bapswarrior

Ron Taylor, a CFA Level I candidate, trades cotton contracts for a small commodity broker. Taylor convinces a government cotton inspector to issue a warning that the Texas cotton crop is in danger from insect infestation. The price of cotton soars. Taylor immediately shorts cotton futures. Once the position is created, the government inspector issues a second report reversing his original opinion and cotton prices plummet.
Cedric Sims, a CFA Level III candidate, would like to generate a tax loss on a security held in his personal portfolio; however, he believes the security has significant upside potential. To avoid the wash sale provisions of the income tax code, Sims sells the security and simultaneously creates a synthetic long position using derivatives.
With regard to Standard II(B) Market Manipulation, which of the following statements concerning Taylor’s and Sims’s conduct is CORRECT?

A) Neither Taylor nor Sims is in violation of Standard II(B).

B) Both Taylor and Sims are in violation of Standard II(B).

C) Taylor is in violation of Standard II(B), but Sims is not in violation.

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Taylor is in violation of Standard II(B) Market Manipulation by creating a scheme that caused others to trade on false information. Sims is not in violation of Standard II(B). The Standard does not prohibit transactions conducted for tax purposes.

bapswarrior

All of the following are violations of Standard II(B) Market Manipulation EXCEPT:

A) securing a controlling interest in an equity security in order to influence the price of a related derivative instrument.

B) disseminating misleading information about the development of new products and technologies.

C) exploiting differences in market inefficiencies.

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Standard II(B) Market Manipulation prohibits practices that distort prices or artificially inflate trading volumes with the intent to mislead market participants. The Standard is not intended to prohibit legitimate trading strategies that exploit differences in market inefficiencies.

bapswarrior

Mark Williamson is “bearish” on ABC Manufacturing Company. Williamson is so convinced that ABC is overpriced, two weeks ago, he shorted 100,000 shares. Today, Williamson is “surfing” several popular investment bulletin boards on the internet and posting false derogatory comments about company management. According to Standard II(B), Market Manipulation, Williamson has engaged in:

A) transaction-based manipulation, but not information-based manipulation.

B) both transaction-based manipulation and information-based manipulation.

C) information-based manipulation, but not transaction-based manipulation.

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Williamson is in violation of Standard II(B), Market Manipulation, by engaging in information-based manipulation. Information-based manipulation includes, but is not limited to, spreading false rumors about a firm in order to induce others to trade.

bapswarrior

Trude Front, CFA, is a portfolio manager. While in the normal course of her duties, she happens to overhear material non-public information concerning the stock of VTT Bowser. She purchases several exchange traded funds which contain VTT Bowser, while shorting similar exchange traded funds which do not contain VTT Bowser. This is most likely:

A) a violation of Standard II(A) "Material Non-Public Information."

B) not a violation of Standard II(A) "Material Non-Public Information."

C) only a violation of Standard II(A) "Material Non-Public Information" because Front is simultaneously shorting the funds which do not contain VTT Bowser.

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This is a violation of Standard II(A) "Material Non-Public Information" irrespective of whether Front is simultaneously shorting the funds which do not contain VTT Bowser. Her trades are motivated by material non-public information.

bapswarrior

While trading on behalf of a pension account, an analyst receives special research reports from the brokerage firm with whom she is doing the trades. Such an activity is:

A) a violation of only The Code of Ethics.

B) a violation of both Standard III(A), Loyalty, Prudence, and Care, and the Code of Ethics.

C) not in itself a violation of Standard III(A), Loyalty, Prudence, and Care, nor the Code of Ethics.

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An analyst can receive research from a brokerage firm with whom she is trading on behalf of a client. The analyst should inform the client of the arrangement. The client is more likely to violate Standard III(A) by obtaining non-research services or, worse yet, personal benefits from the brokerage firm.

bapswarrior

An independent analyst has only one client. One of the client’s largest holdings is a brokerage firm. Because of the large holding by his client, the brokerage firm recently began allowing the analyst to tap into the firm’s computer network to use the firm’s research facilities. This is allowable as long as the analyst:

A) does both of the actions listed here.

B) uses the resources to help manage the client's account.

C) discloses the relationship to the client.

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According to Standard III(A), Loyalty, Prudence, and Care, the analyst must put the client first and inform the client of any possible conflicts of interest. The analyst must channel any benefits derived from his service to the client, back to the client, and inform the client of the benefits.

bapswarrior

Tony Calaveccio, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto. He places trades for the fund with River City Brokerage. River City provides Calaveccio with soft dollars to purchase research. River City also deals in municipal bonds, some of which Calaveccio holds in his personal portfolio. He periodically uses the soft dollars to request research reports on various small cap stocks and also on the status of the municipal bond market and issues that he holds. These actions are:

A) not in violation of the Code and Standards.

B) in violation of his fiduciary duties regarding the municipal bond research but not so regarding the research on the small cap issues.

C) in violation of his fiduciary duties regarding both the small cap research and the municipal bond research.

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The issue at hand is the member's fiduciary responsibilities in handling "soft dollars" which are technically the property of the client. Standard III(A), Loyalty, Prudence, and Care, delineates the member's fiduciary responsibilities with regard to soft dollars. Since municipal bond research is clearly not relevant to the Small Cap Fund holders, he is clearly using the soft dollars to obtain research for his personal benefit and is in violation of the Standard.

bapswarrior

Which of the following is a possible breach of fiduciary duties by a CFA Institute member who manages assets on behalf of a client?

A) Using directed brokerage.

B) Neither of these breach fiduciary duties.

C) Voting all proxies of stocks the client owns.

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Proxies have economic value to the client. To comply with Standard III(A), the analyst is obligated to vote proxies in an informed and responsible manner. A cost benefit analysis may show that voting all proxies may not benefit the client, so voting proxies may not be necessary in all instances. Directed brokerage occurs when the client requests that a portion of the client's brokerage be used to purchase services that directly benefit the client. Although, this may prevent best execution, it does not violate the Standards as it was directed by the client, not the brokerage firm.

bapswarrior

Tony Calaveccio, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto. He places trades for the fund with Canadian Brokerage. Canadian provides Calaveccio with soft dollars to purchase research. He uses these soft dollars to get research reports from Canadian's research department regarding the issues currently held in the small cap portfolio, and also for firms he is contemplating adding to the portfolio. By using soft dollars in this manner, Calaveccio has:

A) violated the Code and Standards by acquiring research on currently held issues and by acquiring research on issues contemplated for purchase.

B) not violated the Code and Standards.

C) violated the Code and Standards by acquiring research on issues contemplated for purchase but not by acquiring research on currently held issues.

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"Soft dollars" are the property of the client (in this case the holders of the shares of the Small Cap Venture Fund). Standard III(A) Loyalty, Prudence, and Care delineates the member's responsibilities. Since he is clearly using the soft dollars to obtain research that is directly applicable to his professional duties, there is no violation of the Standard.

bapswarrior

All of the following are required by fiduciaries under Standard III(A), Loyalty, Prudence, and Care, EXCEPT:

A) act solely in the interest of the ultimate beneficiaries.

B) place the client’s interest before the employer’s interest.

C) support the sponsor's management during proxy fights.

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Members are required to act in the interest of their clients. In voting proxies, the client’s interest must prevail over management’s interest.