Reading - 2-I - LOS b: Q1-Q5

1、An analyst has been writing research reports on a company for many years. As part of the analyst’s continuing research efforts, the analyst allows the firm to fly him to the firm’s headquarters and put him up in the guest quarters the company has for all corporate visitors. According to Standard I(B), Independence and Objectivity, this is:

A)   a violation no matter what the circumstances.

B)   not a violation even if the headquarters are within reasonable driving distance from the analyst's home.

C)   a violation if the headquarters are within reasonable driving distance from the analyst's home.

D)   not a violation under any circumstances.

The correct answer was  C)

If such a trip is “out-of-the-way,” payment by the company for the trip is acceptable. If the headquarters are within reasonable driving distance, the analyst should drive there.

2、An analyst who is a CFA Institute member receives an invitation from a business associate’s firm to spend the weekend in a high-quality resort. In order to abide by the Standards, the analyst should (may):

A)   refuse the invitation if the associate is from a firm he analyzes for his employer.

B)   do all of the actions listed here.

C)   accept if it is a client whose portfolio he manages.

D)   obtain written consent from his supervisor regarding the trip.

The correct answer was  B)  

The analyst must do all of these actions to comply with the Standards. According to Standard I(B), the analyst should refuse the invitation if it is from a firm the analyst covers for his employer. The analyst can accept the invitation if it is from a client and the analyst gets approval from his supervisor according to Standard I(B). According to Standard IV(B), the analyst must receive written consent regarding all monetary compensation and benefits they receive for their services.

3、Tony Calaveccio, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto. He places trades for the fund with Worldwide Brokerage. Worldwide is holding a conference in Amsterdam and has offered to pay for Calaveccio's airfare, meals, and accommodations associated with his attendance of the conference. The conference concerns European small cap securities and the EASDAQ. He decides that he will accept their offer and attend the conference. In order to comply with the Code and Standards, he may:

A)   simply attend. Since the conference is directly related to his professional responsibilities, no further notification or permission is required.

B)   attend, but he must disclose the arrangement to his employer as a gift.

C)   attend, but he must disclose the arrangement as additional compensation to his employer in writing.

D)   attend, but he must disclose the arrangement to TrustCo's clients and prospects as required under Standard IV.B.7.

The correct answer was  B)

Under Standard I(B) gifts, benefits, and other consideration cannot be accepted if the purpose was to influence or reward. Token items are OK. Worldwide Brokerage is not a client of Calaveccio but an entity that he does business with. As such Worldwide could influence Calaveccio to always do business with them which could be to the detriment of his fund if the execution of their trades starts to deteriorate compared to their competitors.

4、All of the following would be permitted according to the CFA Institute Standards of Professional Conduct EXCEPT:

A)   use of an issuer’s corporate aircraft when commercial transportation is not available.

B)   business related entertainment that is not intended to influence the recipient.

C)   air transportation paid by a corporate issuer for travel to a major metropolitan airport.

D)   token gifts received from clients.

The correct answer was  C)

In order to maintain independence and objectivity, members and candidates should restrict special reimbursement arrangements concerning commercial transportation and hotel charges. Use of corporate aircraft is permitted when commercial transportation is not available.

5、An analyst is told by his supervisor that when he feels he should write a buy recommendation he is free to do so, and when he feels he should write a sell recommendation he should check with the supervisor first. This practice is:

A)   in violation of Standard I(B), Independence and Objectivity.

B)   in violation of Standard V(A), Diligence and Reasonable Basis.

C)   congruent with Standard V(A), Diligence and Reasonable Basis.

D)   prudent since stocks tend to go down only about 3 years in 10.

The correct answer was  A)

The policy dictated by the supervisor would infringe upon the analyst’s independence and objectivity . It would probably discourage the analyst from making sell recommendations and, furthermore, present the opportunity for the supervisor to try and change the analyst’s mind.