cyber21

Ron Taylor, a CFA Level I candidate, trades cotton contracts for a small commodity broker. Taylor convinces a government cotton inspector to issue a warning that the Texas cotton crop is in danger from insect infestation. The price of cotton soars. Taylor immediately shorts cotton futures. Once the position is created, the government inspector issues a second report reversing his original opinion and cotton prices plummet.
Cedric Sims, a CFA Level III candidate, would like to generate a tax loss on a security held in his personal portfolio; however, he believes the security has significant upside potential. To avoid the wash sale provisions of the income tax code, Sims sells the security and simultaneously creates a synthetic long position using derivatives.
With regard to Standard II(B) Market Manipulation, which of the following statements concerning Taylor’s and Sims’s conduct is CORRECT?

A) Neither Taylor nor Sims is in violation of Standard II(B).

B) Both Taylor and Sims are in violation of Standard II(B).

C) Taylor is in violation of Standard II(B), but Sims is not in violation.

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Taylor is in violation of Standard II(B) Market Manipulation by creating a scheme that caused others to trade on false information. Sims is not in violation of Standard II(B). The Standard does not prohibit transactions conducted for tax purposes.

cyber21

Which of the following is a violation of Standard II(B), Market Manipulation?

A) Overstating an earnings projection in order to increase the price of a stock.

B) Implementing a trading strategy to exploit differences in market power and information.

C) Engaging in a block trade to limit the effect on the price of a thinly traded security.

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Standard II(B), Market Manipulation, is not intended to prohibit transactions that are done in order to minimize income taxes or trading strategies that are not intended to distort prices or artificially inflate trading volume. Overstating earnings projections in order to increase the price of a stock is a direct violation.

cyber21

Jason Reynolds meets Jack Parker, CFA, at a social engagement and asks for some "hot stock tips." Parker declines, but sets up an appointment to review Reynolds’ risk and return objectives and financial constraints. At the conclusion of their appointment, Parker recommends three securities he has thoroughly researched: ACK, D-Wing, and Ophus-Littbinger. Parker is least likely:

A) not in violation.

B) in violation of Standard III(A) "Loyalty, Prudence, and Care" for failing to consider the three securities in the context of the whole portfolio.

C) in violation of Standard III(A) "Loyalty, Prudence, and Care" for failing to make a reasonable inquiry into the client’s investment experience.

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Standard III(A) "Loyalty, Prudence, and Care" requires Parker to make a reasonable inquiry into the client’s investment experience, risk and return objectives, and financial constraints. Investment decisions must be made based on a total portfolio approach, rather than the quality of an individual investment in isolation.

cyber21

An analyst with his own money management firm trades on behalf of several large pension funds. The analyst now performs all trades through a particular brokerage firm because the brokerage provides his firm with a no-interest line of credit if paid within 60 days. The line of credit is available to all brokerage clients. The brokerage provides the analyst with personal account privileges that he would not otherwise be eligible for. The brokerage also provides the analyst with free research reports on many companies. Which of these benefits are violations of Standard III(A), Loyalty, Prudence, and Care?

A) Neither of these.

B) The personal account privileges.

C) The research reports.

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The personal account privileges are clearly a violation. The no-interest line of credit could be a violation if the analyst does not factor in the benefits when determining the fees of the clients, but it is not a per se violation. Research reports are least likely to be a violation.

cyber21

An independent analyst has only one client. One of the client’s largest holdings is a brokerage firm. Because of the large holding by his client, the brokerage firm recently began allowing the analyst to tap into the firm’s computer network to use the firm’s research facilities. This is allowable as long as the analyst:

A) uses the resources to help manage the client's account.

B) does both of the actions listed here.

C) discloses the relationship to the client.

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According to Standard III(A), Loyalty, Prudence, and Care, the analyst must put the client first and inform the client of any possible conflicts of interest. The analyst must channel any benefits derived from his service to the client, back to the client, and inform the client of the benefits.

cyber21

Joni Black, CFA, works for a portfolio management firm. Black is a partner of the firm and is primarily responsible for managing several large pension plans. She also is in a supervisory position with several research analysts reporting directly to her. Dave Wood is a research analyst who has worked under Black for the last six years. Wood recently completed the Level III CFA exam and is anxiously awaiting the results. As a display of confidence, Black shows Wood a box of business cards that have already been printed up for Wood with the initials “CFA” after his name. She locks them away in a file cabinet and promises to deliver them on the day they get the news of his passing the exam. Black and Wood have been working closely to service a number of clients. Wood knows that Black recently met with a prospect named John Talbert. Black says that she received Talbert’s paperwork and made a recommendation to Talbert to which he agreed. Black tells Wood to execute the trade. Wood has not seen the final paperwork, but from what he knows, the trade is congruent with Talbert’s situation. Wood also knows the recommendation is generally a sound one.
Black is on the board of directors for ATX Corporation. She was asked to write a research report for ATX Corporation. Because of her relationship with ATX, she assigned Wood to write the report instead. Black is Wood’s supervisor and requires Wood to show all of his work to her for final approval. As Wood begins writing the report, he remembers that the trust fund of his children, left to them by the parents of Wood’s wife, has a sizable investment in ATX. Black manages a pension fund for Evergreen International. The management of Evergreen International has just requested that Black increase the portion in international equity funds to 30 percent of total assets from its current position of 10 percent of total assets. The management of Evergreen International believes the potential for growth in international markets is much greater than the domestic market and would like to see the pension fund managed more aggressively. Wood watches as Black immediately acts upon the recommendation of Evergreen International. Black allocates some of the fund’s assets to a few stocks in foreign countries. One of the stocks immediately goes up in price and volatility, and Black sees an opportunity to earn some extra income by selling a covered call on that particular stock. She sells the call on behalf of the pension fund. Wood asks Black if the pension fund’s charter allows derivative strategies. Black says she does not know, but says she only sells covered calls when she sees a really good opportunity and none of her clients have ever complained even when they have specified that no options shall be used. “Covered calls can never cost a client anything, and they always earn income for the client,” Black points out to Wood.
Despite his close relationship with Black, Wood has been preparing to start his own money management firm. He has turned a spare bedroom in his house into an office with new furniture and computer. He has the room wired with the latest Internet service upgrades. He has subscribed to financial news services and opened a trading account in the name of his proposed company. He has told an old friend about his plans. His friend has a large portfolio being managed at another brokerage firm. The friend had met Black, and told Wood that he did not like her and could not let them handle his portfolio despite their friendship. If Wood was on his own, however, the friend had told Wood that he would want Wood to manage his portfolio. Wood also contacts a cousin, who recently inherited a large portfolio. The cousin says that he would like to get some help managing the portfolio as soon as possible. Wood instructs the cousin to use futures contracts to, in effect, hedge the value of the portfolio cost-free until Wood sets up his business, and Wood can then take his cousin on as a client. He sends each of them a copy of his resume where in his credentials he places after his name “CFA (expected 200X).”With respect to Black’s instruction to execute the trade for Talbert, according to the Standards, Wood should:

A) execute the trade immediately.

B) execute the trade only after consulting the firm’s legal counsel.

C) not execute the trade because he has not met Talbert himself.

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Since Black is Wood’s supervisor and has the CFA designation and Wood sees nothing wrong, Wood has no reason to take any intermediate action. (Study Session 1, LOS 2.a,b)

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With respect to the report on ATX Corporation that Black asked Wood to write, which of the following must Wood include in the report?

A) Black is on the board of ATX and the position of ATX in the trust fund of Wood’s children only.

B) Wood does not have the CFA designation and that Black is on the board of ATX.

C) Wood does not have the CFA designation and the position of ATX in the trust fund of Wood’s children.

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This question is related to Disclosure of Conflicts, Standard VI(A). Black’s relationship with ATX Corporation must be disclosed in the research report because it could impair Black’s ability to make an unbiased judgment. Under the same standard, the position of ATX in the children’s trust fund must be mentioned because it is beneficial ownership that could reasonably impair Wood’s judgment. Even though Wood is the one writing the report, both potential conflicts need to be disclosed since Black is supervising Wood. The fact Black requires Wood to get her approval, which is congruent with Standard IV(C), is simply a routine firm policy that does not need reporting. It is not required to mention that an analyst does not have the CFA designation. (Study Session 1, LOS 2.a,b)

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With respect to the pension fund for Evergreen International, Black’s fiduciary duty is:

A) owed to the participants and beneficiaries of Evergreen International. Therefore, Black should continue to manage the fund in their best interest regardless of the management's request.

B) to the participants, beneficiaries, and management of Evergreen International. Therefore, Black should increase the portion in international equities as long as it is within policy statement guidelines.

C) primarily to the management and stockholders of Evergreen International. Black should follow management's direction to potentially increase the value of the company.

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This question relates to Standard III(A), Loyalty, Prudence, and Care. Black’s fiduciary duty is to the participants and beneficiaries of the pension plan according to ERISA. Black should act in their best interest in managing the funds. (Study Session 1, LOS 2.a,b)

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With respect to the pension fund for Evergreen International, after Wood notices Black’s actions concerning the management’s instructions, he should:

A) try to distance himself from Black’s activities.

B) report Black’s activities to the police.

C) do nothing because he knows what Black said about the covered call properties and her record is true.

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According to Standard I(A), Knowledge of the Law, members and candidates must know the law and not knowingly assist in breaking the law. When questionable activities occur like Black’s option trading, the best course of action for an associate is distance him/herself and seek legal counsel. (Study Session 1, LOS 2.a,b)

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With respect to Wood preparing to set up his own business, Wood violated the Standards:

A) in his communication with his cousin.

B) in his communication with his friend.

C) by setting up trading accounts in the name of his company.

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Wood violated Standard IV(A), Loyalty to Employer by contacting his cousin and advising him because the cousin could potentially be a client for his current firm. Since the friend had said he would not do business with Black, and Wood gave him no instructions, that was not a violation. Note that Standard IV(A) covers competing with an employer, not preparing to compete. Preparing to compete by setting up an office and other related activities are not a violation of the Standards. (Study Session 1, LOS 2.a,b)

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Violations with respect to the use of the CFA designation occurred with:

A) both the printing of the business cards by Black and the letters sent by Wood to his friend and cousin.

B) the printing of the business cards by Black but not the letters sent by Wood to his friend and cousin.

C) the letters sent by Wood to his friend and cousin but not with the printing of the business cards by Black.

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Standard VII(B), Reference to CFA Institute, the CFA Designation, and the CFA Program, limits the use of the CFA designation to those who have passed all three levels of the CFA Program, have received their charters, and are charter holders in good standing. Wood may not put “CFA (expected 200X)” following his name because it is a violation of the Standard. However, he may state that he is a Level III candidate in the CFA program if he wishes. The printing of the business cards was not a prudent move, but since they are taking care not to distribute them until the appropriate time, no violation has occurred. In some sense, it is like a research report written in advance of an anticipated event. As long as the report is not released until after the event, no violation has occurred. (Study Session 1, LOS 2.a,b)

cyber21

In order to comply with Standard III(A), Loyalty, Prudence, and Care, an analyst needs to:

A) comply with applicable fiduciary duty.

B) perform both of the actions listed here.

C) liquidate his personal holdings of all stocks that his client owns.

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To comply with Standard III(A), the analyst must use reasonable care and exercise prudent judgment, always act for the benefit of clients, and determine and comply with applicable fiduciary duty.

cyber21

Which of the following is a possible breach of fiduciary duties by a CFA Institute member who manages assets on behalf of a client?

A) Using directed brokerage.

B) Voting all proxies of stocks the client owns.

C) Neither of these breach fiduciary duties.

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Proxies have economic value to the client. To comply with Standard III(A), the analyst is obligated to vote proxies in an informed and responsible manner. A cost benefit analysis may show that voting all proxies may not benefit the client, so voting proxies may not be necessary in all instances. Directed brokerage occurs when the client requests that a portion of the client's brokerage be used to purchase services that directly benefit the client. Although, this may prevent best execution, it does not violate the Standards as it was directed by the client, not the brokerage firm.

cyber21

Tony Calaveccio, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto. He places trades for the fund with River City Brokerage. River City provides Calaveccio with soft dollars to purchase research. River City also deals in municipal bonds, some of which Calaveccio holds in his personal portfolio. He periodically uses the soft dollars to request research reports on various small cap stocks and also on the status of the municipal bond market and issues that he holds. These actions are:

A) not in violation of the Code and Standards.

B) in violation of his fiduciary duties regarding the municipal bond research but not so regarding the research on the small cap issues.

C) in violation of his fiduciary duties regarding both the small cap research and the municipal bond research.

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The issue at hand is the member's fiduciary responsibilities in handling "soft dollars" which are technically the property of the client. Standard III(A), Loyalty, Prudence, and Care, delineates the member's fiduciary responsibilities with regard to soft dollars. Since municipal bond research is clearly not relevant to the Small Cap Fund holders, he is clearly using the soft dollars to obtain research for his personal benefit and is in violation of the Standard.

cyber21

While trading on behalf of a pension account, an analyst receives special research reports from the brokerage firm with whom she is doing the trades. Such an activity is:

A) a violation of only The Code of Ethics.

B) a violation of both Standard III(A), Loyalty, Prudence, and Care, and the Code of Ethics.

C) not in itself a violation of Standard III(A), Loyalty, Prudence, and Care, nor the Code of Ethics.

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An analyst can receive research from a brokerage firm with whom she is trading on behalf of a client. The analyst should inform the client of the arrangement. The client is more likely to violate Standard III(A) by obtaining non-research services or, worse yet, personal benefits from the brokerage firm.