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

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

B) with the help of the special performance presentation standards.

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

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

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 Rangens 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, (2) uses margin accounts, and (3) concentrates the equity portion of their portfolio in one or two stocks. Rangens approach leads to extremely high turnover rates in all three accounts.

Which of the following statements about Rangen is FALSE?

A) Rangen has a fiduciary duty to each client.

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

C) Rangen places his own interests above those of his clients by excessively trading in the accounts.

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

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

B) meets the requirements of the Code and Standards because he does not have complete control over his clients' accounts.

C) 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.

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

The Securities and Exchange Commission (SEC) sanctioned Stephen Rangen, a former broker, for unsuitable recommendations and excessive trading in several accounts. His clients were unsophisticated, inexperienced individual investors with limited means. As such, they relied heavily on Rangens advice and expected him to initiate any transactions in their respective accounts. The SEC found that Rangens trading methods were contrary to his clients goals. For example, he used margin accounts and concentrated their equity holdings in particular securities. Rangen claimed that his actions were justified because his clients were aware of the risks.

Which of the following statements best describes why Rangens argument, that his clients were aware of the risks, did NOT meet the requirements of the Code and Standards? Rangen failed to:

A) make recommendations that were consistent with his clients' financial needs.

B) deal fairly and objectively with his clients when taking investment action.

C) consider the effect of excessive trading on the returns of his clients' portfolios.

D) disclose to his clients all matters that reasonably could be expected to impair his ability to make unbiased and objective recommendations.

A) Rangen misrepresented the basic characteristics of the investments that he bought for his clients' accounts.

B) Rangen did not use reasonable care and judgment to achieve and maintain independence and objectivity in taking investment actions.

C) Rangen used material nonpublic information from his firm's research department as the basis for selecting the securities that he bought for his clients' accounts.

D) Rangen's duty was to make only recommendations that were in the best interests of his clients.

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

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

C) develop an investment policy statement for each client.

D) educate clients with respect to the selection of appropriate asset allocations and strategies.

A) reviewing investment policy statements regularly.

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

C) obtaining proper portfolio diversification where appropriate.

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

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.

D) When making investment recommendations or taking investment actions, managers should focus primarily on a client's tax considerations and after-tax returns. Managers should attempt to develop tax-efficient investment strategies and portfolios. Managers should typically avoid high-yielding securities in favor of those expected to result in capital gains. Managers are required to review changes in applicable tax laws and regulations to ensure that the best interests of clients are being met from a tax perspective. Managers should review portfolios at least annually.

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) Basic characteristics of the investment involved.

D) Needs and circumstances of the portfolio or client.

The ODouls (husband and wife) have decided to work with Jane Mack, CFA, to have her recommend an investment portfolio for them. The ODouls are novice investors and Mack has determined their asset allocation model falls into the conservative category. After researching various investment options for the ODouls, 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 ODouls are not aware that Macks firm is underwriting an offering of the company in question. Which CFA Institute Standard(s) has Mack violated given her actions?

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

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

C) Standard III(D), Performance Presentation, and III(B), Fair Dealing.

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

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.

In this situation, all of the following would be components of an effective compliance process EXCEPT:

A) using margin accounts.

B) diversifying portfolios where appropriate.

C) educating clients in the basics of investment characteristics.

D) preparing an investment policy statement based on information obtained from each client.

A) Use concentrated portfolios consisting of only a few assets because this approach reduces trading costs.

B) Examine risk tolerance carefully because risk tolerance is an important element in determining an appropriate investment policy statement.

C) Update client information regularly, because client circumstances may change.

D) Educate clients on how to select investments because this can help clients accomplish their investment policy statement goals.

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

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

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

D) Notify the client of the change in policy and why he is enacting it.

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

A) obey the client's request without question.

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

C) examine whether the strategy is appropriate and inform the SEC if it is not.

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

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(A), Loyalty, Prudence, and Care.

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

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) congruent with Standard III(C), Suitability.

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

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

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

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) only permissible if the account holders are contacted first before the shares are purchased.

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

D) a violation of the Standard concerning fiduciary duties.

A) Patel may change the current portfolio strategy and begin trading based upon Singhs expectations because he advised her to do so.

B) Patel must adhere, in principle, to the existing strategy but may begin altering the accounts composition based upon Singhs expectations.

C) Patel must adhere to the existing portfolio strategy until she meets with Singh to develop a new portfolio strategy based upon updated financial information but may place trades which are consistent with the existing strategy.

D) Patel must not place any trades in the account until she meets with Singh to develop a new portfolio strategy based on the updated information.

A) No, because Patel and Singh must meet and revise the investment policy statement and portfolio strategy before reallocating.

B) No, because Patel must wait until the next annual meeting to reallocate.

C) Yes, because the funds have actually been transferred and the timing is no longer uncertain.

D) Yes, because the total value of the municipal bonds received into the account will be too large relative to the other assets in the portfolio.

A) No No

B) Yes Yes

C) Yes No

D) No Yes

A) The fact that a promotional announcement was made violates the restrictions on misrepresenting the meaning of the CFA designation.

B) The promotional announcement uses the letters CFA as a noun and hence is an improper use of the designation.

C) The announcement is likely a violation because passing the level 3 exam does not entitle Patel to use the CFA designation.

D) The announcement violates the Code of Ethics because it implies that obtaining a CFA charter leads to superior performance.

A) Yes, since Patel is obligated to seek the best possible price and execution for all clients.

B) Yes, since Patel has inappropriately directed trades to a personal friend at a high-priced brokerage firm.

C) Yes, since Patel failed to properly notify Singh that using TradeRight would lead to higher commissions and opportunity costs.

D) No.