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Which of the following is least likely required of fiduciaries who are responsible for pension plans?

A)	Judging investments in the context of the total portfolio.

B)	Acting in accordance with the plan's stated investment policies.

C)	Acting solely in the interest of plan participants.

D)	Supporting the sponsor's management during proxy fights.

Under Standard III(A) Loyalty, Prudence, and Care, fiduciaries must evaluate managements proposals during proxy fights to see if they are in the best interest of the plan participants. If managements ideas are justifiable and reasonably ensure plan participants betterment, then fiduciaries can support them. If management is only trying to further its own objectives, especially at the cost of plan participants, then fiduciaries must vote against management in proxy fights.

Joni Black, CFA, works for a portfolio management firm. Black is a partner of the firm and is primarily responsible for managing several large pension plans. She also is in a supervisory position with several research analysts reporting directly to her. Dave Wood is a research analyst who has worked under Black for the last six years. Wood recently completed the Level III CFA exam and is anxiously awaiting the results. As a display of confidence, Black shows Wood a box of business cards that have already been printed up for Wood with the initials CFA after his name. She locks them away in a file cabinet and promises to deliver them on the day they get the news of his passing the exam.

Black is on the board of directors for ATX Corporation. She was asked to write a research report for ATX Corporation. Because of her relationship with ATX, she assigned Wood to write the report instead. Black is Woods supervisor and requires Wood to show all of his work to her for final approval. As Wood begins writing the report, he remembers that the trust fund of his children, left to them by the parents of Woods wife, has a sizable investment in ATX.

Despite his close relationship with Black, Wood has been preparing to start his own money management firm. He has turned a spare bedroom in his house into an office with new furniture and computer. He has the room wired with the latest Internet service upgrades. He has subscribed to financial news services and opened a trading account in the name of his proposed company. He has told an old friend about his plans. His friend has a large portfolio being managed at another brokerage firm. The friend had met Black, and told Wood that he did not like her and could not let them handle his portfolio despite their friendship. If Wood was on his own, however, the friend had told Wood that he would want Wood to manage his portfolio. Wood also contacts a cousin, who recently inherited a large portfolio. The cousin says that he would like to get some help managing the portfolio as soon as possible. Wood instructs the cousin to use futures contracts to, in effect, hedge the value of the portfolio cost-free until Wood sets up his business, and Wood can then take his cousin on as a client. He sends each of them a copy of his resume where in his credentials he places after his name CFA (expected 200X).

With respect to Blacks instruction to execute the trade for Talbert, according to the Standards, Wood should:

A)	execute the trade only after consulting the firms legal counsel.

B)	execute the trade immediately.

C)	not execute the trade because he has not met Talbert himself.

D)	not execute the trade because he has not yet earned the CFA designation.

Since Black is Woods supervisor and has the CFA designation and Wood sees nothing wrong, Wood has no reason to take any intermediate action.

A)	Wood does not have the CFA designation and the position of ATX in the trust fund of Woods children.

B)	Black is on the board of ATX and the position of ATX in the trust fund of Woods children only.

C)	Wood does not have the CFA designation only.

D)	Wood does not have the CFA designation and that Black is on the board of ATX.

This question is related to Disclosure of Conflicts, Standard VI(A). Blacks relationship with ATX Corporation must be disclosed in the research report because it could impair Blacks ability to make an unbiased judgment. Under the same standard, the position of ATX in the childrens trust fund must be mentioned because it is beneficial ownership that could reasonably impair Woods judgment. Even though Wood is the one writing the report, both potential conflicts need to be disclosed since Black is supervising Wood. The fact Black requires Wood to get her approval, which is congruent with Standard IV(C), is simply a routine firm policy that does not need reporting. It is not required to mention that an analyst does not have the CFA designation.

A)	primarily to the management and stockholders of Evergreen International. Black should follow management's direction to potentially increase the value of the company.

B)	to the participants, beneficiaries, and management of Evergreen International. Therefore, Black should increase the portion in international equities as long as it is within policy statement guidelines.

C)	owed to the participants and beneficiaries of Evergreen International. Therefore, Black should continue to manage the fund in their best interest regardless of the management's request.

D)	equally divided amongst all company stakeholders. Therefore, she must consider all requests of management, stockholders, participants and beneficiaries.

This question relates to Standard III(A), Loyalty, Prudence, and Care. Blacks fiduciary duty is to the participants and beneficiaries of the pension plan according to ERISA. Black should act in their best interest in managing the funds.

A)	try to distance himself from Blacks activities.

B)	do nothing because he knows what Black said about the covered call properties and her record is true.

C)	report Blacks activities to the police.

D)	do nothing, because he knows his supervisor is competent and has the CFA designation and what Black said about the covered call properties and her record is true.

According to Standard I(A), Knowledge of the Law, members and candidates must know the law and not knowingly assist in breaking the law. When questionable activities occur like Blacks option trading, the best course of action for an associate is distance him/herself and seek legal counsel.

A)	in his communication with his friend.

B)	by setting up trading accounts in the name of his company.

C)	in his communication with his cousin.

D)	by setting up an office in his home with news subscriptions in the name of his company.

Wood violated Standard IV(A), Loyalty to Employer by contacting his cousin and advising him because the cousin could potentially be a client for his current firm. Since the friend had said he would not do business with Black, and Wood gave him no instructions, that was not a violation. Note that Standard IV(A) covers competing with an employer, not preparing to compete. Preparing to compete by setting up an office and other related activities are not a violation of the Standards.

A)	the letters sent by Wood to his friend and cousin but not with the printing of the business cards by Black.

B)	the printing of the business cards by Black but not the letters sent by Wood to his friend and cousin.

C)	neither the printing of the business cards by Black nor the letters sent by Wood to his friend and cousin.

D)	both the printing of the business cards by Black and the letters sent by Wood to his friend and cousin.

Standard VII(B), Reference to CFA Institute, the CFA Designation, and the CFA Program, limits the use of the CFA designation to those who have passed all three levels of the CFA Program, have received their charters, and are charter holders in good standing. Wood may not put CFA (expected 200X) following his name because it is a violation of the Standard. However, he may state that he is a Level III candidate in the CFA program if he wishes. The printing of the business cards was not a prudent move, but since they are taking care not to distribute them until the appropriate time, no violation has occurred. In some sense, it is like a research report written in advance of an anticipated event. As long as the report is not released until after the event, no violation has occurred.

While trading on behalf of a pension account, an analyst receives special research reports from the brokerage firm with whom she is doing the trades. Such an activity is:

A)	a violation of both Standard III(A), Loyalty, Prudence, and Care, and the Code of Ethics.

B)	a violation of only The Code of Ethics.

C)	a violation of only Standard III(A), Loyalty, Prudence, and Care.

D)	not in itself a violation of Standard III(A), Loyalty, Prudence, and Care, nor the Code of Ethics.

An analyst can receive research from a brokerage firm with whom she is trading on behalf of a client. The analyst should inform the client of the arrangement. The client is more likely to violate Standard III(A) by obtaining non-research services or, worse yet, personal benefits from the brokerage firm.

Tony Calaveccio, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto. He places trades for the fund with River City Brokerage. River City provides Calaveccio with soft dollars to purchase research. River City also deals in municipal bonds, some of which Calaveccio holds in his personal portfolio. He periodically uses the soft dollars to request research reports on various small cap stocks and also on the status of the municipal bond market and issues that he holds. These actions are:

A)	in violation of his fiduciary duties regarding the municipal bond research but not so regarding the research on the small cap issues.

B)	not in violation of the Code and Standards.

C)	in violation of his fiduciary duties regarding the small cap research, but not so regarding the research on the municipal bonds.

D)	in violation of his fiduciary duties regarding both the small cap research and the municipal bond research.

The issue at hand is the member's fiduciary responsibilities in handling "soft dollars" which are technically the property of the client. Standard III(A), Loyalty, Prudence, and Care, delineates the member's fiduciary responsibilities with regards to soft dollars. Since municipal bond research is clearly not relevant to the Small Cap Fund holders, he is clearly using the soft dollars to obtain research for his personal benefit and is in violation of the Standard.

Which of the following is a possible breach of fiduciary duties by a CFA Institute member who manages assets on behalf of a client?

A)	None of these breach fiduciary duties.

B)	Using directed brokerage.

C)	Voting all proxies of stocks the client owns.

D)	Obeying the rules of corporate governance.

Proxies have economic value to the client. To comply with Standard III(A), the analyst is obligated to vote proxies in an informed and responsible manner. A cost benefit analysis may show that voting all proxies may not benefit the client, so voting proxies may not be necessary in all instances. Directed brokerage occurs when the client requests that a portion of the client's brokerage be used to purchase services that directly benefit the client. Although, this may prevent best execution, it does not violate the Standards as it was directed by the client, not the brokerage firm.

In order to comply with Standard III(A), Loyalty, Prudence, and Care, an analyst needs to:

A)	perform all of the actions listed here.

B)	liquidate his holdings of all stocks that his client owns.

C)	charge the average fee of his competition in the market.

D)	comply with applicable fiduciary duty.

To comply with Standard III(A), the analyst must use reasonable care and exercise prudent judgment, always act for the benefit of clients, and determine and comply with applicable fiduciary duty. Neither liquidating personal holdings nor charging some average fee is required.

An independent analyst has only one client. One of the clients largest holdings is a brokerage firm. Because of the large holding by his client, the brokerage firm recently began allowing the analyst to tap into the firms computer network to use the firms research facilities. This is allowable as long as the analyst:

A)	does all of the actions listed here.

B)	discloses the relationship to the client.

C)	uses the resources to help manage the client's account.

D)	does not put his relationship with the firm before the client.

According to Standard III(A), Loyalty, Prudence, and Care, the analyst must put the client first and inform the client of any possible conflicts of interest. The analyst must channel any benefits derived from his service to the client, back to the client, and inform the client of the benefits.

Tony Calaveccio, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto. Calaveccio places a trade with Quantco Brokerage. While Calaveccio's part of the transaction was conveyed correctly to Quantco, there was a trading error made in Calaveccio's account due to a slip up within Quantco. Calaveccio realizes that the error has taken place, and informs his contact at Quantco. Calaveccio allows Quantco to cover the error, with no cost to TrustCo. This is:

A)	a violation of Calaveccio's fiduciary duties.

B)	a violation of the Standard regarding fair dealing.

C)	permissible under CFA Institute Standards since some trading errors are a fact of life in the securities industry.

D)	a violation of Calaveccio's duty to his employer.

The issue is similar to an allocation of soft dollars. Clearly, if the broker absorbs the loss, they expect to make up the difference in some way. However, since the error was on the part of Quantco Brokerage, Calaveccio is under no obligation to cover the cost of the trading error. Moreover, no reasonable observer expects that there exists any implied future allocation of trades to Quantco in return for correcting their own mistake. There is no violation of Standard III(A), Loyalty, Prudence, and Care.

An analyst with his own money management firm trades on behalf of several large pension funds. The analyst now performs all trades through a particular brokerage firm because the brokerage provides his firm with a no-interest line of credit if paid within 60 days. The line of credit is available to all brokerage clients. The brokerage provides the analyst with personal account privileges that he would not otherwise be eligible for. The brokerage also provides the analyst with free research reports on many companies. Which of these benefits are violations of Standard III(A), Loyalty, Prudence, and Care?

A)	The research reports.

B)	The personal account privileges.

C)	The no-interest line of credit.

D)	None of these.

The personal account privileges are clearly a violation. The no-interest line of credit could be a violation if the analyst does not factor in the benefits when determining the fees of the clients, but it is not a per se violation. Research reports are least likely to be a violation.

Tony Calaveccio, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto. He places trades for the fund with Canadian Brokerage. Canadian provides Calaveccio with soft dollars to purchase research. He uses these soft dollars to get research reports from Canadian's research department regarding the issues currently held in the small cap portfolio, and also for firms he is contemplating adding to the portfolio. These actions are:

A)	in violation of his fiduciary duties insofar as both the currently held issue research and research concerning issues contemplated for purchase.

B)	in violation of his fiduciary duties insofar as the contemplated issues are concerned but not so regarding research concerning currently held issues.

C)	not in violation of the Code and Standards.

D)	in violation of his fiduciary duties insofar as the currently held issues are concerned but not so regarding research concerning issues contemplated for purchase.

The issue at hand is the member's fiduciary responsibilities in handling "soft dollars, soft pounds, etc.," which are technically the property of the client (in this case the holders of the shares of the Small Cap Venture Fund). Standard III(A) delineates the member's fiduciary responsibilities. Since he is clearly using the soft dollars to obtain research that is directly applicable to his professional duties, there is no violation of the Standard.