Millie Walker, CFA, established an aggressive growth portfolio for her client, Jesse Wilmer, over three years ago. Wilmer was placed on Walker’s employer’s client mailing list, and received monthly account statements and the firm’s newsletter, which regularly informed clients that they should contact their account representative with any change in their personal circumstances or investment objectives. As of January, of this year, Walker had not spoken to Wilmer nor received any correspondence from Wilmer since the account was established. Walker has:

A) not violated the Code and Standards because Wilmer has been reminded regularly about the opportunity to inform Walker about any changes.

B) not violated the Code and Standards because there has been regular correspondence from Walker's firm to Wilmer.

C) violated the Code and Standards because the manager has not performed an update of Wilmer's financial situation and investment objectives.

Stephen Rangen, a broker, has three accounts consisting of unsophisticated, inexperienced individual investors with limited means.  One of these accounts is an elderly couple.  The clients want to invest in safe, income-producing investments. They rely heavily on Rangen’s advice and expect him to initiate most transactions in their respective accounts. In managing their accounts, Rangen pursues the following strategies: (1) buys U.S. treasury strips and non-dividend paying over-the-counter (OTC) stocks recommended by his firm's research department, (2) uses margin accounts, and (3) concentrates the equity portion of their portfolio in one or two stocks.  Rangen’s approach leads to extremely high turnover rates in all three accounts.

Which of the following statements about Rangen is FALSE?

A) Rangen's conduct violates Standard IV(B), Additional Compensation Arrangements.

B) Rangen has a fiduciary duty to each client.

C) Rangen's conduct violates Standard III(C), Suitability.

A) meets the requirements of the Code and Standards because his firm's research department recommended the U.S. Treasury strips and non-dividend paying stocks.

B) does not meet the requirements of the Code and Standards because his investment strategy is inconsistent with his clients' objectives.

C) meets the requirements of the Code and Standards because his clients are aware of the risks that he is taking in managing their accounts.

The O’Douls (husband and wife) have decided to work with Jane Mack, CFA, to have her recommend an investment portfolio for them. The O’Douls are novice investors and Mack has determined their asset allocation model falls into the conservative category. After researching various investment options for the O’Douls, Mack has made a recommendation that they divide their account on a 25%/75% basis between shares of a computer peripherals manufacturing company her brokerage firm is underwriting and investment grade corporate bonds. The O’Douls are not aware that Mack’s firm is underwriting an offering of the company in question. Which CFA Institute Standard(s) has Mack violated given her actions?

A) Standard VI(A), Disclosure of Conflicts, and III(C), Suitability.

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

C) Standard III(B), Fair Dealing, and III(A), Loyalty, Prudence, and Care.

Carol Hull, CFA, is an investment advisor whose prospective client, Frank Peters, presents special requirements. To construct an investment policy statement for Peters, Hull inquires about Peters’ investment experience, risk and return objectives, and financial constraints. Peters states that he has a great deal of investment experience in the capital markets and does not wish to answer questions about his tolerance for risk or his other holdings. Under Standard III(C), Suitability, Hull:

A) may accept Peters’ account but may only manage his portfolio to a benchmark or index.

B) is permitted to manage Peters’ account without any knowledge of his risk preferences.

C) must decline to enter into an advisory relationship with Peters.

Karen Jackson is a portfolio manager for Super Selection.  Jackson is friendly with David James, president of AMD, a rapidly growing biotech company. James has provided Jackson with recommendations in the biotech industry, which she buys for her own portfolio before buying them for her clients. For three years, Jackson has also served on AMD's board of directors. She has received options and fees as compensation.

Recently, the board of AMD decided to raise capital by voting to issue shares to the public. This was attractive to board members (including Jackson) who wanted to exercise their stock options and sell their shares to get cash. When the demand for initial public offerings (IPO) diminished, just before AMD's public offering, James asked Jackson to commit to a large purchase of the offering for her portfolios. Jackson had previously determined that AMD was a questionable investment but agreed to reconsider at James' request. Her reevaluation confirmed the stock to be overpriced, but she nevertheless decided to purchase AMD for her clients' portfolios.

A) Yes, she did not deal fairly with all clients.

B) No.

C) Yes, she did not consider the appropriateness and suitability of investment recommendations or actions for each portfolio or client.

According to CFA Institute Standards of Professional Conduct, when a client asks her portfolio manager to change the current investment strategy of the client’s portfolio, the manager should:

A) explain the implications of the new strategy after the member manager implements the strategy.

B) examine whether the strategy is appropriate for the client and explain the implications of the new strategy before implementing the strategy.

C) obey the client's request without question.

Bob Hatfield, CFA, has his own money management firm with two clients. The accounts of the two clients are equal in value. One of the clients gets married and the assets of the new spouse and the client are combined. With the larger portfolio of the now married client, Hatfield determines that they can assume a higher level of risk and begins a change in the policy concerning that portfolio. Which of the following would violate Standard III(C), Suitability?

A) Assess the return objectives of the newly married client and his spouse.

B) Assess the time horizon of the newly married client and his spouse.

C) Implement a similar policy for the other client who did not just get married.

Janet Reilly has just approached Betty Miller, CFA, about purchasing 10,000 shares of Brookshire Co., a newly incorporated real estate development firm. Reilly is a retired schoolteacher living off the income from her late husband's life insurance policy. This investment will represent a significant shift in her investment portfolio. Brookshire Co. is a local firm that has recently received a lot of press concerning some exciting, but speculative projects that they have undertaken in the region. Consistent with the Standards, Miller should:

A) not accept the order, because it is not a suitable investment for Reilly.

B) accept Reilly's order after she acquaints Reilly with the downside risks associated with a risky investment of this type.

C) accept Reilly's order, but have her sign a disclaimer absolving Miller of any potential losses.

What is the required frequency for updating information on each client’s financial situation, investment experiences, and investment objectives?

A) Only during the first meeting with the client.

B) Regularly.

C) Every year.

If an analyst has a policy of making an inquiry into a client’s financial situation, investment experience, and investment objectives regularly, this is:

A) congruent with Standard III(C), Suitability.

B) neither of these.

C) a violation of Standard III(E), concerning client confidentiality.

An analyst thinks that a major change in the tax law will benefit holders of utility company stocks. She immediately begins calling all her clients and telling them of the upside potential of investing in such assets now. Based upon this information, this is most likely:

A) a violation of Standard V(A), Diligence and Reasonable Basis.

B) a violation of Standard III(C), Suitability.

C) congruent with Standard V(A), Diligence and Reasonable Basis.

Bob Hatfield, CFA, has his own money management firm with two clients. The accounts of the two clients are equal in value. Hatfield has been trading on the clients’ behalf with a single brokerage firm for several years. Because of his many years of business, the brokerage firm occasionally gives Hatfield shares in an initial public offering (IPO) to sell to his clients. Hatfield has a policy of allocating the IPO shares equally between the portfolios of the two clients. This policy is:

A) congruent with Standard III(C), Suitability.

B) a violation of Standard III(B), Fair Dealing.

C) a violation of Standard III(C), Suitability.

Kim Lee manages a variety of accounts at Superior Investments. Some are permitted to invest in tax-exempt issues only; others may not invest in a stock unless it pays dividends. Lee is researching a biotech firm specializing in the analysis of "mad cow" disease. While touring company facilities and meeting with management, she learns that they believe they may have found a way to reverse the disease. Moreover, one manager conjectured, "Suppose that we reversed the disease in someone who didn't even have it? We might then be able to boost that individual's IQ into the stratosphere!" Lee returns to her office and buys shares for all accounts under her supervision. This action is:

A) appropriate given the obvious potential of the therapy.

B) a violation of the Standard concerning appropriateness and suitability of investment actions.

C) a violation of the Standard concerning fiduciary duties.

Procedures for compliance with Standard III(C), Suitability, include determining all of the following with respect to a client EXCEPT:

A) liquidity needs.

B) return objectives.

C) social habits and interests.

A portfolio manager must determine the client’s constraints, which may include all of the following EXCEPT the client’s:

A) tax considerations.

B) mortgage payment.

C) liquidity needs.

Stephen Rangen, a former broker, had three accounts consisting of unsophisticated, inexperienced individual investors with limited means. One of these accounts was an elderly couple. The clients wanted to invest in safe, income-producing investments. They relied heavily on Rangen’s advice and expected him to initiate most transactions in their respective accounts. In managing their accounts, Rangen pursued the following strategies: (1) bought U.S. treasury strips and non-dividend paying over-the-counter stocks, (2) used margin accounts, and (3) concentrated the equity portion of their portfolios in one or two stocks. Rangen’s approach led to extremely high turnover rates in all three accounts. The Securities and Exchange Commission sanctioned Rangen for unsuitable recommendations and excessive trading in several accounts.

For this specific situation, which of the following is least likely to be an appropriate compliance procedure involving Standard III(C), Suitability? The broker should:

A) develop an investment policy statement for each client.

B) assess and document each client's risk tolerance.

C) avoid using material nonpublic information received in confidence to benefit clients.

A) reviewing investment policy statements regularly.

B) educating clients about selecting appropriate asset allocations and strategies.

C) complying with any prohibitions on activities imposed by their employer if a conflict of interest exists.

A) Before advising individual clients, managers should review the recommendations provided by the firm's research department. From this set of recommendations, they should select those securities that provide the expected highest return on investment. Managers should review the investor's portfolio at least monthly to see if existing securities should be replaced with those more recently recommended. Managers should turnover portfolios frequently and concentrate holdings within portfolios in order to achieve the highest possible returns for clients.

B) Before making any recommendations or taking any investment actions, managers should formulate an investment policy for a client. They should consider the type and nature of the client and should obtain and analyze necessary information on the client's objectives (risk and return) and constraints. Managers should maintain and review regularly the investor's objectives and constraints to reflect any changes in the client's circumstances. Where appropriate, managers should properly diversify portfolios.

C) When making recommendations or taking investment actions, managers should seek to minimize the client's portfolio risk. Managers should review the recommendations of the firm's research department to identify securities with low volatility. In making asset allocation recommendations or decisions for discretionary accounts, managers should weight the portfolios towards dividend-paying stocks and other income-producing assets such as bonds and mortgage REITS. Managers should review portfolios at least semi-annually.

The best way to determine the suitability of an investment is:

A) to consider the financial situation, investment experience, and investment objectives of the client.

B) based on portfolio performance results, presented as a weighted average, from the biggest financial companies.

C) by administration of a specially designed survey of the client's opinions.

A broker was sanctioned for unsuitable recommendations and excessive trading involving three accounts under his care. These clients were unsophisticated, inexperienced individual investors with limited means. According to CFA Institute Standard III(C), Suitability, which of the following is least likely to be considered a relevant factor in determining the appropriateness and suitability of investment recommendations or actions for each portfolio or client?

A) Best interests of the investment professional.

B) Basic characteristics of the total portfolio.

C) Needs and circumstances of the portfolio or client.