senior clients, a regional investment counseling firm is advertising that their long-term Treasury bond funds are liquid and guaranteed. Which of the following statements would best describe such advertising? A) Standard V-A, Diligence and Reasonable Basis, has been violated since the firm doesn't even have comprehensive details about this fund for the public. B) Standard III-D, Performance Presentation, has been violated since no specific fund returns are mentioned, only the fact that returns are guaranteed. C) There are no violations since stating that long-term Treasury bonds are guaranteed is a statement of fact. D) Standard I-C, Misrepresentation, has been violated with the claim that this company has been making.


d. Your answer was correct! Hide Explanation Explanation: Long-term Treasury bonds are "guaranteed" only if the bonds are held to maturity. Candidates should know from the fixed income section that fixed-income securities can experience meaningful price swings due to interest rate risk. Moreover, a fund manager is almost certain to trade the portfolio (to manage duration, for example). In this case, a guarantee for a specific return directly violates Standard I-C.


Which of the following ethical responsibilities does the Code of Ethics require? I. Members must conduct themselves with integrity, competence, diligence, respect and in an ethical manner. II. Members must use reasonable care and exercise independent professional judgment. III. Members must hold themselves out to be associated with the CFA Institute and thus possess superior ethical standards and investment knowledge. IV. Members must encourage fellow investment professionals to conduct themselves in a professional and ethical manner. A) I and II only B) I and IV only C) I, II and III only D) I, II and IV only


d. Your answer was correct! Hide Explanation Explanation: Choices I, II and IV are straight from the CFA Institute's Code of Ethics. Choice III does not belong: Members and Candidates would never hold themselves out to have superior ethical standards or investment knowledge.


Regarding Standard II-A, Material Non-Public Information: which of the following statements is (are) true with respect to the "misappropriation theory" of determining whether securities laws have been violated? I. A violation occurs only if the covered person owed a fiduciary duty towards a company and still traded in securities while in possession of material nonpublic information. II. A tippee is also guilty if he or she acted on inside information received from an insider when the tippee should have known that this insider was breaching his or her duty. III. Under this theory, inside information is deemed as property, the theft of which violates securities laws. IV. The misappropriation theory is less restrictive than the traditional theory. A) II and III only B) I, II and III only C) I and IV only D) I, II, III and IV only


a. Your answer was d, and was incorrect. Hide Explanation Explanation: Choice I is incorrect because with the misappropriation theory, a violation occurs even if the covered person did not owe a fiduciary duty towards a company. IV is incorrect because the misappropriation theory is more restrictive (not less restrictive) than the traditional theory. For example, under the traditional theory, securities fraud only takes place if the covered person who traded on inside information had a fiduciary duty towards the company whose shares are being traded. Under the misappropriation theory, a violation would have taken place regardless of whether any fiduciary duty was owed.


Which of the following procedures are intended to ensure compliance with Standard I-B, Independence and Objectivity? I. Regardless of the employer's consent, Members should not accept gifts from clients that exceed a value of $100. II. If an IPO is oversubscribed, an analyst may only take an allocation of shares that is reasonable compared to her previous trading patterns. III. When making a recommendation for a particular stock, Members must disclose if their spouse or a close relative holds those shares. IV. A restricted list should be constructed if the Member's firm is unwilling to issue a negative rating for some particular stocks. A) I and II only B) I and IV only C) I, II, III and IV D) III and IV only


d. Your answer was correct! Hide Explanation Explanation: Choice I is incorrect; client gifts are permissible so long as they are disclosed. The restriction on gifts and $100 limit is designed for non-client relationships - for example, items provided by a company that is being researched and recommended by an analyst. II is incorrect because if an IPO is oversubscribed, an analyst should avoid taking any allocation of shares, as it would be placing her own interests above those of her clients.


During the investment process, which of the following duties are members expected to carry out in order to comply with Standard V: Investment Analysis, Recommendations and Action? I. Ensure that all recommendations are adequately supported by keeping a record of all materials that were used in order to make the recommendation. II. Publish unadjusted ratios of foreign securities but with a disclaimer indicating that differences may exist between foreign reporting and home country reporting. III. Avoid material misrepresentation in research reports and investment recommendations. IV. A member may make investment recommendations by relying on sources other than his own firm's research department so long as this outside source is known to have done thorough and diligent work on the specific issue. A) I and III only B) I, III and IV only C) I, II, III and IV D) I, II and III only


b. Your answer was d, and was incorrect. Hide Explanation Explanation: Choice II would fall short in terms of diligence and thoroughness. A member must make an effort to make ratios reported by foreign entities compatible to the ratios that would be reported by companies listed in the local markets


Dan Smithers, CFA, is having a conversation with a prospective client who has a moderate to large degree of risk aversion. Dan informs this prospect that over the last year, his small-cap stock portfolio outperformed the DJIA by 7%. Furthermore, he implies that barring any major shocks to the market, he doesn't see why he can't produce the same performance in the future. However, this large outperformance came from two small-cap stocks that received merger offers during the period. Which of the following statements best describe Dan's actions? I. Dan made no guarantees and therefore did not violate Standard I-C, Misrepresentation. II. Dan violated Standard Standard I-C, Misrepresentation. III. Dan violated Standard III-D, Performance Presentation. IV. By recommending small cap stocks with an individual who wouldn't be able to tolerate that level of risk, Dan is violating Standard III-C, Suitability. A) I, II and IV only B) II and IV only C) I, III and IV only D) II, III and IV only


b. Your answer was d, and was incorrect. Hide Explanation Explanation: While Dan did not make any explicit guarantees, he did insinuate that past performance would be indicative of future results. Thus, choice I is incorrect, while choice II is accurate. Nothing from the example suggests that Dan presented performance information inappropriately (eliminating choice III). Choice IV is true as it indicates that the client is risk averse, while the portfolio is more appropriate for risk-tolerant individuals.


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) I and IV only B) II and IV only C) III only D) III and IV only


a. Your answer was correct! 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, that is their duty alone.


Homer Smith, an analyst with Springfield Securities, covers Burn's Corp. as part of his duties. Homer's wife, Marge, recently bought some shares of Burn's Corp. for their kid's education fund through her online account held with some other brokerage firm. In order not to violate any laws or Standards, Homer should: A) Simply disclose this conflict of interest to his employer B) Encourage Springfield Securities to place Burn's Corp. on a restricted list C) Not worry about anything since his wife trades independently and with another brokerage firm D) Discontinue coverage of Burn's Corp. because of this inherent conflict of interest


a. Your answer was d, and was incorrect. Hide Explanation Explanation: It is very common for analysts, or their immediate family members, to trade in shares that the analyst covers for his or her employer. As detailed in Standard VI-A, Disclosure of Conflicts, Homer must notify his employer of this potential conflict of interest. It is then up to the employer to assess the situation and decide what course of action would best address this conflict.


To judge the suitability of an investment approach and avoid violating Standard III-C, Suitability, a CFA Member or Candidate would be likely to take the following into consideration: A) the investor’s return and risk objectives and time horizon. B) a large unrealized capital gain that the client wishes to offset gradually with short-term losses. C) a pending real estate sale, from which proceeds will be contributed to the current portfolio. D) All of the above.


d. Your answer was correct! Hide Explanation Explanation: Members and Candidates must be thorough in gathering client information and forming investment policy. It starts with risk/return objectives and time horizon and extends to any unique circumstances. All of this information could potentially be relevant.


Fred Downer, CFA, was recently hired by the compliance department of a very large brokerage firm. Soon after beginning his employment, he discovered that the heads of the compliance department were consistently being unduly influenced by the heads of the sales department. In short, compliance procedures were not being followed. In order not to violate the CFA Institute's Code and Standards, Fred should: A) inform the regulatory agencies that govern such matters. B) disassociate himself only from the activities which he deems to be in breach of compliance procedures. C) decline, in writing, to accept any supervisory duties until compliance procedures are properly enforced. D) simply have a discussion with his supervisors and point out all the breaches of the compliance procedures.


c. Your answer was a, and was incorrect. Hide Explanation Explanation: A system that is only partially in compliance is not a compliant system. Therefore, Fred cannot have any association with the compliance system unless his supervisors make the system workable again


You are the human resources manager of a large brokerage firm. Over the last month, various incidents have been brought to your attention involving the employees of the firm. Which of the following incidents are violations of Standard I-D, Misconduct? I. A serious car accident as a result of the employee grossly violating the local highway traffic act. II. A worker shows up to work in an intoxicated state because he was "entertaining" clients during lunch. III. A worker has been convicted a third time for a misdemeanor involving littering in public. You know for a fact that this was a hard-working employee who probably just didn't have time to find a garbage can on his way to work. IV. A complaint has been filed against the head of research by one of his subordinates because he, the head of research, conducted a criminal background check that the subordinate felt was an invasion of her privacy. A) I, II and III only B) II and III only C) I and II only D) I, II, III and IV


b. Your answer was c, and was incorrect. Hide Explanation Explanation: Choice I would be a violation if the conviction was a felony or is a something that could result in prison time greater than one year. However, most car accidents do not fall under this category. IV is not a violation because it is the duty of supervisors to conduct a background check on employees to determine their eligibility to work in the finance profession


Which of the following statements is (are) true with respect to the key characteristics of GIPS? I. Should these Standards be more strict than local laws, yet are in conflict with each other, then the managers must report two sets of performance presentation figures. II. A fee-paying discretionary portfolio may only be accounted for in one composite. III. Non-discretionary portfolios should not be included in any of the composites. IV. Countries without established performance presentation standards, may incorporate Global Investment Performance Standards into their system by way of creating a "Country Version" of GIPS. A) I and IV only B) III only C) I, II and IV only D) I, II and III only


b. Your answer was correct! Hide Explanation Explanation: Choice I is incorrect. The rule is that if the Standards are more strict than local laws, yet they are in conflict with each other, then the managers must adhere to the local laws, but must simultaneously disclose this conflict in their presentation. II is incorrect. It is possible for a fee-paying discretionary portfolio to be accounted for in more than one composite. IV is incorrect. Countries without established performance presentation standards, may incorporate GIPS into their system by way of creating a "Translation of Global Investment Performance Standards. The "Country Version of Global Investment Performance Standards" is for those countries that already have presentation standards in place.


Before implementing an investment decision for a client, all of the following are required except: A) a consideration of the impact that each individual investment will have on the portfolio as a whole. B) a disclosure as to how the firm's model portfolios for each risk classification have performed. C) an inquiry as to what the client's investment horizon is. D) a disclosure to the client as to how the stock selection criteria is set.


b. Your answer was d, and was incorrect. Hide Explanation Explanation: The performance of model portfolios is hardly a requirement. However, covered persons may disclose such information as long as it is clearly pointed out that the portfolios are indeed only models.


Which of the following is not a component of the Code of Ethics? A) Be a credit to the profession B) Make independent decisions C) Exercise due diligence D) Act with integrity


c. Your answer was a, and was incorrect. Hide Explanation Explanation: Exercising due diligence is a component of the Standards of Professional Conduct, not the Code of Ethics


Jamie Stone has been hired by Trump Securities in order to implement procedures that will improve the firm's dealing with clients. Which of the following procedures would be in compliance with Standard III-B, Fair Dealing? I. Shorten, as much as possible, the length of time between when the recommendation is formed by the research department and the time that this news is actually disseminated. II. Set a predetermined formula that will be used to allocate a portion of future private placements over to the firm and its employees. III. Implement a system that will notify all the clients of the firm if there is a new investment product or opportunity. IV. Set some guidelines that may be used in the future to determine whether a change in the underlying investment warrants a change in recommendation. A) II only B) I and IV only C) I, II, III and IV D) II and III only


b. Your answer was d, and was incorrect. Hide Explanation Explanation: Choice II is incorrect because the clients have the first opportunity to buy as many shares as they want. Hence, a pre-set method of allocating some future issues to non-clients would be a violation of this Standard. III is not exactly correct because only those clients who might find the investment to be "suitable" must be contacted as soon as possible. In other words, a conservative client who has expressed no interest in growth IPOs, need not be notified.


Which of the following are the main topics addressed by GIPS? I. Choosing the appropriate benchmark for comparison purposes II. Creation and maintenance of composites III. Disclosure IV. Presentation of performance results A) I, II, III and IV B) II, III and IV only C) II only D) II and IV only


b. Your answer was d, and was incorrect. Hide Explanation Explanation: Choosing an appropriate benchmark in order to compare a manager's results against it is not one of the main topics addressed by GIPS.


Janet Jackson was recently hired as the new compliance officer of Long Beach Securities. Upon orientation of the firm, she learns that the head of research is also responsible for the junior analysts that work in the corporate finance department. Which Standards would be susceptible to violation given this situation? A) Standard I-B, Independence and Objectivity B) Standard I-D, Misconduct C) Standard II-A, Material Nonpublic Information D) Standard IV-C, Responsibilities of Supervisors


c. Your answer was d, and was incorrect. Hide Explanation Explanation: Standard II-A, Material Nonpublic Information, discusses the need for "firewalls" in order to keep sensitive information secure. Corporate finance personnel are deemed as "temporary insiders", with any information they may gain in the course of their duties required to be kept strictly confidential, even from the analytical department of the same firm. For Janet to build an effective "firewall", there must not be an overlap of personnel or supervisory scope across these two very different departments.


In an effort to increase the marketability of her investment firm, Sally Mae would like to construct a brochure describing the investment professionals that they employ. Which of the following statements would be a violation of the Code and Standards? A) A concise description of the requirements that must be met before a CFA charter is granted B) An indication that the firm's CFA charterholders are a testament to the firm's potential to generate superior rates of return C) An indication of the proportion of the total employees of the firm that are CFA charterholders D) An indication of the number of years of experience associated with each CFA charterholder in the firm


b. Your answer was c, and was incorrect. Hide Explanation Explanation: Covered persons are only allowed to give a concise description of what is required in order to earn a charter. They are not allowed to make inferences as to what the possession of a CFA charter may imply


An analyst comes into the possession of material nonpublic information. The analyst should be aware that according to the misappropriation theory: I. Insider trading restrictions only apply to tippees. II. Insider trading restrictions apply to even those who owe no fiduciary duty towards the shareholders of that particular issuer. III. Trading would still be possible so long as the information was not obtained illegally. IV. Insider trading restrictions only apply to those who owe a fiduciary duty towards the shareholders of that particular issuer. A) II and III only B) III only C) II only D) I and IV only


c. Your answer was a, and was incorrect. Hide Explanation Explanation: According to the misappropriation theory, securities fraud will have been committed even by those who owe no fiduciary duty towards the shareholders of that particular issuer, if they traded on inside information obtained from sources to whom they owed a duty of trust and confidence. Choices I and IV are incorrect then because the restrictions extend way beyond just the tippee and those who owe a fiduciary duty to the shareholders. III is incorrect because violations would have occurred even if the inside information wasn't obtained illegally


All of the following are necessary in order to be reinstated after a revocation, except: A) The covered person accepts the conditions for reinstatement as set forth by the PSPC. B) Pass a Standards of Practice examination administered by the CFA Institute or a member society. C) The covered person can demonstrate to the PSPC that he is once again fit to practice as an investment professional. D) At least five years have passed since the date the revocation was imposed.


b. Your answer was d, and was incorrect. Hide Explanation Explanation: The covered person will have to pass a "self-administered" standards of practice examination. There is no oversight by the CFA Institute or a member society as the covered person takes the test


Joe Skinner, CFA, is perhaps one of the hardest working analysts in the industry. Recently however, he was arrested for drunk driving. This follows his two recent arrests last year for domestic violence. Through the skillful negotiation skills of his lawyer, Joe was given no jail time and his probation period was shortened to just six months. Which of the following statements would be true in this situation? A) Standard I-B, Professional Misconduct, has clearly been violated. B) Standard I-B, Professional Misconduct, was not violated because this conviction was neither a felony nor did it result in jail time greater than a year. C) None of these arrests are tied to his line of work and thus his private life should be segregated from his professional life. D) Standard I-B would only be violated if Joe violates his parole conditions.


a. Your answer was d, and was incorrect. Hide Explanation Explanation: Joe has had a few arrests and while his lawyer got him off a conviction based on his negotiation skills, it does not change the fact that Joe has very little respect for the law. These transgressions reflect poorly on his integrity and competence


Which of the following is not a requirement of GIPS with respect to presentation and reporting? A) If a new firm is simply the result of an ownership change, then the new firm may use the performance record of the original firm as its very own historical record. B) A measure of how the portfolio returns were dispersed around each composite's reported average return C) The annual equivalent of composite performances that were less than a year D) The number of portfolios that make up each composite


c. Your answer was d, and was incorrect. Hide Explanation Explanation: Composite performances that are less than a year may only be reported as a periodic return, with a corresponding statement as to how long that period is. However, periodic returns less than a year, may not be annualized


Which of the following procedures are required, as opposed to recommended, by GIPS? A) inclusion of the firm's management fee schedule when performance is presented gross of those fees. B) disclose any significant events that may help to explain the performance of the composites. C) create separate composites for portfolios that use hedging. D) use of accrual accounting rather than cash basis.


d. Your answer was b, and was incorrect. Hide Explanation Explanation: The use of the accrual method is a requirement. The objective of the accrual method is to account for any pending income that has yet to be received in the cash account


Which of the following compliance procedures would be effective in enforcing insider trading rules? I. A Member who comes to the possession of insider information must inform a supervisor of that fact before doing any trading in that security. II. There should be a firewall between the research department and the sales division of a brokerage firm. III. There should be no overlap of even support personnel between the corporate finance department and the brokerage side. IV. If a Member comes into the possession of inside information by way of a breach of duty by a tipper, than the Member's only duty is inform his or her supervisor and refrain from trading. A) I and IV only B) I, II, III and IV only C) II, III and IV only D) I and III only


d. Your answer was a, and was incorrect. Hide Explanation Explanation: Choice II is incorrect because the research analysts and the sales people (brokers) are effectively the same department - brokers should have access to all public information that analysts possess. A firewall should be between the corporate finance department and the brokerage/research side. IV is incorrect because if a Member comes into the possession of inside information, his or her duties only start by informing the supervisor and refraining from trading. In addition, the Member is required to make a reasonable effort to have inside information made public.


Babarino Securities is putting a brochure together in order to market the firm more effectively. Which of the following statements would not violate Standard VII, Responsibilities as a CFA Institute Member or CFA Candidate? I. "Our firm has some of the most respected CFAs working in the industry." II. "Our head of research is a CFA charterholder who was recently awarded the Most Accurate Forecaster Award." III. "The Chartered Financial Analysts in our fixed-income department have a combined experience of 157 years." IV. "Our managing director has earned the right to use the CFA designation." A) II and III only B) I and III only C) I, II, III and IV D) II and IV only


d. Your answer was a, and was incorrect. Hide Explanation Explanation: Choice I is incorrect because "CFA" or "Chartered Financial Analyst" should never be used as a noun. For instance, the firm can say that they have CFA charterholders on staff, but they can't say that they have CFAs. For this same reason, III is incorrect. IV is correct because "CFA" is used as an adjective.


In order to comply with GIPS, which of the following sources of return must be included in computing composite returns? I. Pending dividend payments II. Unrealized gains on asset values III. Accrued interest from fixed-income securities IV. Realized gains on asset values A) I, II, III and IV only B) II, III and IV C) I, III and IV only D) III and IV only


a. Your answer was correct! Hide Explanation Explanation: In the original GIPS, the accrual method to account for pending dividends was only recommended, not required. Starting with 2005 returns, it became a requirement. All other sources of return have always been part of GIPS.


Vinnie Bombastic is a stock analyst with Yogi Securities. Vinnie's brother, Johan, has asked Vinnie to serve as a consultant for a new income trust fund that he has started. Because Johan is his younger brother and is running a small operation, Vinnie decides to provide his time for free. However, in order to ensure compliance with Standard IV, Duty to Employer, Vinnie is required to do all of the following except: A) Do nothing, as he is dedicating his time for free. Only if he was receiving some form of compensation, would the employer need to be notified. B) Obtain a written permission from the employer after disclosing the length and the amount of compensation that's to be expected from this independent project. C) Inform Johan what Yogi Securities would charge for the same service that is to be provided. D) Obtain a written acknowledgement from Johan that he clearly understands that Vinnie will be performing independently from his employer.


a. Your answer was d, and was incorrect. Hide Explanation Explanation: Even though Vinnie is providing his services for free, it does require a sacrifice of time that could be of use to his primary employer. Moreover, the new venture could be a potential competitor to Yogi Securities. Hence, to the employer, it is the equivalent of losing business to a competitor. Therefore, not informing the employer of this arrangement would be a breach of this Standard.


Which of the following ethical responsibilities does the Code of Ethics require? I. Members must conduct themselves with integrity and dignity. II. Members must use proper care and exercise independent professional judgment. III. Members must hold themselves out to be associated with the CFA Institute and thus possess superior ethical standards and investment knowledge. IV. Members must encourage fellow investment professionals to conduct themselves in a professional and ethical manner. A) I, II and IV only B) I, II and III only C) I and IV only D) I and II only


a. Your answer was correct! Hide Explanation Explanation: CFA Institute members must never hold themselves out to have superior investment knowledge, as this claim is regarded as undignified.


Which of the following is not one of the primary goals of GIPS? A) Enhance the professionalism of the investment industry B) More accurately measure the performance of firms claiming to be compliant with GIPS C) Bolster self-regulation D) Achieve greater comparability among firms claiming to be compliant with GIPS


b. Your answer was a, and was incorrect. Hide Explanation Explanation: Broad ethical goals are the "primary" intention of GIPS (achieve professionalism, self-regulation, comparability). Improved accuracy of measurement is one of many issues associated with comparability, and thus is too specific to be mentioned as a "primary" goal along with the other choices.


Richie Cunningham, CFA, is an acquisition expert with Columbia Securities. John Goodman, an old friend of Richie, asks Richie if he can provide his services, privately, to a deal that John's company is currently working on. In order to comply with the CFA Institute's Standards of Professional Conduct, Richie needs to do all of the following except: A) first give Columbia Securities an opportunity to present its services to John. B) inform his employer of this private compensation arrangement. C) inform his employer of the services that will provided to John. D) get a written confirmation from John that he has read all the necessary disclosure items.


a. Your answer was correct! Hide Explanation Explanation: Consistent with the duty of loyalty to one's employer, providing services privately, (i.e. without the involvement of the employer) can become a delicate situation. Thus the appropriate disclosure items are required to be forwarded, in writing, to both the employer and the private client. In addition, a written confirmation that they have read all the items, is required back from both parties. The employer may insist that they have an opportunity to meet John first, but it is not required under the Standards


Johnny B. Good is an analyst with a major U.S. brokerage firm. Currently, he is working at the firm's branch in the country of Yorkland. Yorkland explicitly forbids analysts to receive any form of benefits from companies that they cover. At a recent analyst convention, one of the firms Johnny covers had placed nominal "courtesy" gifts (worth $150) at the table for each of the analysts. The firm supplying the courtesy gifts was not actually present at the convention, and thus would have no way of knowing which of the analysts accepted the gifts. Johnny should: A) Accept the gift as long as Johnny insists that his firm reimburse the issuer $50 in order to reduce the nominal value of the gift to below $100 B) Accept the gift unconditionally since there is no way the issuer will know which analysts are more receptive to their persuasions C) Accept the gift as long as Johnny insists that his firm reimburse the issuer for the entire cost of the gift D) Not accept the gift whatsoever


d. Your answer was a, and was incorrect. Hide Explanation Explanation: Standard I-B, Independence and Objectivity, requires that all gifts be limited to "token" items not to exceed $100. Offering to reimburse the giver (in an effort to comply) is not viewed as an acceptable practice.


Werner Johnson, CFA, is the vice-president for sales of a regional brokerage firm. At a local golf tournament, he is asked by one of the participants if Werner's firm covers the Asian market. Werner responds that his firm covers the globe and that the participant should stop by one day and see what the firm could do for him. The fact is though, Werner's firm only covers regional over-the-counter stocks. Werner's comments: A) are not a violation since the comment was made on a person-to-person basis B) are not a violation since Werner spoke of this matter during his leisure time C) are a violation of Standard I-C, Misrepresentation D) are not a violation since his comments were simply an effort to invite the participant to explore his company's services


c. Your answer was a, and was incorrect. Hide Explanation Explanation: Misrepresentation of company services, or of individual qualifications, is a violation, irrespective of the circumstances. In addition, Werner's statements may also be deemed as a violation of the Code, since his "lie" is counter to the duty to act with integrity.


Helen Carter, CFA, is a portfolio manager at a large multi-service financial services firm. The investment banking division of her firm was recently hired by Mega Corp. in order to assess the feasibility of conducting a large share buyback program. Which of the following actions should be taken in order to avoid violating the Standards of Professional Conduct? A) Helen, along with all the other investment managers, must sign a confidentiality agreement not to release any information that they may obtain through the investment banking division. B) Helen should immediately cease trading in any of Mega Corp.'s securities. C) Impose a "fire wall" between these two departments. D) The investment banking division should turn down offering their services to Mega Corp.


c. Your answer was a, and was incorrect. Hide Explanation Explanation: It is very important for information not to flow outside the boundaries of the investment banking division. Information found in this department is likely to be material and nonpublic. Therefore, an effective fire wall must be erected around this department.


Bill Houston, CFA, is a research analyst working at a hedge fund company, with numerous "long" and "short" positions in the fund. His research is quite unorthodox in that he actively seeks nonmaterial private information about the issues that he follows. His supervisors are well aware of his methods. According to the Standards of Professional Conduct: A) Bill is simply applying the mosaic theory, there are no violations. B) Both Bill and his supervisor are violating insider trading rules. C) Bill would only be violating the "traditional theory" if the information was being obtained through an insider. D) Bill's supervisors are in direct violation of Standard IV-C, Responsibilities of Supervisors.


a. Your answer was correct! Hide Explanation Explanation: A violation of the Traditional Theory would take place only if the information was both nonpublic and "material". This was not the case here. Instead, Bill simply pieces together nonmaterial private information, which under the mosaic theory, is an allowable practice.


Jane Bell is a broker's assistant at a large brokerage firm. She notices that a fellow broker's assistant is committing an act that is unethical, if not illegal. Which of the following actions should Jane pursue? I. Bring these acts to the attention of the compliance officer and express her desire to see these acts stopped. II. The Code and Standards would also require Jane to report these acts to the appropriate regulatory agencies. III. If Jane is unsatisfied or suspect of the compliance officer's response to the matter, she would then be justified in consulting with legal counsel outside the firm. IV. Association with the guilty party without actual participation in these suspect activities should be enough to clear Jane of any wrongdoing. A) I and II only B) I only C) I and III only D) I, II, III and IV only


c. Your answer was a, and was incorrect. Hide Explanation Explanation: The Code and Standards does not mandate that Jane report illegal activities to regulators (Choice II). However, in certain instances, if Jane feels compelled to report these activities, she would not be violating any standards by doing so. IV is wrong because even if Jane does not partake in illegal activities, by simply associating herself with the perpetrator, she may be deemed a participant.


Which of the following procedures are intended to ensure compliance with Standard V-B, Communication with Clients and Prospective Clients? I. Information with respect to the client's objectives and constraints should be updated at least once every three years. II. The security selection process should be disclosed to the client. III. A written authorization should be obtained before making changes to the portfolio. IV. The client's investment experience should not have an impact on what investments the Member thinks is suitable to the client's objective. A) I, II and III only B) II and III only C) II only D) III and IV only


b. Your answer was a, and was incorrect. Hide Explanation Explanation: Choice I is incorrect because information with respect to the client's objectives and constraints should be updated at least once a year; once every three years is insufficient. IV is incorrect because the client's investment experience (in particular, risk tolerance) should have a major impact on the investments the Member thinks is suitable to the client's objective.


Brian Adair, CFA, has developed a very comprehensive network among the parts suppliers of the auto industry. Over the last two weeks, through his contacts, he found out that Specific Motors has been signing huge deals to outsource most of its high cost operations. Taking this news as a sign that Specific Motors will soon begin to report much more favorable earnings, Brian buys a series of call options on its stock. According to the Standards of Professional Conduct: A) Brian did absolutely nothing wrong. B) Brian violated the Code and Standards because his conduct lacked integrity and would likely discredit the profession. C) Brian violated the Standards by not encouraging Specific Motors to immediately disseminate this new information. D) Brian violated the Standards because he neither conducted a due diligence nor had a sound basis for making this trade.


a. Your answer was d, and was incorrect. Hide Explanation Explanation: Brian, in effect, conducted "front-line" research. The information he gained was clearly nonpublic since many contacts were involved in obtaining this information. Remember, what distinguishes nonpublic information from public information is timing. So by the time vendors start getting orders from Specific Motors, the information is no longer nonpublic. Brian did nothing wrong.


Which of the following statements is (are) true with respect to the disclosures that must be made in order to comply with GIPS? I. If a new portfolio manager begins to manage assets for the firm, disclose the track record of the new manager from previous firms. II. A disclosure of the definition of firm must be made in order to determine the boundaries within which assets must be included in the performance presentations. III. A firm need only disclose the returns associated with each composite, and not the dollar size of each composite. IV. A firm may exclude the performance of small-sized portfolios from its composites as long as it discloses the minimum portfolio size under which returns will not be taken into account. A) I, III and IV B) II and IV only C) II and III D) I, II and III only


b. Your answer was a, and was incorrect. Hide Explanation Explanation: Choice I is incorrect because performance results belong to the firms, not to the individual portfolio managers. Hence, a new portfolio manager's track record from previous firms must not be included in disclosures. III is incorrect because a firm needs to disclose not only the returns associated with each composite, but the actual dollar size of each composite and the proportion of the firm's total assets that the composite represents


Regarding Standard II-A, Material Non-Public Information: which of the following statements is (are) true with respect to the "traditional theory" of determining whether securities laws have been violated? I. Securities fraud will have been committed only if the individual trading on material nonpublic information had a fiduciary duty towards the company whose shares are being traded. II. An individual, who does not have a fiduciary duty towards either the acquiring company or the target company, may trade in the shares of the two companies while knowing of an outstanding tender offer. III. A violation may have been committed by an analyst if through piecing together of all publicly available information, a conclusion is reached that is later found to have been true, material and nonpublic at the time of the conclusion. IV. Persons who were in possession of inside information may begin to trade in the affected securities as soon as this inside information is made public. A) II and IV only B) I only C) I, II, III and IV D) I, II and IV only


b. Your answer was a, and was incorrect. Hide Explanation Explanation: Choice II is incorrect because even if an individual, who does not have a fiduciary duty towards either the acquiring company or the target company, cannot trade in the shares of the two companies while knowing of an outstanding tender offer. A breach of fiduciary duty is not required in this case for a violation to have been committed. III is not correct because this scenario is a description of the mosaic theory, whereby an analyst pieces together enough nonmaterial and public information to construct an insider view of a corporation. IV is incorrect because persons who were in possession of inside information, must allow some time for the public to assimilate the information before they may begin to trade in the affected securities


Matthew Smith, CFA, is an airline analyst with Fuzzy Securities. The chairman of Fuzzy, Bill Gross, also sits on the board of directors of Universal Airlines. Bill has asked Matthew to pick up coverage on Universal Airlines, and thus issue a report. In order not to violate Standard VI-A, Disclosure of Conflicts, Bill should: A) issue a report, however, clearly disclosing of the special relationship between the chairman of Fuzzy and Universal Airlines. B) issue the report only after having asked Bill, in writing, to resign his post as a director of Universal Airlines. C) refuse to issue a report because of the blatant conflict of interest that exists between Fuzzy and Universal Airlines. D) issue a report that consists entirely of facts and does not include any ratings.


a. Your answer was correct! Hide Explanation Explanation: Conflict of interest situations frequently come up and are often unavoidable. It's why the solution is to simply disclose any such conflicts (and the nature of the conflict) to the affected parties. This way, those affected parties can decide for themselves whether or not a report is truly objective


Martin works as an equity analyst for a full-service brokerage firm that also underwrites securities for Growth Co., a firm covered by Martin. The manager of the underwriting effort tells Martin that his "lukewarm" reports on Growth Co.'s prospects are hurting the firm's ability to continue underwriting Growth Co. securities. Which course of action best addresses the conflict of interest issue and avoids a violation of the Code and Standards? A) Martin should remove this company from his coverage universe and keep it on a restricted list with a neutral investment rating. B) Martin should file a lawsuit against the underwriting manager. C) Martin should improve the tone of his report as it demonstrates loyalty to his firm. D) Martin should immediately resign.


a. Your answer was correct! Hide Explanation Explanation: Under the standard of independence and objectivity, an analyst must be free to issue an objective opinion. However, if this opinion adversely impacts the firm, it is better to simply discontinue coverage


John Seibert, a Candidate who is a broker's assistant to Ray Vanelli, CFA, was recently told that Ray and one of his clients are suspected of trading based on inside information. Subsequently, a few governing bodies launched an investigation into the activities of the broker and his client. Which of the following should John do so that he will not be found to have violated Standard I, Professionalism? I. Resign immediately so as to no longer be deemed to have any association with the broker and his client. II. Only report to the firm's compliance officer and avoid breaching confidential information even to the CFA Institute's Professional Conduct Program. III. Usually, breaches occur at the senior levels, thus John just needs to do what he is told by his supervisors and compliance officer. IV. John is not required to independently approach the authorities and report all activities that he deems as violations. A) II and III only B) I, II, III and IV C) I and III only D) IV only


d. Your answer was a, and was incorrect. Hide Explanation Explanation: Choice I is incorrect as resigning is an extreme form of disassociation. Instead, John should consult with the firm's compliance officer to determine his duties throughout the investigation. II is incorrect because providing confidential information to a representative of the CFA Institute's Professional Conduct Program would not be a breach of confidentiality. III is wrong - simply being in a "junior" position does not insulate someone from responsibility.


Which of the following is not a reason as to why GIPS were created? A) To foster more global diversification among actively managed portfolios B) To promote compatibility among the performance figures reported by the various managers around the world C) To promote the notion of self-regulation of the investment industry on a global basis D) To assure investors that regardless of where the managers reside, the performance figures are fairly presented


a. Your answer was correct! Hide Explanation Explanation: GIPS are developed for presentation purposes. It would have no influence in the decision-making process of the manager with respect to diversifying globally


Hans Solo, CFA, is a research analyst with Rebel Financial. He is nearing the completion of a research report on Quadrant Corp. Which of the following situations would he need to disclose in conjunction with this research report? I. The CEO of Rebel Financial occasionally serves as a consultant to Quadrant Crop. II. Hans' brother, who lives in another city, owns a large number of shares of Quadrant Corp. III. The investment banking division of Rebel Financial frequently does work for Quadrant Corp. IV. The value of any gifts that Quadrant Corp. has given to Hans Solo in the past. A) III and IV only B) I and III only C) I, II, III and IV D) I and IV only


b. Your answer was a, and was incorrect. Hide Explanation Explanation: Choice II would not need to be disclosed since family members who do not reside with the analyst are treated just like any other client. In other words, the analyst is not deemed to have a beneficial interest in his brother's account. IV is a trick response. First of all, if any gifts were given, they cannot have been worth more than $100. Thus, due to its immaterial nature, such items would not need to be disclosed. On the other hand, gifts with values greater than $100 should never have been accepted from an issuer in the first place.


Tom Duran just received confirmation that he passed the CFA Level 1 exam. Which of the following courses of action can Tom undertake without violating the Code or the Standards? I. He may refer to himself as a Level 2 Candidate. II. On his personal letterhead, he may put CFA (Level I) after his name. III. On his resume, he may state that he hopes to finish the CFA Program at the earliest possible date. IV. He may communicate to his clients that this accomplishment is indicative of what he could do for them. A) I and III only B) III only C) I only D) I, II and IV only


b. Your answer was correct! Hide Explanation Explanation: Standard VII-B, Reference to CFA Institute, the CFA Designation, and the CFA Program, is being tested in this question. Both I and II indicate that a certain "status" is achieved by passing Level I, which is not allowed - one is simply a "CFA Candidate" until completing all requirements. IV is also improper - the Standard requires that members and candidates not exaggerate the meaning or implication of the CFA designation. However, III would be allowed, as Tom is not promising anything, but rather, expressing his goal.


Which of the following statements is (are) true with respect to the calculation of returns of composites in accordance with GIPS? I. Results that cover a period of less than a year must be annualized. II. Geometric return calculations must be used for multi-period results. III. Cash basis must be used to calculate returns from securities that generate accrued interest. IV. The weights used to calculate composite returns are based on the average asset values over the measurement period. A) I, III and IV only B) I, II, III and IV C) II, III and IV only D) II only


d. Your answer was a, and was incorrect. Hide Explanation Explanation: Choice I is incorrect because results that cover a period of less than a year must not be annualized. III is incorrect because accrual accounting must be used to calculate returns from securities that accrue interest. IV is incorrect because the weights used to calculate composite returns are based on the beginning of period asset values.


Which of the following statements is (are) true with respect to the requirements in order to be in compliance with GIPS? I. Since presentations must reflect the performance on a firm-wide basis, one of the acceptable definitions of firm could simply be a distinct division of a much larger firm. II. If a firm specialized in equities, yet manages a few fixed-income portfolios, then the firm may claim to be in compliance with GIPS only with respect to its equity assets. III. When a firm first decides to report its performance using GIPS, it must also re-present its prior year's performance figures adjusted in order to be compliant with the Standards. IV. Going forward, firms that wish to be compliant, must add a calendar year to their historical performance until they eventually establish a five-year track record. Hence, as a recent year is added to the record, the performance of the calendar year five years ago, may be dropped. A) I, III and IV only B) III and IV only C) II and IV only D) I and III only


d. Your answer was a, and was incorrect. Hide Explanation Explanation: Choice II is incorrect. To claim to be in compliance with GIPS, all fee-paying discretionary portfolios must have been accounted for the presentation. Non-compliance of any of these portfolios will deprive the entire firm of such a claim. IV is incorrect. Firms that wish to be compliant, must add a calendar year to their historical performance until they eventually establish a 10-year track record. Hence, as a recent year is added to the record, the performance of the calendar year 10 years ago, may be dropped. However, dropping the performances of compliant years that are older than 10 years, is not mandatory.