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Jess Green, CFA is the research director for Castle Investment, Inc., and has supervisory responsibility over eight analysts, including three CFA charterholders. Castle has a compliance program in place. According to CFA Institute Standards of Professional Conduct, which of the following is NOT an action that Green should take to adhere to the compliance procedures involving responsibilities of supervisors? Green should:

A) issue periodic reminders of the procedures to all analysts under his supervision.

B) disseminate the contents of the compliance program to the eight analysts.

C) incorporate a professional conduct evaluation as part of the performance review only for the three CFA charterholders.

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Green should incorporate a professional conduct evaluation as part of his review of all eight analysts under his supervision, not just the three CFA charterholders.

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Edwin McNeill, CFA, is a senior trader for Grey Securities. In his monthly review of his team’s activity, McNeill notices a series of suspicious trades by one of the traders. McNeill consults his manager, who agrees that these trades are a potential violation. McNeill informs the trader that her duties will be restricted while these trades are being investigated and refers the matter to Grey’s compliance officer for further action. McNeill has:

A) violated Standard IV(C) – Responsibilities of Supervisors by restricting the trader’s duties before the investigation is completed.

B) violated Standard IV(C) – Responsibilities of Supervisors by failing to prevent a potential violation.

C) not violated the Standards.

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By reviewing the employee’s conduct, restricting the employee’s activities while investigating a potential violation, and referring the matter to his manager and compliance officer, McNeill acted properly according to Standard IV(C) – Responsibilities of Supervisors. Wrongdoing by a subordinate does not mean the manager has violated Standard IV(C) as long as adequate procedures to detect and prevent violations are in place and the manager enforces them.

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Dixie Miller, CAIA, and Level II CFA candidate, heads the research department of a large brokerage firm. The firm has many analysts, some of whom are subjected to the CFA Institute Code of Ethics and Standards of Professional Conduct. If Miller delegates some of her supervisory duties, which statement best describes her responsibilities under the CFA Institute Code and Standards?

A) Miller retains supervisory responsibilities for those duties delegated to her subordinates.

B) CFA Institute Standards prevent Miller from delegating supervisory duties to subordinates.

C) Miller's supervisory responsibilities do not apply to those subordinates who are not subjected to the CFA Institute Code and Standards.

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Even though members may delegate supervisory duties, such delegation does not relieve members of the supervisory responsibility.

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Carmen Jorgensen, CFA, is the chief compliance officer for Dalton Financial Network, a regional brokerage firm. Dalton is divided into three regions, each of which has a regional compliance officer. Martin Lund, CFA, is the regional compliance officer for Dalton’s South Region.
Dalton has established procedures for proper allocation of trades to all clients. In October, Fred Curry, CFA, a broker in the South Region, misallocated a trade in favor of certain of his clients and to the detriment of others. It became evident that Lund had failed to review the trades on a timely basis as called for in Dalton’s Procedures Manual.After an investigation, it was concluded that Curry violated the Code and Standards by failing to allocate trades properly and Lund violated the Code and Standards by failing to supervise appropriately. It should also conclude that Jorgensen:

A) did not violate the Code and Standards because adequate procedures were in place, even though they weren't being followed.

B) violated the Code and Standards by failing to establish proper procedures.

C) violated the Code and Standards by failing to adequately supervise her regional compliance officer, Lund.

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Standard IV(C) is violated when a supervisor does not take reasonable steps to implement an effective compliance system. Even though the system employed by Dalton may be adequate, Jorgensen is responsible to see that her regional compliance officers follow it.

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Karen Dalby, CFA, is a rising star at a major investment bank and has an extremely demanding schedule. To avoid "burning out" new hires, the bank has instituted a mandatory vacation policy which requires employees to take at least 5 days of vacation per year. At the end of the year, Dalby has taken no vacation, but is scheduled to travel to Fiji to take the mandatory 5 days. The bank’s most important client is suddenly targeted in a hostile takeover and asks specifically for Dalby to join the takeover defense team. Her supervisor, Hank Lone, CFA, asks Dalby to cancel her vacation and she complies. Lone is most likely:

A) not in violation of the Code and Standards.

B) in violation of Standard IV(A) "Loyalty."

C) in violation of Standard IV(C) "Responsibilities of Supervisors."

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Lone has a responsibility to equally enforce all firm policies to demonstrate that all rules are equally important.

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Susan Tigra, CFA, is a portfolio co-manager for the Sandia Energy pension fund. She has been contacted by Ted Garnet, a former classmate. Garnet has started his own investment management firm and would like Sandia Energy to move a portion of its assets to be managed by his firm. Tigra moves 5% of the pension fund to Garnet’s firm to help him build his assets under management. Kurt Show, CFA, is Tigra’s supervisor. Show notes the move, but does not investigate. Show is most likely:

A) not in violation of the Code and Standards.

B) in violation of Standard IV(C) "Responsibilities of Supervisors."

C) in violation of Standard V(A) "Diligence and Reasonable Basis."

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Show should review important changes to the portfolio for compliance with firm policies and procedures. The decision to work with Garnet seems arbitrary, and may not be necessary or prudent.

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Don Wilson and Nadine Chavis, both CFA charterholders, are investment advisors at Uptown Securities. Wilson recommends that one of his clients buy Alpha Company based on research conducted by Uptown. Chavis recommends that one of her clients sell Alpha Company based on research conducted by another brokerage firm for general distribution. Both recommendations are consistent with each client's investment objectives and within the context of their entire portfolios. Neither Wilson nor Chavis has reason to suspect that any information contained in the research reports from these two sources is inaccurate or inadequately supported. According to Standard V(A) Diligence and Reasonable Basis, do Wilson and Chavis have a reasonable basis for making their investment recommendations?

A) Only one of these advisors has a reasonable basis for his or her recommendation.

B) Neither of these advisors has a reasonable basis for their recommendations.

C) Both of these advisors have a reasonable basis for their recommendations.

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Wilson and Chavis have a reasonable and adequate basis if they recommend an investment transaction based on sound research prepared by their firm or an independent third party.

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A financial analyst and CFA Institute member sends a preliminary research report on a company to his supervisor. The supervisor approves the report, but then the analyst receives news that causes him to revise downward the earnings estimate of the company. The analyst resubmits the report to the supervisor with the new earnings estimate. The analyst soon finds out that the supervisor plans to release the first version of the report with the first earnings estimate without a reasonable and adequate basis. In response to this the analyst must:

A) insist that the supervisor change the earnings forecast or remove his (the analyst's) name from the report.

B) both insist that a follow up report be issued and take up the issue with regulatory authorities.

C) only insist that the first report be followed up by a revision.

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According to Standard V(A), Diligence and Reasonable Basis, the analyst must exercise diligence, independence, and thoroughness when performing investment analysis, making a recommendation, or taking investment action. The analyst should document the difference in opinion including any request to remove his or her name from the report.

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The following scenarios refer to recommendations made by two analysts.

• Jean King, CFA, is a quantitative analyst at Quantlogic, Inc. King uses computer-generated screens to differentiate value and growth stocks based on accounting numbers such as sales, cash flow, earnings, and book value. Based on her analysis of all domestically traded stocks in the U.S. over the past year, King concludes that value stocks as a class have underperformed growth stocks over that period. Using only this analysis, she recommends that account executives at Quantlogic sell all value stocks from the portfolios for which they have discretionary authority to trade and replace these stocks with growth stocks.
• James Capelli, CFA, is a fundamental analyst at Wheaton Capital Management, which focuses on regional stocks. His analysis of Branson Wireless includes the investment's basic characteristics such as information about historical earnings, ownership of assets, outstanding contracts, and other business factors. In addition to conducting both a general industry analysis and a company financial analysis, Capelli interviews key executives at Branson. Based on his analysis, he concludes that the company's future prospects are strong and issues a "buy" recommendation.

According to CFA Institute Standards of Professional Conduct, did King and Capelli have a reasonable and adequate basis for making their recommendations?

A) Capelli has a reasonable basis for his recommendation, but King does not.

B) Both King and Capelli have a reasonable basis for their recommendations.

C) King has a reasonable basis for his recommendation, but Capelli does not.

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Capelli appears to have exercised diligence and thoroughness in making his recommendation. King's recommendation is not based on thorough quantitative work because the period used in her study is only one year. Also, her recommendation does not consider the client's specific needs and circumstances.

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A client calls his money manager and asks the manager to liquidate a large portion of his assets under management for an emergency. The manager warns the client of the risk of selling many assets quickly but says that he will try to get the client the best possible price. This is a violation of:

A) none of the Standards listed here.

B) Standard V(A), Diligence and Reasonable Basis.

C) Standard III(C), Suitability.

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The money manager has done his duty. He has warned the client of the risk and made no explicit promises concerning what he can and cannot do.