HuskyGrad2010

Ray Stone, CFA, follows the Amity Paving Company for his employer. Which of the following scenarios is Stone least likely to have to disclose to his employer.

A) The fact that Stone's son worked at Amity as a laborer during the summer while in school.

B) Stone's ownership of Amity securities.

C) Stone's personal relationship with the CEO of Amity.

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Members are required to disclose to their employer all matters that reasonably could interfere with their objectivity. Personal friendships with corporate executives and personal ownership of securities could reasonably interfere with objectivity, but it is unlikely that a child’s employment in a labor function would reasonably interfere with a parent’s objectivity.

HuskyGrad2010

Arthur Harrow, CFA, is a pharmaceuticals analyst at Dominion Asset Management. His supervisor directs him to prepare separate research reports on Miracle Drug Company and Wonder Drug Company. Harrow's former college roommate and close friend is the president of Miracle. Harrow owns 2000 shares of Wonder, which currently sells for $25 a share. Harrow's supervisor is unaware of these facts. According to CFA Institute Standards of Professional Conduct, which of the following action, if any, is Harrow required to take if he writes the research reports?

A) Harrow must disclose to Dominion his ownership of shares in Wonder but not his relationship with the president of Miracle.

B) Harrow must disclose to Dominion both his relationship with the president of Miracle and his ownership of shares in Wonder.

C) Harrow must disclose to Dominion his relationship with the president of Miracle but not his ownership of shares in Wonder.

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Standard VI(A) requires that Harrow disclose to Dominion conflicts that reasonably could be expected to interfere with his independence and objectivity. Both Harrow's relationship with the president of Miracle and his ownership of a substantial dollar amount of Wonder's shares represent a potential conflict requiring prompt disclosure to Dominion.

HuskyGrad2010

Will Lambert, CFA, is a financial analyst for Offshore Investments. He is preparing a purchase recommendation on Burch Corporation. According to CFA Institute Standards of Professional Conduct, which of the following statements about disclosure of conflicts is most correct? Lambert would have to disclose that:

A) he has a material beneficial ownership of Burch Corporation through a family trust.

B) his wife owns 2,000 shares of Burch Corporation.

C) both of these choices require disclosure.

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Standard VI(A) requires that Members and Candidates fully disclose all matters which may impair their independence or objectivity or interfere with their duties to their employer, clients and prospects.

HuskyGrad2010

Bill Valley has been working for Advisors, Inc., for several years, and he just joined CFA Institute. Valley routinely writes research reports on Pharmaceutical firms. Valley has recently been asked to serve on the board of directors of an organization that promotes the search for a cure of a certain cancer. Serving on the board is an unpaid position without any direct benefits other than meeting new people and potential clients. To comply with Standard VI, Disclosure of Conflicts, Valley needs to:

A) do nothing.

B) only disclose the position on the board to his supervisor.

C) both disclose the position on the board to his supervisor and describe his responsibilities on the board.

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Valley could be affected by his position on the board because he may tend to favor investments in firms that do cancer research. To comply with Standard VI(A), Disclosure of Conflicts, Valley must inform his supervisor of this relationship and describe his responsibilities on the board. Even if his supervisor does not find the relationship troublesome, any subsequent action that could lead to a conflict of interest should be discussed with the firm’s compliance officer.

HuskyGrad2010

Dwight Dawson, a CFA charterholder and portfolio manager at Ascott Investments, was recently appointed to the investments committee at Brightwood College. He will receive no compensation from Brightwood for serving on this committee. Another person at Ascott manages part of Brightwood’s endowment. Dawson does not inform Ascott’s compliance office of his involvement with Brightwood, because he does not believe doing so is necessary.
Brenda Hamilton, a CFA candidate, also works for Ascott as an investment analyst. Procedures established at Ascott prohibit personal trading in securities analyzed or recommended by Ascott. One of these securities is Horizon, a telecommunications firm. Hamilton buys 10 shares of Horizon for her infant son’s trust account. She believes that reporting this purchase to Ascott’s compliance officer is unnecessary because the amount of the transaction is small and is not for her own personal account.
Did Dawson or Hamilton’s actions violate CFA Institute Standards of Professional Conduct?

A) Dawson: Yes, Hamilton: Yes.

B) Dawson: No, Hamilton: No.

C) Dawson: No, Hamilton: Yes.

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Dawson violated Standard VI(A), Disclosure of Conflicts, by failing to inform Ascott of her involvement with Brightwood College. Dawson could reasonably be expected to be involved with investment policy decisions at Brightwood that could affect Ascott because Ascott manages a portion of Brightwood’s endowment. Hamilton also violated Standard VI(A), because she ignored a directive of her employer. Her purchase of Horizon stock has an appearance of impropriety. Hamilton could discuss the purchase of Horizon stock with her firm’s compliance officer and request an exception to the prohibition against personal trading in securities analyzed or recommended by Ascott.

HuskyGrad2010

Ryan Brown, CFA, is an analyst with a large insurance company. His personal portfolio includes a significant investment in QRS common stock that his firm does not currently follow. The director of the research department asked Brown to analyze QRS and write a report about its investment potential. Based on CFA Institute Standards of Professional Conduct, Brown should:

A) sell his shares of QRS before completing the report.

B) decline to write the report without specific approval of his supervisor.

C) disclose the ownership of the stock to his employer and in the report.

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Members are required to act on behalf of their clients, placing their clients’ interests ahead of their own. Brown should disclose his personal ownership of QRS to his employer and also in the report.

HuskyGrad2010

The following scenarios involve two analysts at Dupree Asset Management, a small New York-based company with about $150 million in assets under management. Dupree restricts personal trading of stocks analyzed, corporate directorships, trustee positions, and other special relationships that could reasonably be considered a conflict of interest with their responsibilities to their employer.

• Ray Bolt, CFA, is a senior investment analyst. Bolt was recently elected to the board of trustees of his alma mater, Midwest University, and was appointed as the chairman of the University's endowment committee. Midwest has more than $2 billion in its endowment. Bolt must travel from New York to Chicago eight times a year to attend meetings of the board of trustees and endowment committee. Bolt did not inform Dupree of his involvement with Midwest University.
• Wanda Delvecco, a candidate in the CFA Program, is a junior investment analyst. She recently wrote a research report on Aveco Communications and recommended the stock for Dupree's "buy" list. Delvecco bought 200 shares of Aveco stock for her personal account 12 months before she wrote her research report. Over the past 12 months, the stock's price has been in the $20-42 price range. Delvecco has not informed Dupree of her ownership of Aveco stock.

According to CFA Institute Standards of Professional Conduct, which the following statements about Bolt and Delvecco's actions is CORRECT?

A) Both Bolt and Delvecco violated the Standards.

B) Delvecco violated the Standards, but Bolt did not.

C) Neither Bolt nor Delvecco violated the Standards.

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Standard VI(A), Disclosure of Conflicts, requires that Bolt inform Dupree of his involvement with Midwest University given that Bolt's new role can be expected to be time consuming and possibly affect his responsibilities at Dupree. Delvecco is required to disclose her ownership of Aveco stock before conducting the research report because such ownership could bias her objectivity in making a recommendation. She should have discussed owning the stock with her supervisor before beginning to write the research report on Aveco.

HuskyGrad2010

Lee Hurst, CFA, is an equity research analyst for a long-term investment fund. His annual bonus is linked to quarterly trading profits. Under a new policy, the quarterly assessment period is switched to a monthly assessment period. According to the Code and Standards, best practices dictate:

A) requiring Hurst to obtain permission from each client prior to implementation of the new policy.

B) keeping the policy change private as a trade secret.

C) updating disclosures when the policy change is implemented.

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Standard VI(A) "Disclosures of Conflicts" recognizes this policy as a potential conflict of interest as members and candidates could be incentivized to favor short-term trading gains over long-term value creation. Best practices dictate updating disclosures when the policy change is implemented. The long-term investors should know how members and candidates are compensated, especially when there is the potential for conflicts of interest.

HuskyGrad2010

When an analyst makes an investment recommendation, which of the following statements must be disclosed to clients?

A) An employee of the firm holds a directorship with the recommended company.

B) The firm is a market maker in the stock of the recommended company.

C) Both of these statements must be disclosed to clients.

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Both of these items are explicitly listed in the discussion of Standard VI(A), Disclosure of Conflicts.

HuskyGrad2010

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

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

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.