hinsafdar

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.

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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.

hinsafdar

Maggie McCarthy is an individual investment advisor who uses mutual funds for her clients. She typically chooses from a list of 40 funds that she has thoroughly researched. The Figgs, a married couple that are a client, asked her to consider the Boilermaker fund for their portfolio. McCarthy had not previously considered the fund because when she first conducted her research three years ago, Boilermaker was too small to be considered. However, the fund has now grown in value, and after doing thorough research on Boilermaker, she found the fund was by far the most outstanding large company value fund in her list of funds. She puts the fund in the Figgs' portfolio, and in all new clients portfolios, but not in any of her other clients' portfolios. Her reasoning is that her existing clients were comfortable with their current holdings, and she did not want to risk disturbing their comfort. Has McCarthy violated any Standards? McCarthy has:

A) violated the Standards by not having a reasonable and adequate basis for making the recommendation.

B) violated the Standards by not dealing fairly with clients.

C) not violated the Standards.

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The fund should have been considered for the existing clients' portfolios. There may have been reasons not to add the fund to their portfolios, such as tax consequences or a lack of suitability, but disturbing their comfort is not sufficient.

hinsafdar

Denise Weaver is a portfolio manager who manages a mutual fund and has pension clients. When Weaver receives a proxy for stock in the mutual fund, she gives it to Susan Griffith, her administrative assistant, to complete. When the proxy is for a stock owned in a pension plan, she asks Griffith to send the proxy on to the sponsor of the pension fund. Weaver has:

A) violated the Standards by her policy on mutual fund proxies, but not her policy on pension fund proxies.

B) not violated the Standards.

C) violated the Standards by her policy on mutual fund and pension fund proxies.

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Proxies should be taken seriously, and although it is likely that Griffith can understand some of the issues, it is likely that she is not capable of making responsible decisions on all potential proxy issues. Proxies for a pension plan should be voted in the best interests of the beneficiaries, not the plan sponsor. The sponsor's interests will not always be the same as the beneficiary's interest.

hinsafdar

Sheila Stevens has accepted a one-year gift membership (valued at approximately $225) to the Women’s World Health Club from a firm to which she directs trades. She has done so without notifying her employer. Which of the following statements is least accurate?

A) This is a violation of the Code and Standards but is less serious than an identical case in which the gift was given by a client of Stevens.

B) This is a violation of the Code and Standards, because the gift is not a token amount.

C) This is a violation of the Code and Standards, because it has not been disclosed to her employer.

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This action is clearly a violation of Standard I(B), Independence and Objectivity. Accepting a gift from a non-client is a more serious violation than accepting a gift from a client (for which a compensation arrangement would already exist), since the intent is almost certainly to gain influence over future actions of the member (e.g., increased allocation of trades).

hinsafdar

David Lynch is an individual investment advisor who uses mutual funds for his clients. He typically chooses funds from a list of 40 funds that he has thoroughly researched. The Palmers, a married couple that are a client, asked him to consider the Twin Peaks fund for their portfolio. Lynch had not previously considered the fund because when he first conducted his research three years ago, Twin Peaks was too small to be considered. However, the fund has now grown in value, and after doing thorough research on the fund, he finds the fund has suitable characteristics to be included in his acceptable list of funds. He puts the fund in the Palmers' portfolio but not in any of his other clients' portfolios. The fund ends up being the best performing fund of any of the funds on his list. Has Lynch violated any Standards? Lynch has:

A) not violated the Standards.

B) violated the Standards by not dealing fairly with clients.

C) violated the Standards by not disclosing conflicts to clients.

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Prior to the discovery of the fund, Lynch did not put all of the same funds in all of his clients' portfolios, so there was no reason to do so now. The fund was among a list of other good funds. Lynch did not fail to maintain independence and objectivity, had no conflicts to disclose to clients, and did not deal unfairly with clients.

hinsafdar

Greg Allen is a security analyst and visits David Dawson, the Chief Financial Officer of Edmonds Company. Dawson reveals a great deal of nonmaterial financial data to Allen, data that Dawson routinely reveals to all security analysts who visit him. From this data and other industry information, Allen conjectures that Edmonds is likely to make a tender offer for another company in the industry, a fact that if true would be considered material to the value of the company. Allen:

A) can publish his conclusion in a research report.

B) should send a copy of the report to Dawson for verification before disseminating the report to clients.

C) must not disseminate the information or use it for trading purposes until the tender offer is announced.

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Releasing information to analysts does not constitute a public release of information. Dawson's information should be considered nonpublic until it is released to the public. Allen has used this information, along with other industry information, to come to his conclusion of a pending tender offer which he can use to trade upon based on the mosaic theory.

hinsafdar

Mason Dixon is an investment advisor with Vicki Lynn as a client. Lynn has expressed an interest in socially responsible investing and has expressed a desire to replace her international and small company funds with socially responsible funds. Dixon has research that indicates the Alpha International Fund and the Beta Small Company Fund are the best socially responsible funds in their class. He believes the Alpha fund will likely have slightly lower performance than the current international fund, but the Beta fund will have significantly worse performance than the current small company fund. Moreover, Dixon has research that supports the contention that socially responsible funds as a group will underperform regular funds. Dixon:

A) must explain the research to Lynn, who can purchase the funds if she still feels comfortable with these investments.

B) must explain the research to Lynn and tell her that he cannot as her advisor purchase either fund without violating his fiduciary duty.

C) must explain the research to Lynn and tell her that he cannot as her advisor purchase the Beta fund without violating his fiduciary duty, but he can purchase the Alpha fund.

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Lynn is in effect establishing a constraint that Dixon must respect in formulating her portfolio. As long as she has full knowledge of the economic consequences, Dixon can continue as her advisor.

hinsafdar

Brenda Clark is an investment advisor. Two years ago Clark decided to stop calculating a return composite because of the time required to make those calculations. A prospective client asks Clark what she thinks her performance would have been over the past two years. Clark:

A) cannot answer the question because it would be misleading.

B) can answer the question orally but cannot state the numbers in writing.

C) cannot answer the question, nor can she discuss potential future market returns with the prospective client.

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Any discussion of past performance would imply that Clark had made some calculations, which would be misleading. However, Clark need not calculate historical performance to be an advisor. She can also talk about her view on the future of capital markets.

hinsafdar

Kyle Hogue, CFA, is an emerging market analyst for Garrison Equity Funds, a U.S.-based mutual fund manager. Hogue has been covering the South American markets for five years and generally makes several 1-week trips per year to visit various countries and businesses in his assigned markets. As part of his trips, Hogue meets with government officials to discuss economic policies of the country and with executives of firms within the country to gather information on both short- and long-term prospects for the companies.
During Hogue’s latest data-gathering trip he spent the majority of his time in Brazil. Brazilian legislators and economic policymakers informed Hogue that the country’s taxation system was about to be restructured and that trade barriers were going to be relaxed. Under the new tax structure, foreign entities with operations in Brazil will face an increase in effective tax rates, while local firms will be given a 5-year reduction in their effective tax rate, which can be extended up to a maximum of fifteen years. New policies with regard to foreign trade will reduce tariffs on foreign imports of consumer goods, but high tariffs will remain in effect for industrial and agricultural products, Brazil’s largest contributors to its growing GDP. The policymakers give Hogue to read and return a confidential economic report used internally by government officials. The report contains detailed data on the general trends he had been discussing with the government and economic officials. Hogue photocopies the report and then returns the original as requested by his hosts.
Hogue also met with several Brazilian brokerage firms and members of the Brazilian stock exchange. During their first meeting, Hogue informed them that his research on the Brazilian market was being purchased by outside clients in record numbers. Hogue mentions that American investors are very excited about one company in particular, Brazil AgriTech Inc. (BAI). Hogue notes that 3,000 investors have expressed great interest in purchasing BAI stock either directly or through Garrison’s Brazil Fund within the next two months. He does not mention that only 600 investors actually expressed interest in purchasing the stock directly and that the remaining investors were existing clients who had expressed interest in purchasing shares of the Brazil Fund but had no specific opinions about the individual holdings.
During his final meeting with the exchange members, Hogue convinced two exchange specialists to enter into a contract with the exchange to increase their daily trading volume of BAI stock as well as the stock of Banc de Brazil (BDB), the country’s largest private banking institution. BDB provides both commercial and investment banking services and has recently added brokerage services to its product mix. The trading contract will be effective the following day and will last for one year but will not be renewable at the end of its term. It is disclosed to potential investors in the marketing collateral.
Two days later, after returning to his office in the U.S., Hogue has noticed that the stock price of BAI has risen and the bid-ask spread of BDB has narrowed, which he fully expected to occur. Hogue puts together a sell recommendation on BAI stock noting in the report that sharply lower growth in agricultural technological innovation and the increase in foreign-owned farms with access to better technologies developed outside of Brazil. He also constructs a buy recommendation on BDB stock, citing several key fundamental factors that make the stock attractive as well as a “deepening level of local market liquidity that will create attractive price entry points as a result of a temporary 1-year contract to increase market liquidity for BDB.” Hogue releases the recommendation reports first to his “tier one” clients that pay the highest fees. He then issues shorter versions of the reports to the rest of his “tier two” clients later that day with a disclosure that more information is available upon request. Hogue also sells all holdings of BAI stock in the Brazil Fund and purchases shares of BDB with the proceeds the day after the recommendations are released.
Hogue’s supervisor, Marianne Jones, CFA, questions him regarding his method of distributing recommendations to his clients. Jones is relatively new to the firm and just wants to make sure everything is on the “up and up.” Hogue explains that he offers different levels of service to his clients and that in order to receive a lesser subscription to his research reports, they must sign a waiver. He goes on to say:
“All clients are offered both levels of service so that clients are fully informed before making a decision. The details of the service levels, including fees charged for both, are contained in my marketing brochures along with 10-year performance figures for the Brazil fund. Since I have only been managing the fund for five years, I have included my predecessor’s performance to present a full 10-year period. Our management styles are very similar, however, so this minor detail is only disclosed to those clients who ask. I generally find that my clients are only interested in the last five years of data anyway. The brochure presents market-value-weighted return data before any fees or taxes are deducted. These return calculation methods are disclosed in clear language in the brochure.”

Did Hogue violate any CFA Institute Standards of Professional Conduct by meeting with Brazilian economic and governmental officials or by photocopying the economic report?

Meeting

Photocopying

A) No Yes

B) Yes Yes

C) No No

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In meeting with the officials, Hogue is performing proper due diligence on the Brazilian market to support his recommendations to clients. This is entirely appropriate. There is no indication that he is being inappropriately influenced by the policymakers and the meeting is not a violation of the Standards. By photocopying the report, however, Hogue has violated Standard I(D) Misconduct. Under the standard he is not to commit any professional act involving dishonesty or deceit or conduct himself in a way that reflects poorly on his professional reputation, integrity, or competence. The report was marked confidential and Hogue was instructed to return it after he had a chance to read it. The intent was not to distribute the report for Hogue’s professional benefit. He has therefore deceived the officials by photocopying the report without receiving permission. (Study Session 1, LOS 2.a,b)

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During his first meeting with the Brazilian brokers and stock exchange members, did Hogue violate any CFA Institute Standards of Professional Conduct?

A) No.

B) Yes, because he broke client confidentiality by revealing their plans to purchase BAI stock.

C) Yes, because he attempted to manipulate the market price of a Brazilian security.

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Hogue clearly exaggerated the American investors’ interest in BAI stock in an attempt to get local market participants to buy the stock in anticipation of increased American investment. By pumping the stock, the price rose and Hogue sold the Brazil Fund position and recommended investors do the same to take advantage of the artificially high prices. Hogue cites poor business prospects in his sell recommendation, a clear indication of his devious intent in claiming the high level of interest from American investors. By manipulating market prices in Brazil, Hogue has violated Standard II(B) Market Manipulation. (Study Session 1, LOS 2.a,b)

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Did the increased trading-volume contract that Hogue negotiated between the Brazilian market specialists for the BDB stock violate any CFA Institute Standards of Professional Conduct?

A) Yes, because the intent of the contract is to distort the trading volume of BDB in order to attract investors.

B) Yes, because the contract allows the traders to place their transactions ahead of client transactions.

C) No.

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The contract is fully disclosed to potential investors in the marketing collateral. Thus investors can evaluate for themselves the true cost of the transactions. Therefore the intent of the increased liquidity is not to deceive investors, but rather to increase the market liquidity and ease of trading for foreign investors. The contract does not violate Standard II(B) Market Manipulation, since it is disclosed. If it were not disclosed, however, it would constitute a violation. (Study Session 1, LOS 2.a,b)

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When he distributed his buy and sell recommendations on BDB and BAI, respectively, did Hogue violate any CFA Institute Standards of Professional Conduct?

A) No.

B) Yes, because he has released the two versions of the report at different times.

C) Yes, because he has issued two versions of the same report which disadvantages clients paying lower fees.

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Standard III(B) Fair Dealing, requires members and candidates to deal fairly with their clients. Hogue can offer different levels of service so long as it is disclosed to his clients and all service levels are available to all clients. Since his “tier one” clients pay higher fees, the depth of research they receive may be greater than the “tier two” clients without violating the standard. By releasing the reports at different times, however, the “tier two” clients are put at a great disadvantage simply because they subscribe to a lesser level of service. This is a violation of Standard III(B), which says that members can offer different services to clients, but different levels of service must not disadvantage clients. (Study Session 1, LOS 2.a,b)

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Has Hogue violated any CFA Institute Standards of Professional Conduct with respect to the time period of returns and method of calculating returns used in his performance presentation?

Time period

Calculation method

A) Yes No

B) No Yes

C) Yes Yes

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According to Standard III(D) Performance Presentation, Hogue must disclose the fact that the 10-year performance history of the fund is comprised of five years of his performance and five years of his predecessor’s performance. By not disclosing this, the presentation is misleading and violates Standard III(D). It does not matter that the investment styles are similar or that he believes most investors are only interested in the last five years of data. Performance presentations need to be fair, accurate, and complete. His method of calculating returns before fees and taxes on a market-value-weighted basis is acceptable and fully disclosed. Therefore the calculation methodology does not constitute a violation of Standard III(D). (Study Session 1, LOS 2.a,b)

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By charging “tier one” and “tier two” clients different fees, has Hogue violated any CFA Institute Standards of Professional Conduct?

A) No.

B) Yes, because having two classes of clients inappropriately discriminates against the lower fee clients

C) Yes, because having two classes of clients is a form of investment fraud.

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Hogue is allowed to offer different levels of service without violating Standard III(B) Fair Dealing, as long as the different levels of service are fully disclosed and offered to all clients and prospects. Hogue has his “tier two” clients sign a waiver indicating they are aware of the different levels of service offered by the firm. Thus he has complied with the Standard. (Study Session 1, LOS 2.a,b)

hinsafdar

Janine Walker is an individual investment advisor with 200 individual clients. When she first obtains a client, Walker solicits personal data that helps her formulate an investment recommendation, including tax status, income, expenditure needs, and risk tolerance. The Standards:

A) require Walker to update the data regularly.

B) require updating a client's data only when a material change occurs to the personal data.

C) only require to update a client's data when a material change is being made to the clients' portfolio.

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According to Standard III(C), Suitability, Members and Candidates must reassess client information and update regularly.