cross-ied

John Hill, CFA, has been working for Advisors, Inc., for eight years. Hill is about to start his own money management business and has given his two-week notice of his resignation from Advisors. A few days before his resignation takes effect, on his lunch hour, he takes out a loan from a bank on behalf of his new business and uses the money to buy some office equipment for his new business. Since he engaged in these transactions while still an employee of Advisors, Hill violated Standard IV(A), Loyalty to Employer, by:

A) neither of these actions.

B) engaging in a financial transaction, like taking out a loan, only.

C) both taking out the loan and purchasing the office equipment.

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The Standards of Practice under IV(A) expressly says that a departing employee is “generally free to make arrangements or preparations to go into a competitive business before terminating the relationship with the employee’s employer provided that such preparations do not breach the employee’s duty of loyalty.” Neither of these actions are in conflict with the interests of Advisors, and Hill performed them on his own time.

cross-ied

Nick O'Donnell, CFA, unsuspectingly joins the research team at Wickett & Co., an investment banking firm controlled by organized crime. None of the managers at Wickett are CFA Institute members. Because of his tenuous situation at Wickett, O'Donnell begins making preparations for independent practice. He knows he will be terminated if he informs management at Wickett that he is preparing to leave. Consequently, he determines that "if he can just hang on for one year, he will likely have a client base sufficient for him to strike out on his own." This action is:

A) a violation of his fiduciary duties.

B) a violation of his duty to disclose conflicts to his employer.

C) not a violation of his duty to employer.

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O’Donnell is required to obtain consent from his employer if he is attempting to practice in competition with his employer. Merely undertaking preparations to leave, which do not violate a duty, is not a violation of the Code and Standards.

cross-ied

Theresa Hatcher, CFA, is making arrangements to establish her own investment advisory business before terminating her relationship with her current employer, Elite Brokers, Inc. Elite is a small company consisting of only six investment professionals and a small support staff. According to CFA Institute Standards of Professional Conduct, which of the following activities is least likely a violation of Hatcher's duty to Elite?

A) Hatcher leases office space, furniture, and other equipment for her new business.

B) Hatcher solicits Elite's clients before her termination of employment at Elite.

C) Hatcher engages in secret negotiations with two other investment professionals and her administrative assistant to leave Elite in order to join her new business.

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Standard IV(A) permits Hatcher to make preparations to begin a new practice, such as leasing office space, furniture, and other equipment, but not to engage in the other activities that may violate her duty to employer.

cross-ied

The following information concerns two analysts at Mega Securities Company.

• Mega recently hired Ron Anderson, CFA, who was previously an independent investment advisor. Anderson wants to keep his existing clients for himself and obtains written consent from Mega to do so. He also informed and received consent from his existing clients in writing about his new position at Mega.
• Brenda Ford, a CFA Institute member, has been a full-time analyst for Mega for 12 years. She recently started providing investment services, which compete with Mega, to private clients on her own time. Ford obtained written consent for this arrangement from her direct supervisor at Mega. Ford has not disclosed to each of her clients her employment at Mega.

According to CFA Institute Standards of Professional Conduct, have Anderson and Ford violated Standard IV: Duties to Employers?

A) Ford violated this Standard, but Anderson has not.

B) Neither Anderson nor Ford violated this Standard.

C) Anderson violated this Standard, but Ford has not.

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Standard IV(A) requires consent to enter into independent practice. Standard IV(B) Additional Compensation Arrangements states that no compensation may be accepted which may create a conflict of interest without written consent from all parties. Anderson received consent from all parties, Ford did not receive consent from her independent clients.

cross-ied

Michel Marchant, CFA, recently became an independent money manager. After six months, he has only ten clients, who are family and friends. To supplement his income, Marchant accepted part-time employment as an advisor at Middleton Financial Advisors. According to CFA Institute Standards of Professional Conduct, which of the following statements about Marchant's duty to his new employer is CORRECT?

A) Marchant need not inform Middleton about his existing clients but must inform his existing clients about his new part-time employment at Middleton.

B) Marchant must inform Middleton to keep his existing clients and must inform his existing clients of his new part-time employment at Middleton.

C) Marchant must inform Middleton about his existing clients but need not inform his existing clients about his new part-time employment with Middleton.

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Standard IV(A) and IV(B) requires that Marchant inform both Middleton and his existing clients.

cross-ied

Brian Bellow, a CFA Institute member, is a portfolio manager for Progressive Trust Company. Several friends asked Bellow to review their investment portfolios. On his own time, Bellow examined their portfolios and made several recommendations. He received no monetary compensation from his friends for his investment advice and provided no future investment counsel to them. According to CFA Institute Standards of Professional Conduct, did Bellow violate his duty to Progressive Trust?

A) No, because Bellow received no monetary compensation for his services.

B) Yes, because he undertook an independent practice that could result in compensation or other benefit to him.

C) No, because Bellow provided no ongoing investment advice.

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Standard IV(A) does not preclude providing independent services for compensation while still employed; however, notification to the employer is required describing the type of service, the expected duration, and the compensation. Compensation includes more than just monetary benefits.

cross-ied

Grant Starks, CFA, has been working for Advisors, Inc., for eight years. Starks is about to start his own money management business and has given his two-week notice of his resignation. A few days before his resignation takes effect, a current client of Advisors calls him at his office to inquire about some services for her account at Advisors. During the conversation, Starks tells the client that his new business will have lower commissions than Advisors. Starks has most likely violated:

A) Standard VI(B), Priority of Transactions, by violating the priority of transactions.

B) none of these Standards.

C) Standard IV(A), Loyalty to Employer, by competing with his current employer.

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This is a breach of loyalty to his current employer. By telling a current client of his employer about the lower commissions he will charge in his new business, Starks is placing himself in direct competition with Advisors, and this is a violation of Standard IV(A).

cross-ied

Sue Parsons, CFA, works full-time as an investment advisor for the Malloy Group, an asset management firm. To help pay for her children’s college expenses, Parsons wants to engage in independent practice in which she would advise individual clients on their portfolios. She would conduct these investment activities only on weekends. She is currently only in the preparation stage and has not started independent practice yet. Which of the following statements about Standard IV(A), Loyalty to Employer, is most accurate? Standard IV(A):

A) does not require Parsons to notify Malloy of preparing to undertake independent practice under the current conditions.

B) requires Parsons to obtain written consent from both Malloy and the persons from whom she undertakes independent practice.

C) requires Parsons to notify Malloy in writing about her intention to undertake an independent practice.

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Standard IV(A), Loyalty to Employer, requires that Parsons obtain written consent only from her employer before she undertakes independent practice that could result in compensation or other benefit in competition with Malloy. It is not required to get permission from your employer when only preparing to go into independent practice.

cross-ied

John Hill, CFA, has been working for Advisors, Inc., for eight years. Hill is about to start his own money management business and has given his two-week notice of his resignation from Advisors. A few days before his resignation takes effect, a former client of Advisors calls Hill at his home about his new firm. The former client says that he is very happy that Hill is leaving Advisors because now he and Hill can resume a professional relationship. The client says that he would never become a client of Advisors again. Hill promises to call the client back after he has left Advisors. Hill does not tell his employer about the call. Hill has most likely:

A) not violated the Standards.

B) violated the Standard concerning disclosure of conflicts.

C) violated the Standard concerning loyalty to employer.

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Based on the information here, Hill has done nothing wrong. He took a call at his home, presumably on his own time, and the client made it clear that he would never be a client of Advisors. Therefore, there was no breach of loyalty to Advisors by Hill, nor is there a conflict of interest.

cross-ied

Which of the following statements is most correct under the Code and Standards?

A) CFA Institute members are prohibited from undertaking independent practice in competition with their employer.

B) Members are prohibited from making arrangements or preparations to go into competitive business before terminating their relationship with their employer.

C) Consent from the employer is necessary to permit independent practice that could result in compensation or other benefits in competition with the member's employer.

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Members are not prohibited from making arrangements or preparations to go into competitive business before terminating their relationship with their employer. CFA Institute members are not prohibited from undertaking independent practice in competition with their employer provided they have consent from their employer. Members must provide notification to their employer describing the types of services to be rendered, the expected duration, and compensation for the services.