Reading 2-I: Standards of Profes....Professionalism－LOS c

cfaedu

CFA Institute Area 1-2: Ethical and Professional Standards
Session 1: Code of Ethics and Professional Standards
Reading 2-I: Standards of Professional Conduct & Guidance: Professionalism
LOS C.: Misrepresentation.

cfaedu

An analyst preparing a report does NOT need to cite the use of which of the following?

A) Charts developed by a colleague in the same firm.

B) A recent quote from Alan Greenspan.

C) The use of a new algorithm for computing betas developed by a group of university professors.

D) Estimates of betas provided by Standard & Poor's.

---

Answer and Explanation

Statistics provided by a recognized agency, such as Standard and Poors, do not need to be cited. Charts, quotes, and algorithms developed by individuals must be cited when they are used.

cfaedu

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 percent 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) Since the speculative investments in the fund are certain to retain at least 10 percent of their value, we know that combined with the value of Treasury bonds, the value will be greater than your initial investment.

C) A CFA Institute member may not make any of these statements.

D) The fund is virtually default risk free.

---

Answer and Explanation

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

cfaedu

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

A) Using charts and graphs without stating their sources.

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

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

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

---

Answer and Explanation

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

cfaedu

All of the following violate Standard I(C), Misrepresentation, EXCEPT:

A) copying a proprietary computerized spreadsheet without seeking authorization from their creators.

B) presenting factual information published by recognized statistical reporting services without acknowledgment.

C) citing quotes attributable to "investment experts" without specific references.

D) using excerpts from reports prepared by others with minor word changes without acknowledgment.

---

Answer and Explanation

Standard I(C), Misrepresentation, permits using recognized sources of factual information such as Standard & Poors Corporation and Moodys Investors Service without acknowledgment.

cfaedu

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 cannot be gathered from several public sources.

C) not a violation of Standard I(C) if the charterholder has a subscription to the publication.

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

---

Answer and Explanation

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. Whether or not the charterholder has a subscription to the publication is not an issue.

cfaedu

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 TRUE?

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

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

C) Both Bagenot and Wain violated the Standards.

D) Neither Bagenot nor Wain violated the Standards.

---

Answer and Explanation

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.

cfaedu

A money manger 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) is a violation because she should have gathered the relevant information before the prospect became a client.

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

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

---

Answer and Explanation

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

cfaedu

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 uses reasonable care and verifies that the technique provides superior results.

B) none of these answers provide grounds for an exception.

C) if the analyst modifies the technique slightly.

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

---

Answer and Explanation

None 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.

cfaedu

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) a violation of the Standard concerning the use of nonpublic information, since shares can be manipulated to obtain the desired return.

D) not in violation of the Code and Standards.

---

Answer and Explanation

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.