sabaruch

Which of the following statements is a violation of Standard VII(B) if it is included on a CFA charterholder’s resume?

A) Both of these are violations of Standard VII(B).

B) My earning the CFA designation indicates my superior ability.

C) My earning the CFA designation indicates my desire to maintain high standards.

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A CFA charterholder may not make claims about how earning the designation proves superior capabilities. Saying "my earning the CFA designation indicates my desire to maintain high standards" is allowed because it is a factual statement

hinsafdar

Victor Logan is a portfolio manager for McCoy Advisors, and Jack Brisco is the Director of Research for McCoy. Brisco has developed a proprietary model that has been thoroughly researched and is known throughout the industry as the McCoy model. The model is purely quantitative and screens stocks into buy, hold, and sell categories. The basic philosophy of the model is thoroughly explained to clients. Brisco frequently alters the model based on rigorous research—an aspect that is well explained to clients, although the specific alterations are not continually disclosed. Portfolio managers then make specific sector and security holding decisions, purchasing only securities that are indicated as "buys" by the model. Logan has conducted very thorough research on his own, using the same process that Brisco uses to validate his findings. Logan feels the model is missing some key elements that would further reduce the list of acceptable securities to purchase, however, Brisco has refused to look at Logan's research. Frustrated by this, Logan applies his own version of the model, with the justification that he is still only purchasing securities on the buy list. Because of the conflict with Brisco, he does not disclose the use of the model to anyone at McCoy or to clients. Which of the following statements regarding Logan and Brisco is CORRECT? Logan is:

A) violating the Standards by applying his version of the model and by not disclosing it to clients. Brisco is violating the Standards by failing to consider Logan's research.

B) violating the Standards by applying his version of the model and by not disclosing it to clients. Brisco is not violating the Standards.

C) not violating the Standards by applying his version of the model, but is violating the Standards by not disclosing it to clients. Brisco is not violating the Standards.

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Because the research is thoroughly conducted, and Logan has authority to make individual security selection decisions, Logan is not violating the Standards by applying his model. However, Logan is violating the Standard on communication with clients and prospective clients by excluding relevant factors of the investment process. The use of his model is an important aspect of the investment process and should be disclosed to clients. Brisco is not violating the Standards by not considering Logan’s research.

hinsafdar

Member compliance on issues relating to corporate governance or to soft dollars is primarily addressed by the Standard concerning:

A) Loyalty, Prudence, and Care.

B) Disclosure of Referral Fees.

C) Disclosure of Conflicts to Clients and Prospects.

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Fiduciary duty on issues relating to corporate governance or to soft dollars is primarily addressed by Standard III(A), Loyalty, Prudence, and Care.

hinsafdar

June Carter passed Level III of the CFA examination in June but will not complete her work experience requirement until August of next year. Carter can state on her resume that she:

A) passed Levels I, II, and III of the CFA examination.

B) will be a CFA charterholder in August of next year as long as she is on track to complete her work experience.

C) is a CFA in waiting.

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A candidate cannot use any form of the CFA designation until receiving her charter.

hinsafdar

Chuck Daniels has just been hired to manage a security analysis group for Aaron Asset Management. Daniels performed a similar function at another firm and finds the compliance system at Aaron inadequate. He develops a system that he feels is appropriate, but senior management tells him he will have to wait six months to implement the system. Daniels should:

A) resign his position immediately.

B) decline in writing to accept supervisory responsibility until a satisfactory compliance system is put into place.

C) protest in writing the delay, listing the potential dangers that can occur.

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According to the Standard on supervisory responsibilities, Daniels should decline in writing to accept supervisory responsibility until a satisfactory compliance system is put into place.

hinsafdar

Scott LaRue is a portfolio manager for Washington Advisors. Washington has developed a proprietary model that has been thoroughly researched and is known throughout the industry as the Washington model. The model is purely quantitative and screens stocks into buy, hold, and sell categories. The basic philosophy of the model is thoroughly explained to clients. The director of research frequently alters the model based on rigorous research—an aspect that is well explained to clients, although the specific alterations are not continually disclosed. Portfolio managers then make specific sector and security holding decisions, purchasing only securities that are indicated as "buys" by the model. La Rue feels the model would be improved by adding some factors but he has not fully tested this new version of the model. LaRue discloses his model to his own clients but not to his supervisor. LaRue is:

A) violating the Standards by not considering the appropriateness of the recommendations to clients.

B) violating the Standards by not having a reasonable and adequate basis for his investment recommendation.

C) not violating the Standards.

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The ad hoc model is not part of the formal research process and does not formulate an adequate basis for a recommendation.

hinsafdar

Ken James has been an independent financial advisor for 15 years. He received his CFA Charter in 1993, but did not feel it helped his business, so he let his dues lapse this year. He still has several hundred business cards with the CFA designation printed on them. His promotional materials state that he received his CFA designation in 1993. James:

A) can continue to use the existing promotional materials, and can use the cards until his supply runs out—his new cards cannot have the designation.

B) must cease distributing the cards with the CFA designation and the existing promotional materials.

C) must cease distributing the cards with the CFA designation, but can continue to use the existing promotional materials.

Use of the CFA designation must be stopped immediately, however, the receipt of the Charter is a matter of fact.

hinsafdar

Patricia Hoolihan is an individual investment advisor who uses mutual funds for her clients. She typically chooses funds from a list of 40 funds that she has thoroughly researched. The Burns, a married couple that are a client, asked her to consider the Hawkeye fund for their portfolio. Hoolihan had not previously considered the fund because when she first conducted her research three years ago, Hawkeye was too small to be considered. However, the fund has now grown in value, and cursory research uncovers no fundamental flaws with the fund. She puts the fund in the Burns' portfolio but not in any of her other clients' portfolios. The fund ends up being the best performing fund on her list. Hoolihan has:

A) violated the Standards by not having a reasonable and adequate basis for making the recommendation.

B) violated the Standards by not dealing fairly with clients.

C) not violated the Standards.

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Despite the fact the addition of the fund was successful, Hoolihan acted improperly in not conducting the same degree of research as she did for the other funds on her list.

hinsafdar

In the course of reviewing the Corn Co., an analyst has received comments from management that, while not meaningful by themselves, when pieced together with data he has accumulated from outside sources, lead him to recommend placing Corn Co. on his firm's sell list. What should the analyst do?

A) Show his report to his own manager and counsel for their review since this information has become material once it was combined with his analysis.

B) Not issue the report until the comments are publicly announced.

C) The comments are non material and the report can be issued as long as he maintains a file of the facts as supplied by management.

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This is an example of the mosaic theory where separate pieces of nonmaterial information are pieced together to make an investment recommendation.

hinsafdar

Patricia Cuff is the chief financial officer and compliance officer at Super Selection Investment Advisors that has incorporated the CFA Institute Code of Standards into the firm's compliance manual. Karen Trader is a portfolio manager for Super Selection. Trader is friendly with Josey James, president of AMD, a rapidly growing biotech company. Trader has served on AMD's board of directors for the last three years. James has asked Trader to commit to a large purchase of AMD stock for her portfolios. Trader had previously determined that AMD was a questionable investment but agreed to reconsider. Her reevaluation deemed the stock to be overpriced, but she nevertheless decides to purchase for her portfolios. Which standard was NOT broken?

A) I(C)—Misrepresentation.

B) IV(A)—Loyalty.

C) IV(C)—Responsibilities of Supervisors.

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IV(A) Loyalty was not broken because this standard involves going into a business that competes with your employer. IV(C) Responsibilities of Supervisors was breached because Trader broke several CFA Institute Standards which Cuff should have enforced. I(C) Misrepresentation was broken because Trader purchased stock for her clients even though she thought AMD was a questionable investment.