1215

While copying some of her research materials at work, Mary Jones comes across a few incomplete research notes written by one of her colleagues. As a result of reading the notes, and without further review, Jones immediately changes one of her stock recommendations from sell to buy. Which of the following CFA Institute Standards has Jones violated?

A) Standard III(A), Loyalty, Prudence, and Care.

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

C) Standard I(B), Independence and Objectivity.

---

Jones has violated Standard V(A) by failing to exercise diligence and thoroughness.

1215

The Konkol Company implements a new methodology for portfolio valuation that is licensed to them by ABC Statistics. Konkol complies with the CFA Institute Code and Standards by:

A) discussing the new methodology with the clients, in its entirety.

B) not discussing the new methodology with clients because there is no need to, as it will not change their risk and yield preferences.

C) discussing the new methodology with clients only when a change in the security selection process is involved.

---

Standard V(B), Communication with Clients and Prospects, requires any change in the scope, valuation methodology, or focus of the portfolio to be discussed with clients.

1215

John McNeal, CFA, has a friend named Stan Green, a journalist at Investment News, a weekly magazine. In one of their conversations, Green tells McNeal about material nonpublic problems at Brightstar.com, a heavily traded firm. Green has written a special article about Brightstar.com’s problems that will appear in the next issue of Investment News. According to the Standards, can McNeal act on the information Green has shared with him?

A) Yes, McNeal can trade on the information but should ask Green to disseminate the information immediately.

B) Yes, McNeal can trade on the information, because it is already public.

C) No, McNeal cannot trade on the information.

---

McNeal cannot trade on the information before the article is published. Trading on the information received from the journalist before the magazine is published is trading on material nonpublic information, a breach of Standard II(A).

1215

Susan Nielsen, CFA, works for a rating agency which competes directly with S& and Moody’s. Her friend, Lance Parker, works for the same company but in a different department which is involved in advisory services for structured products. Nielsen frequently receives pressure from Parker to "put a positive face" on client ratings to help him sell advisory services. She is reluctant to discuss client ratings with Parker and tries to avoid the topic. She consults her company’s compliance department and learns that there are no policies or procedures to discourage Nielsen and Parker from sharing information and is encouraged to consider his advice on company ratings. Nielsen should most likely:

A) continue to consult with Parker on company ratings as the compliance department’s position is that there is no conflict.

B) advise regulators of the potential conflict of interest and seek legal counsel.

C) advise her firm to develop firewalls and protections to allow the different departments to function independently and avoid talking with Parker about client ratings.

---

Nielsen should advise her firm to develop firewalls and protections to allow the different departments to function independently. If Nielsen and Parker are going to remain friends, they should stop talking about client ratings.

1215

After a very successful quarter of high investment returns, Judy O’Berry, CFA, receives several gifts from grateful clients. O’Berry considers the gifts to be of novelty or sentimental value only, but she hears rumors that several junior employees are jealous of the attention she received for the group’s efforts. She decides to consult the company’s compliance rules on gifts and is surprised to learn her firm has no established rules. She consults the Standards of Practice Handbook, and then submits proposed rules on gifts to her company’s compliance department. These rules should contain all of the following EXCEPT:

A) a formal value limit based on local customs.

B) a requirement to disclose the gift.

C) restrictions on all types business entertainment.

---

The rules should contain a formal value limit based on local customs. Not all types of business entertainment are forbidden. Only business entertainment which is intended to influence or reward members and candidates should be avoided.

1215

Member compliance on issues relating to corporate governance or to soft dollars is primarily addressed by the Standard concerning:

A) Disclosure of Referral Fees.

B) Disclosure of Conflicts to Clients and Prospects.

C) Loyalty, Prudence, and Care.

---

Fiduciary duty on issues relating to corporate governance or to soft dollars is primarily addressed by Standard III(A), Loyalty, Prudence, and Care.

1215

Rickard Advisors recently had a trading error in a customer account that was subsequently covered by Rickard. The firm felt embarrassed by the disclosure of this error, and, in order to induce the client to continue its relationship, Rickard offers the client preferential access to a new issue that is expected to be “hot.” Which Standard is violated, if any?

A) The Standard concerning Fiduciary Duty.

B) The Standard concerning Fair Dealing.

C) The Standard concerning Independence and Objectivity.

---

Rickard is in violation of the Standard concerning Fair Dealing by offering the client preferential access to a “hot” new issue. There is no obvious violation of Fiduciary Duty, since there is no evidence that Rickard is placing its own financial interest ahead of the client.

1215

Scott Andrews, CFA, is a stockbroker selling an oversubscribed stock issue. Which of the following best describes Andrews' actions regarding this sale? Andrews:

A) cannot offer an oversubscribed issue of stock to any clients.

B) can offer this security on a prorated basis to all clients for which the security is appropriate.

C) can only offer this security to clients for which it is appropriate on a first come first serve basis.

---

Standard III(B), Fair Dealing, applies. When new issues or secondary offerings are available or are being offered by the firm or if the firm is part of a selling syndicate, all clients for whom the security is appropriate are to be offered a chance to take part in the issue. If the issue is oversubscribed, then the issue is to be prorated to all subscribers.

1215

The use of client brokerage by an investment manager to obtain certain products and services to aid the manager in the investment decision-making process is called:

A) quid pro quo practices.

B) trading practices.

C) soft dollar practices.

---

 

Directing client brokerage for research and/or services is called soft dollar practices.

 

1215

Sharon Pope has been asked by the Chief Investment Officer to develop a firm-wide policy for proxy voting. Which of the following would NOT be acceptable to include in the policy statement?

A) Voting proxies may not be necessary in all instances.

B) The value of proxy voting must be maximized.

C) Portfolio managers of active funds must vote in all proxies; portfolio managers of index funds should vote only when they have a definitive opinion.

---

Proxies for stocks in passively managed funds must also be voted. A cost-benefit analysis may show that voting all proxies may not benefit all clients.