Reading 2-I: Standards of Professional Conduct & Guidance manager, center, class, relevant, div

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Session 1: Ethical and Professional Standards
Reading 2-I: Standards of Professional Conduct & Guidance: Professionalism

LOS C.: Misrepresentation.

 

 

A money manager works for a full-service brokerage firm. After meeting with a new client and gathering all relevant information, the money manager says that she thinks her firm can perform all the financial services the new client needs. With respect to Standard I(C), Misrepresentation, this:

A) may not be a violation if the representation was made orally.

B) may not be a violation if the manager's opinion is based upon the factual information gathered.

C) is a violation because she cannot make statements like this under any circumstances.

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There is no violation if the opinion is based upon the factual information gathered and the firm’s actual capabilities. This is true whether or not the representation was written, oral, or electronic. None of the other choices are correct.

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According to CFA Institute Standards of Professional Conduct, which of the following statements about the prohibition against plagiarism is most correct? The prohibition against plagiarism applies to written materials:

A) only.

B) and oral communications only.

C) oral communications, and telecommunications.

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The prohibition against plagiarism applies to all three areas.

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According to CFA Institute Standards of Professional Conduct, which of the following is NOT a form of plagiarism?

A) Using factual information published by recognized financial and statistical reporting services or similar sources without an acknowledgment.

B) Citing specific quotations supposedly attributable to "leading analysts" and "investment experts" without specific reference.

C) Presenting statistical estimates of forecasts prepared by others with the source identified, but without qualifying statements or caveats that may have been used.

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Standard I(C) provides that "factual information published by recognized financial and statistical reporting services or similar sources" may be used without an acknowledgment.

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Steve Barton, CFA, used to work for Advisors, Inc. After he left Advisors, Barton developed a new screening methodology for determining which stocks to include in a portfolio. Barton is on friendly terms with his former colleagues at Advisors and shares his screening methodology with them. If Advisors uses the screening methodology without notifying Barton, then:

A) Advisors must assume the responsibility of any client losses.

B) Advisors has violated Standard I(C), Misrepresentation.

C) Barton must assume the responsibility of any client losses.

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According to Standard I(C), if an analyst or firm uses the work of others, they must seek authorization from the creators. Such work includes algorithms, such as a stock screening methodology.

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Marc Randall, CFA, is an investment analyst. During a meeting with a potential client, Randall's boss states that, "You can be sure our investments will always outperform Treasury Bonds because of our fine research staff members, like Marc." Randall knows that this statement is:

A) a violation of fiduciary duties owed to clients under the Standards.

B) a violation of the Standard concerning prohibition against misrepresentation.

C) not in violation of the Code and Standards.

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Under Standard I(C), members are forbidden from guaranteeing a specific rate of return on volatile investments. Therefore, the statement is in violation of the Standard.

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A copyrighted technique for measuring the downside risk of an investment has just been revealed to the public. If an analyst adopts the technique, he must cite the use of the technique in all research reports in which the technique is used EXCEPT:

A) if the analyst does not modify the technique at all.

B) Neither of these answers provide grounds for an exception.

C) if the analyst uses reasonable care and verifies that the technique provides superior results.

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Neither of the answers in this question provide adequate grounds for not citing the source of the methodology. Although “verifying” the technique is a good idea and congruent with the Code and Standards, the analyst still needs to cite the use of the copyrighted technique even after modifying it slightly to avoid violation of Standard I(C), Misrepresentation.

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A CFA charterholder gathers the closing prices of a security from a widely read publication. The charterholder uses the data as part of a report she is preparing and fails to report the data source in the report. This is:

A) a violation of Standard I(C).

B) not a violation of Standard I(C) if the data can be gathered from several public sources.

C) not a violation of Standard I(C) if the data cannot be gathered from several public sources.

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Since the security prices represent factual information that can be verified from several sources, there is no violation. It could have been a violation had the information been exclusively published by the source.

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At the time of its initial public offering (IPO), a mutual fund is invested primarily in junk bonds. As part of its strategy, it is also invested in some zero-coupon U.S. Treasury bonds. The amount of the investment in the Treasury bonds is such that their maturity value equals 90% of the current value of the fund. Which of the following may a CFA Institute member say to her clients concerning the fund at issuance?

A) Since the fund is backed by the U.S. government, you know you will get your money back.

B) A CFA Institute member may not make either of these statements.

C) The fund is virtually default risk free.

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Standard I(C), Misrepresentation, prohibits making statements that mention a guarantee of returns or misrepresent the true nature of the investment.

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Wes Smith, CFA, has been working toward the completion of a Master of Science in Finance. He has passed all the necessary courses and written the necessary thesis. He still must defend the thesis in one month. Smith’s thesis advisor assures him that he will pass the thesis defense. Smith has new business cards printed with “M.S. in Finance” after his name. This is a violation of:

A) none of the Standards if Smith does not make the cards public until after he defends his thesis and receives his degree.

B) Standard VII(B), Reference to CFA Institute, the CFA Designation, and the CFA Program.

C) Standard I(C), Misrepresentation.

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If the cards were distributed today he would be in violation of Standard I(C), Misrepresentation. However, if Smith does not make the cards public until after he receives the degree, there is no violation.

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The following information involves two research analysts at a brokerage firm.

• Erik Bagenot, CFA, is preparing a research report on Global Enterprises, Inc. In preparing the report, he uses materials from many sources. For example, he uses factual information published by Standard & Poor's Corporation without acknowledging the source. He also uses excerpts from a research report prepared by another analyst. Bagenot makes only a slight change in wording for these excerpts, but acknowledges the source.
• Sally Wain, who is currently enrolled in the CFA program, is preparing a research report on Manson Telecommunications. She attends a conference in which several investment experts provide their views about the future prospects of this company. Wain cites several quotations from these investment experts in her report without specific reference.

According to CFA Institute Standards of Professional Conduct involving prohibition against plagiarism, which of the following statements is CORRECT?

A) Wain violated the Standards, but Bagenot did not.

B) Both Bagenot and Wain violated the Standards.

C) Bagenot violated the Standards, but Wain did not.

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Bagenot complied with Standard I(C), which permits publishing factual information from Standard & Poor's without acknowledgment and using excerpts with acknowledgment. Wain committed plagiarism because she failed to give specific references for the quotations that she used.