optiix

An analyst has the opportunity to offer his clients shares in a “hot new issue.” One of the analyst’s clients is his brother. When the new issue comes out, for those clients he deems it would be appropriate, he offers them an equal share. He includes his brother in that group. With respect to Standard VI(B), Priority of Transactions, this is:

A) congruent with the Standard if his brother is not a 'covered person'.

B) congruent with the Standard even if he has a direct personal interest in his brother's account.

C) congruent with the Standard as long as he does not have a direct personal interest in his brother's account.

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Client accounts that belong to family members should be treated like any other account so long as there is no direct interest on the part of the analyst. In other words, these types of accounts should not be at a disadvantage relative to other client accounts when there is no direct interest on the part of the analyst overseeing the account.

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An analyst has a large personal holding of a security, and he has just determined that market conditions warrant selling this security. The analyst contacts clients who have a position in the security and advises them to sell some or all of the security. After waiting 24 hours, he sells the security from his personal accounts. This is:

A) a violation of Standard VI(B), Priority of Transactions.

B) congruent with Standard VI(B), Priority of Transactions.

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

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According to Standard VI(B), an analyst must give clients the first opportunity to buy or sell a security before the analyst acts on his own behalf. A 24-hour waiting period seems reasonable under the circumstances presented. The analyst seems to have a reasonable basis, and there is no reason to believe that he is violating Standard III(B) since he contacted all of the clients who have a position in the security.

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An analyst routinely has the opportunity to offer his clients the opportunity to purchase “hot new issues.” He tells his clients that he will distribute each issue equally among those interested, with himself included in the distribution. The clients do not object to this. With respect to Standard VI(B), Priority of Transactions, this:

A) may be a violation despite the clients' approval.

B) cannot be a violation because the clients know of the practice and agree.

C) may be a violation because it is impossible to distribute hot new issues equally.

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Just because the clients know of a practice does not make it right. The analyst must put the clients first. It is a violation for the analyst to participate in a “hot new issue” which can lower the allocation to any given client below what that client would prefer. This is tantamount to putting the analyst’s interests ahead of the clients’ interests.

optiix

An analyst, who is a CFA Institute member, manages a high-grade bond mutual fund. This is his only professional responsibility. When the analyst comes across a speculative stock investment that he feels is a good investment for his personal portfolio, the analyst:

A) is in violation of Standard IV(A), Loyalty to Employer, by spending time analyzing stocks when he should only analyze bonds.

B) must notify his supervisor about the stock according to Standard VI(B), Priority of Transactions, to see if it is appropriate for the portfolio that he manages.

C) may invest in the stock because the analyst would not purchase the stock for the bond portfolio he manages.

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The problem says the analyst “came across” the speculative stock investment. We do not know if the analyst neglected his duties. Since such an investment is clearly not appropriate for a high-grade bond fund, the analyst may invest in the stock without any restrictions relating to the fund.

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Lance Tuipulotu, CFA, is a portfolio manager for an investment advisory firm. He plans to sell 10,000 shares of Park N’Wreck, Inc. to finance his daughter’s new restaurant venture, but his firm recently upgraded the stock to "strong buy." In order to remain in compliance with Standard VI(B) "Priority of Transactions," Tuipulotu must:

A) not sell the shares of Park N’Wreck.

B) notify his firm of his intention to sell the shares before selling the shares.

C) delay selling the shares until a firm client makes an offsetting purchase to avoid having a market impact.

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Standard VI(B) "Priority of Transactions" does not prohibit Tuipulotu from trading opposite the firm’s recommendation, but he should notify his firm first. Note that if Tuipulotu were a research analyst covering Park N’Wreck, he may be prevented from selling the security if his firm claims compliance with the CFA Institute’s Research Objectivity Standards.

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Wes Smith, CFA, refers many of his clients to Bill Towers, CPA, for accounting services. In return, Towers performs routine services for Smith, such as his tax returns, for no charge. With respect to this relationship, Smith:

A) is in violation of both Standard V(B) and III(B).

B) must disclose to his clients that Towers provides services for Smith's personal benefit.

C) is only in violation of Standard III(B), Fair Dealing, by not putting the client first.

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According to VI(C), Referral Fees, Smith must disclose to his clients that Towers provides services for Smith’s personal benefit. Neither of the Standards listed in the other answers apply.

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Wes Smith, CFA, refers many of his clients to Bill Towers, CPA, for accounting services. In return, Towers performs routine services for Smith, such as his tax returns, for no charge. Towers has just become a member of CFA Institute. With this development, Towers must:

A) only reveal to the prospects referred by Smith that he performs services for Smith.

B) reveal to the prospects referred by Smith that he performs services for Smith, along with the estimated value of those services.

C) discontinue his services for Smith.

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According to VI(C), Referral Fees, as a member of CFA Institute, Towers must tell his clients about the payment in kind to Smith along with an estimate of the value of those services.

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An analyst who is a member of CFA Institute has composed an introductory information packet for her new clients, which includes information on fees she receives for referring clients to other professionals and those she pays for having clients referred to her. With respect to Standard VI(C), Referral Fees, this action:

A) may not satisfy the Standard if such information is only provided after the receivers of the information have become clients.

B) is not addressed in the Standard.

C) exceeds the requirement of the Standard because she does not need to reveal the fees she pays to those that refer clients to her.

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Standard VI(C) says that a member must reveal information both on fees she receives for referring clients to other professionals and those she pays for having clients referred to her before a prospect becomes a client. This allows the prospect to evaluate any partiality of a recommendation and the full cost of the services.

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Vijay Gill, CFA, leases office space from Land Bank in exchange for an agreement that Gill will pay Land 20% of any fees paid by Land customers to Gill for investment management services. Gill also has an arrangement with Bloom Insurance Advisors whereby Gill receives a fee for each client referred. Gill only refers clients that request insurance products. Gill meets with Randolph Song, a Land Bank customer, who is interested in Gill’s asset management services as well as insurance products. Gill is required to disclose to Song:

A) the terms of the arrangements with both Land Bank and Bloom.

B) the terms of the arrangement with Bloom, but not the terms of the arrangement with Land Bank.

C) neither the Land Bank nor Bloom arrangements, but may disclose them if he chooses to do so.

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Standard VI(C) Referral Fees requires members to disclose to clients and prospects any consideration or benefit received by the member or delivered to others for the recommendation of any services to the client or prospect. Gill is delivering a benefit to Land Bank and receiving a benefit from Bloom, both of which must be disclosed to Song.

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If a CFA charterholder receives a referral fee, he must:

A) disclose the nature of the fee arrangement to the client before entering into a formal agreement.

B) consult with the firm's compliance officer, and follow his or her instructions concerning disclosure.

C) disclose the fee to the supervisor, in written form, as an additional benefit.

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According to Standard VI(C), the nature as well as the value of the fee must be disclosed to the client before entering into a formal agreement. The compliance officer and/or the employee’s supervisor should be contacted for consultation.