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An analyst meets with a new client. During the meeting, the analyst sees that the new client’s portfolio is heavily invested in one over-the-counter stock. The analyst has been following the stock and thinks it will perform well in the long run. The analyst arranges through a brokerage firm to simultaneously sell a large number of shares of the stock via a series of cross trades from the new client’s portfolio to various existing clients. He arranges the trades to be executed at a price that approximates the current market price. This action is:

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

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

C) not in violation of the Standards.

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There is no violation. It is in the best interest of the client to be diversified and selling via a series of cross trades will likely reduce price impact costs when compared to selling directly into the market. The analyst appears to have reasonable basis for putting the securities in the accounts of other clients.

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Which of the following would be a violation of Standard III(B), Fair Dealing?

A) Trading for regular accounts before discretionary accounts.

B) Having well defined guidelines for pre-dissemination.

C) Limiting the number of employees privy to recommendations and changes.

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Do not discriminate against a client when disseminating investment recommendations. If the firm offers different levels of service, this fact must be offered and disclosed to all clients. The other choices are necessary parts of the Standard. The Standard actually says to have published personal guidelines for pre-dissemination, which implies that the guidelines be well-defined.

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All of the following are violations of Standard III(B), Fair Dealing, EXCEPT a member:

A) places a trade for the firm account before issuing a buy recommendation.

B) places a trade for her discretionary accounts before placing a trade for her non-discretionary accounts.

C) telephones clients in distant cities the day after a buy recommendation is mailed to all clients because their mail service is later than the member's local clients.

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Standard III(B) states, "Members shall deal fairly and objectively with all clients and prospects when providing investment analysis, making investment recommendations, taking investment action, or in other professional activities.”
The term “fairly” implies that members should take care not to discriminate against a client when disseminating investment recommendations. All the responses, except for the telephoning of distant clients (which has the effect of putting them in the same position as local clients), describe a situation in which a client or group of clients is receiving preferential or detrimental treatment that is unfair.

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Lance Tuipulotu, CFA, manages investments for 400 individuals and families and often finds his resources stretched. When his largest investors petition him to include a 5% to 7% allocation of non-investment-grade bonds in their portfolios, he decides he needs additional help to meet the request. He considers various independent advisors to use as submanagers, but determines that the most qualified advisors would be too expensive. Reasoning that a lower-cost provider would enable him to pass the savings along to his clients, he chooses that provider to invest the new bond allocation. Tuipulotu has violated:

A) Standard III(C) "Suitability" by failing to consider the appropriateness of the non-investment-grade bonds.

B) Both Standard III(C) "Suitability" and Standard V(A) "Diligence and Reasonable Basis."

C) Standard V(A) "Diligence and Reasonable Basis" by letting fee structure determine the selection of the submanager.

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Both Standard III(C) "Suitability" and Standard V(A) "Diligence and Reasonable Basis" were violated. Tuipulotu must perform a full IPS review to determine the appropriateness of the new portfolio allocations. Submanagers should not be selected by cost structure alone, as the quality and appropriateness of the submanager is Tuipulotu’s responsibility.

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

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

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

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Standard III(C) Suitability requires members to update a client’s financial situation and investment objectives regularly. Wilmer’s account has existed for more than three years, and an update is long overdue. Generally offering to do an update is not sufficient to comply with the Standard.

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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 NOT correct?

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.

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No information in the case suggests that Rangen’s conduct violates Standard IV(B), Disclosure of Additional Compensation Arrangements.

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Which of the following statements about Rangen's conduct is CORRECT? Rangen's conduct:

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.

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Rangen's actions are inconsistent with Standard III(C), Suitability, because his investment actions are neither appropriate nor suitable for each client. Even if his clients were aware of the risks, the portfolios that he constructed are inconsistent with their financial needs. Because he is in a position to control the volume and frequency of transactions in their accounts, he has control over the accounts. Although Rangen relies upon recommendations from his firm’s research department, he cannot shift blame to his employer because he must follow recommendations that are in the best interests of his clients.

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

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

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

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Mack is obliged to disclose the conflict of interest regarding her company’s IPO and to consider both the appropriateness and the suitability of the investment for her client. She has apparently failed in both respects.

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

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

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

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Hull would not violate Standard III(C), Suitability, by managing Peters’ account without knowledge of his risk preferences. She made a reasonable inquiry into Peters’ investment experience, risk and return objectives, and financial constraints, as the Standard requires. If a client chooses not to provide some of this information, the member or candidate can only be responsible for assessing the suitability of investments based on the information the client does provide.

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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.
Did Jackson violate Standard III(C) concerning Portfolio Recommendations and Actions?

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.

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Jackson violated Standard III(C) because she did not consider her clients' financial situation, investment experience, and investment objectives. If the stock is questionable and overpriced, it is not suitable for any of her clients.

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

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

C) obey the client's request without question.

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According to Standard III(C), Suitability, the member manager must determine that an investment is suitable given the client’s objectives/constraints and within the context of the client’s total portfolio. In this case, the member manager must examine the new strategy to see if it is appropriate for the client, even if the client asked for the change. The member should also explain the implications of the strategy to avoid any misrepresentations that may result from omitting details.