HuskyGrad2010

An analyst finds a stock that has had a low beta given its historical return, but its total risk has been commensurate with its return. When writing a research report about the stock for clients with well-diversified portfolios, according to Standard V(B), Communication with Clients and Prospective Clients, the analyst needs to mention:

A) both the historical beta and total risk and return.

B) the relationship of the historical beta and return only.

C) the relationship of the historical total risk to return only.

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Using reasonable judgment, an analyst may exclude certain factors from research reports. Since the report will be delivered to clients with well-diversified portfolios, total risk is not as important as beta. Given that the total risk has been only commensurate with historical return, furthermore, then the analyst is not negligent by not mentioning it.

HuskyGrad2010

An analyst who routinely purges the files that support his research and recommendations:

A) may be violating Standard V(C), Record Retention.

B) is acting in accordance to Standard III(E), Preservation of Confidentiality.

C) is acting in accordance to Standard IV(A), Loyalty to Employer.

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According to Standard V(C), a member shall “maintain appropriate records” to support recommendations. Neither of the other choices would apply to this action.

HuskyGrad2010

Nicole Wise, CFA, is an analyst at Chicago Securities. She attends a meeting with management of one of the companies that she covers. During the meeting, management expresses great optimism about the company’s recent acquisition of a new business. Wise is excited about these prospects and issues a research report that states that the company is about to achieve significant success with the new acquisition. Wise has:

A) violated CFA Institute Standards of Professional Conduct because she did not check the accuracy of the statements that management made.

B) not violated CFA Institute Standards of Professional Conduct because she had reasonable reason to believe that the statements in her report were true.

C) violated CFA Institute Standards of Professional Conduct because she misrepresented the optimism by turning it to certainty.

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Standard V(B), Communication with Clients and Prospective Clients. Members must distinguish between fact and opinion in the presentation of a research report or investment recommendation. Wise violated the standard because she misrepresented management’s enthusiasm by turning it into certainty.

HuskyGrad2010

Roger Halpert, CFA, prepares a company research report in which he recommends a strong "buy." He has been careful to ensure that his report complies with the CFA Institute Standard on research reports. According to CFA Institute Standards of Professional Conduct, which of the following statements about how Halpert can communicate the report is most correct?

A) Halpert can transmit his report by computer on the Internet.

B) Halpert can make his report in person.

C) Halpert can make his report in person, by telephone, or by computer on the Internet.

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A report can be made via any means of communication, including in-person recommendation, telephone conversation, media broadcast, and transmission by computer such as on the Internet.

HuskyGrad2010

Bob Hatfield, CFA, has his own money management firm with two clients. The accounts of the two clients are equal in value. It is Hatfield’s opinion that interest rates will fall in the near future. Based upon this, Hatfield begins increasing the bond allocation of each portfolio. In order to comply with Standard V(B), Communication with Clients and Prospective Clients, the analyst needs to:

A) inform the clients of the change and tell them it is based upon an opinion and not a fact.

B) make sure that the change is identical for both clients.

C) perform both of these functions.

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According to Standard V(B), the analyst must inform the clients of the change and tell them it is based upon an opinion and not a fact. Making an identical change in two portfolios may be a violation of this standard if the needs of the clients are not identical.

HuskyGrad2010

Robert Hamilton, a CFA candidate, is preparing a research report on Pets-R-Us for public distribution. Hamilton's preliminary report contains unfavorable earnings forecasts for the next four quarters. As part of his analysis, Hamilton met with Linda Brisson, the president of Pets-R-Us, and asked her to review the preliminary report for factual inaccuracies. Brisson revised Hamilton's earnings forecasts so that the quarterly earnings showed an upward trend and resulted in positive earnings by the fourth quarter. Hamilton included the revised earnings figures in his report without further review. Although the final report included the basic characteristics of Pets-R-Us, it emphasized certain areas such as projected quarterly earnings but only briefly touched on others. According to CFA Institute Standards of Professional Conduct on research reports, Hamilton:

A) violated the Standard because the report did not give similar attention to all areas but instead emphasized quarterly earnings at the expense of other areas.

B) did not violate the Standard.

C) violated the Standard because he did not thoroughly review and analyze any information provided by Brisson.

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Standard V(B) permits Hamilton to ask company management to review his report for factual inaccuracies, but Hamilton should have taken care to thoroughly review and analyze any information provided by the company. Hamilton is not required to give equal emphasis to all areas but can emphasize certain areas, touch briefly on others, and omit certain aspects deemed unimportant.

HuskyGrad2010

According to CFA Institute Standards of Professional Conduct, members should do all of the following to meet the compliance procedures for having a reasonable basis for recommendations, EXCEPT:

A) analyze the client's investment needs.

B) distribute a detailed, written research report to clients with each recommendation.

C) analyze the investment's basic characteristics before recommending a specific investment to a broad client group.

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Standard V(C), Record Retention, requires that members maintain appropriate records to support the reasonableness of such recommendations or actions, but they are not required to distribute a research report with each recommendation.

HuskyGrad2010

Lee Hurst, CFA, is an equity research analyst who has recently left a large firm to start independent practice. He is able to re-create several of his previous recommendation reports from memory, based on sources obtained at his previous employer. He publishes the reports and obtains several new clients. Hurst is most likely:

A) not in violation of any Standard.

B) in violation of Standard V(A) "Diligent and Reasonable Basis."

C) in violation of Standard V(C) “Record Retention.”

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Hurst is most likely in violation of Standard V(C) "Record Retention" because the supporting documentation is unavailable. He needs to recreate the supporting records based on information gathered through public sources or the covered company.

HuskyGrad2010

Tucson Financial Advisors (TFA) has determined that it needs to have the ability to conduct in-house research to support its other activities. To this end, TFA has recently hired Alba Hernandez, a CFA charterholder in good standing, as an investment analyst. Hernandez becomes the first full-time employee of TFA to have the CFA designation. When she is hired, her supervisor tells her that TFA is familiar with the CFA Institute Code and Standards, but that the company does not feel that they are important. TFA is a well-respected firm with a reputation for integrity that predates the CFA program. TFA tells her that they do not plan to use Hernandez’s affiliation with CFA Institute in any of their literature or advertisements.
Prior to her employment with TFA, Hernandez was an independent contractor, providing financial advice for a fee to private clients. She continues to do so but has informed these clients not to reveal this fact to TFA. Some of her private clients would be considered viable prospects by TFA, while others would not meet TFA's $1 million net worth criterion. Hernandez routinely uses TFA’s data and other research materials in servicing her private clients.
Throughout the year, Hernandez holds a "quarterly investment forum" under the guidance of TFA. Prospects find out about the meetings via private mailings from TFA, which Hernandez supervises. In composing the mailing list, Hernandez is aware that many of the clients do not meet TFA’s $1 million net worth criterion. After each forum, Hernandez often contacts those attendees that do not meet TFA’s criterion, and she solicits them to become clients in her private practice.
ChemMex is a large conglomerate headquartered in Monterrey, Mexico. At present, ChemMex is planning an IPO in the U.S. TFA is seeking the mandate for the IPO, and has asked Hernandez to meet with management to present a proposal. Hernandez's uncle, Hector Lopez, is CFO and treasurer of ChemMex. In recent years, Lopez has given ChemMex securities to his nieces and nephews as Christmas gifts. TFA is not aware of Hernandez's financial interests and personal connections with ChemMex.
Hernandez is putting together a research report on CoppOre, a firm that mines copper in a developing country. She obtains insider information that states a rival firm in that country will soon make a tender offer for CoppOre. Hernandez knows the laws in that country very well and knows that trading on inside information is not illegal there. Hernandez plans to write the research report exaggerating the facts on positive points in order to encourage her clients to purchase shares in CoppOre, but she does not plan to explicitly say that CoppOre will soon be bought out in a tender offer. In doing so, the clients will be encouraged to buy CoppOre stock while not knowing about the tender offer. Hernandez feels that this is part of her fiduciary duty and explains her plan to TFA management. The managers of TFA tell her to do what she thinks is in the best interest of the clients.Concerning her private clients, Hernandez:

A) must discontinue her independent practice.

B) must obtain written consent from TFA only if the private practice was not disclosed orally during the hiring process.

C) must obtain written consent from TFA to continue the relationship.

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Even though the relationships with Hernandez's private clients predate her employment with TFA, she is obligated to obtain written consent from TFA to continue with the activities. Moreover, she needs written consent from her private clients as well. Standard IV(A) Loyalty to Employer, and Standard IV(B) Additional Compensation Agreements. (Study Session 1, LOS 2.a,b)

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With respect to the prospects she invites to the “quarterly investment forum” and then solicits for her private practice, Hernandez is:

A) not in violation of any Code or Standard.

B) in violation Standard VI(A) concerning disclosure of conflicts.

C) in violation of Standard I(D) concerning professional misconduct.

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Standard I(D) states that members shall not engage in any professional conduct involving dishonesty, fraud, or deceit Hernandez is being dishonest by using a TFA mailing to bring in prospects that she knows cannot become TFA clients with the apparent intent of soliciting them for her own private business. Note that Standard VI(A) deals with disclosing conflicts of interest that would impair the member’s ability to make unbiased and objective recommendations, such as serving on a board or having a beneficial interest in a security. Standard III(C) states that a member must inquire as to a client’s financial situation and consider the appropriateness of investment recommendations for each client. Because there are no specific recommendations being given, Standard III(C) does not apply here. (Study Session 1, LOS 2.a,b)

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With respect to the proposal for the IPO mandate of ChemMex, Hernandez:

A) is not allowed to meet with ChemMex officials.

B) may meet with ChemMex officials, but cannot be otherwise involved with the IPO.

C) may meet with ChemMex officials and be involved with the IPO, as long as she discloses the material facts of the situation to TFA.

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Hernandez would be allowed to meet with ChemMex and to be involved with the IPO so long as she discloses the material facts to TFA. Once in possession of these facts, TFA is in position to determine if the conflicts of interest are such that they should preclude Hernandez's participation in the project. Standard VI(A), Disclosure of Conflicts. (Study Session 1, LOS 2.a,b)

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With respect to the recommendation that Hernandez writes for CoppOre, Hernandez may:

A) proceed with the recommendation as long as she does not exaggerate facts and mention the tender offer, but does not have to make an effort to achieve public dissemination of the tender offer.

B) not proceed with the recommendation with either the exaggerated information or the information of the tender offer.

C) proceed with the recommendation as long as she does not exaggerate facts and mention the tender offer, but must make an effort to achieve public dissemination of the tender offer.

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Exaggerating facts is a violation of Standard V(A) Diligence and Reasonable Basis. Mentioning the tender offer, or causing others to trade in a security involved with a tender offer is a violation of Standard II(A): Material Nonpublic Information. According to Standard II(A), in no instance may a member trade or cause other to trade in a security while a member possesses material nonpublic information . The fact that the home country does not make trading on information concerning a tender offer a crime does not allow Hernandez to use it because Standard II(A) prohibits it. Remember that the member must go along with either the home country laws or the Code and Standards, whichever is stricter. (Study Session 1, LOS 2.a)

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All of the following are violations of the Code and Standards EXCEPT:

A) Hernandez not informing TFA of her private practice and getting written permission for it.

B) TFA’s management not making any special effort to include Hernandez’s holding the CFA designation in their literature and advertisements.

C) Hernandez using TFA data and research for her private practice.

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Using the CFA designation is a privilege and is not mandatory. TFA has not prohibited Hernandez from using it, they simply have said that they will not make an effort to use it, which may actually be in compliance with the Standards in that they avoid any undignified use of the designation. The other three choices are clear violations. Hernandez cannot use the property, i.e., the data and research, of TFA. She needs written permission to continue her private practice. TFA is required to supervise Hernandez, and they are not fulfilling this responsibility by allowing her to proceed with her plans to write the CoppOre report. (Study Session 1, LOS 2.a,b)

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Upon her arrival at TFA, as a CFA charterholder, Hernandez:

A) is only required to provide her employer with written notification of her obligation to comply because she has been told her supervisors are aware of the Code and Standards.

B) is not required to deliver a copy of the Code and Standards to her employer.

C) is required to deliver a copy of the Code and Standards to her employer and provide them with written notification of her obligation to comply.

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There is no longer a requirement to provide an employer with a copy of the Code and Standards. (Study Session 1, LOS 1.b)

HuskyGrad2010

Phil Trobb, CFA, is preparing a purchase recommendation on Aneas Lumber for his research firm. All of the following are potential conflicts of interest EXCEPT:

A) Trobb's cousin repairs machines for Aneas.

B) Trobb's research firm has a large stake of ownership in Aneas Lumber.

C) Aneas hires Trobb as a consultant to analyze Aneas' financial statements.

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Standard VI(A) defines what constitutes a conflict of interest with regard to clients, prospective clients, and employers. All of these represent potential conflicts of interest with the exception of the cousin working for Aneas Lumber in a job that is unrelated to the Aneas’ financing.