21、Which of the following statements about a member's use of client brokerage commissions is FALSE? Client brokerage commissions:

A)   should be used by the member to ensure that fairness to the client is maintained.

B)   may be used by the member to pay for securities research used in managing the client's portfolio.

C)   should be commensurate with the value of the brokerage and research services received.

D)   may be directed to pay for the investment manager's operating expenses.

22、David Loy, an analyst, in the course of reviewing the Corn Co., has received comments from management that, while not meaningful by themselves, when pieced together with data he has accumulated from outside sources, lead him to recommend placing Corn Co. on his firm's sell list. What should David do?

A)   The comments are non material and the report can be issued as long as he maintains a file of the facts as supplied by management.

B)   Contact the managers and have them publicly announce their comments.

C)   Show his report to his own manager and counsel for their review since this information has become material once it was combined with his analysis.

D)   Not issue the report until the comments are publicly announced.

23、Jordan Conomos is the new trustee for the Grant Trust, which has both current beneficiaries and remaindermen. Up until now, the trust has been entirely invested in long-term tax-free municipal bonds. Conomos decides to put 30 percent of the assets in common stocks, with the justification that taxes should be the concern of the trust beneficiaries and not the trust, and the trust needs some diversification and growth. Conomos is:

A)   violating his fiduciary duty by not considering taxes.

B)   violating his fiduciary duty by not investing solely for the purposes of the current beneficiaries.

C)   violating his fiduciary duty by not following the Prudent Man Rule.

D)   not violating his fiduciary duty.

24、Ned Brenan manages two dozen pension accounts, one of which earned over 25 percent during the past two years. Brenan tells prospective clients that based on past experience they can expect a 25 percent return on their funds. Which of the following statements is TRUE?

A)   Brenan has violated Standard of Professional Conduct III(D), Performance Presentation, but Brenan has not violated Standard I(C), Misrepresentation.

B)   Brenan has not violated Standard of Professional Conduct III(D), Performance Presentation, but Brenan has violated Standard I(C), Misrepresentation.

C)   Brenan has not violated either Standard of Professional Conduct III(D), Performance Presentation, or Standard I(C), Misrepresentation.

D)   Brenan has violated both Standard of Professional Conduct III(D), Performance Presentation, and Standard I(C), Misrepresentation.

25、Steve Jones is a portfolio manager for Gregg Advisors. Gregg has developed a proprietary model that has been thoroughly researched and is known throughout the industry as the Gregg model. The model is purely quantitative and screens stocks into buy, hold, and sell categories. The basic philosophy of the model is thoroughly explained to clients. The director of research frequently alters the model based on rigorous research—an aspect that is well explained to clients, although the specific alterations are not continually disclosed. Portfolio managers then make specific sector and security holding decisions, purchasing only securities that are indicated as "buys" by the model. Jones thoroughly understands the model and uses it with all of his clients. Jones is:

A)   violating the Standards in purchasing stocks without a thorough research basis and in not disclosing all alterations of the model to clients.

B)   violating the Standards in purchasing stocks without a thorough research basis, but not in failing to disclose all alterations of the model to clients.

C)   violating the Standards in not disclosing all alterations of the model to clients, but not in purchasing stocks without a thorough research basis.

D)   not violating the Standards either in purchasing stocks without a thorough research basis or in not disclosing all alterations of the model to clients.

21、Which of the following statements about a member's use of client brokerage commissions is FALSE? Client brokerage commissions:

A)   should be used by the member to ensure that fairness to the client is maintained.

B)   may be used by the member to pay for securities research used in managing the client's portfolio.

C)   should be commensurate with the value of the brokerage and research services received.

D)   may be directed to pay for the investment manager's operating expenses.

The correct answer was D)

Brokerage commissions are the property of the client and may only be used for client benefit.

22、David Loy, an analyst, in the course of reviewing the Corn Co., has received comments from management that, while not meaningful by themselves, when pieced together with data he has accumulated from outside sources, lead him to recommend placing Corn Co. on his firm's sell list. What should David do?

A)   The comments are non material and the report can be issued as long as he maintains a file of the facts as supplied by management.

B)   Contact the managers and have them publicly announce their comments.

C)   Show his report to his own manager and counsel for their review since this information has become material once it was combined with his analysis.

D)   Not issue the report until the comments are publicly announced.

The correct answer was A)

This is an example of the mosaic theory where separate pieces of nonmaterial information are pieced together to make an investment recommendation.

23、Jordan Conomos is the new trustee for the Grant Trust, which has both current beneficiaries and remaindermen. Up until now, the trust has been entirely invested in long-term tax-free municipal bonds. Conomos decides to put 30 percent of the assets in common stocks, with the justification that taxes should be the concern of the trust beneficiaries and not the trust, and the trust needs some diversification and growth. Conomos is:

A)   violating his fiduciary duty by not considering taxes.

B)   violating his fiduciary duty by not investing solely for the purposes of the current beneficiaries.

C)   violating his fiduciary duty by not following the Prudent Man Rule.

D)   not violating his fiduciary duty.

The correct answer was A)

The trustee must consider tax liabilities of beneficiaries. However, he should also provide diversification and be concerned with the desires of the remaindermen. (Remaindermen referes to the group that is to receive the remainder of the trust once its term is complete. Of course, some trusts never expire so not every trust has remaindermen.)

24、Ned Brenan manages two dozen pension accounts, one of which earned over 25 percent during the past two years. Brenan tells prospective clients that based on past experience they can expect a 25 percent return on their funds. Which of the following statements is TRUE?

A)   Brenan has violated Standard of Professional Conduct III(D), Performance Presentation, but Brenan has not violated Standard I(C), Misrepresentation.

B)   Brenan has not violated Standard of Professional Conduct III(D), Performance Presentation, but Brenan has violated Standard I(C), Misrepresentation.

C)   Brenan has not violated either Standard of Professional Conduct III(D), Performance Presentation, or Standard I(C), Misrepresentation.

D)   Brenan has violated both Standard of Professional Conduct III(D), Performance Presentation, and Standard I(C), Misrepresentation.

The correct answer was D)

Brenan violated Standard of Professional Conduct III(D) by using only one portfolio’s results to create a false impression of all the portfolios, and Brenan violated Standard of Professional Conduct I(C) by creating the impression that a certain return was assured (he should have used the words “might” or “could” instead of “can”).

25、Steve Jones is a portfolio manager for Gregg Advisors. Gregg has developed a proprietary model that has been thoroughly researched and is known throughout the industry as the Gregg model. The model is purely quantitative and screens stocks into buy, hold, and sell categories. The basic philosophy of the model is thoroughly explained to clients. The director of research frequently alters the model based on rigorous research—an aspect that is well explained to clients, although the specific alterations are not continually disclosed. Portfolio managers then make specific sector and security holding decisions, purchasing only securities that are indicated as "buys" by the model. Jones thoroughly understands the model and uses it with all of his clients. Jones is:

A)   violating the Standards in purchasing stocks without a thorough research basis and in not disclosing all alterations of the model to clients.

B)   violating the Standards in purchasing stocks without a thorough research basis, but not in failing to disclose all alterations of the model to clients.

C)   violating the Standards in not disclosing all alterations of the model to clients, but not in purchasing stocks without a thorough research basis.

D)   not violating the Standards either in purchasing stocks without a thorough research basis or in not disclosing all alterations of the model to clients.

The correct answer was D)

Jones and Gregg are using reasonable judgment in not continually disclosing all of the alterations of the model. It is acceptable to use a pure quantitative model as a sole basis for purchasing stocks, as long as it is thoroughly researched.