anshultongia

Greg Allen is a security analyst and visits David Dawson, the Chief Financial Officer of Edmonds Company. Dawson reveals a great deal of nonmaterial financial data to Allen, data that Dawson routinely reveals to all security analysts who visit him. From this data and other industry information, Allen conjectures that Edmonds is likely to make a tender offer for another company in the industry, a fact that if true would be considered material to the value of the company. Allen:

A) should send a copy of the report to Dawson for verification before disseminating the report to clients.

B) can publish his conclusion in a research report.

C) must not disseminate the information or use it for trading purposes until the tender offer is announced.

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Releasing information to analysts does not constitute a public release of information. Dawson's information should be considered nonpublic until it is released to the public. Allen has used this information, along with other industry information, to come to his conclusion of a pending tender offer which he can use to trade upon based on the mosaic theory.

anshultongia

Christopher Lance, CFA, Chuck Cunningham, and Lucy Hunt, CFA, went to graduate school together and have remained close friends ever since. Lance and Hunt earned their CFA charters this past June and Cunningham is a Level III candidate. Lance, Cunningham, and Hunt have dinner every month at Cunningham’s country club, one of the most prestigious in the metropolitan area where they live.Lance was a well-respected research analyst covering the pharmaceutical industry at an international broker-dealer before accepting a job as Vice President, Investor Relations, at IMed, a large multinational pharmaceutical company that he covered as an analyst. Since he started coverage of IMed, Lance had consistently been named “top analyst” of the pharmaceutical industry by Investment Professional, the leading journal of the investment industry.
In his new position at IMed, Lance is the principal spokesperson on the company’s financial performance and is responsible for developing and maintaining good relationships with the company’s shareholders, especially large institutional investors, and with approximately 30 research analysts who issue research reports and make recommendations about publicly-traded equity and debt securities. It is April 12th and Lance is preparing to conduct the next conference call following the release on April 15th of IMed’s quarterly earnings. Participating in the call will be Lance’s former colleague and good friend, Cunningham, and the other analysts who cover IMed. In addition, Hunt, a portfolio manager at Primary Pensions, a major institutional investor, has told Lance she will also be on the call. Primary Pensions has accumulated the largest single holding in IMed equity. Lance is concerned about this call because IMed’s president, Bill Norton, has just told the management team that sales of Mediplex, its new cancer drug, have begun to sag after rumors of serious side effects, including death, have hit the press. Norton told Lance that if sales continue to fall that this year’s earnings would be considerably less than the current consensus forecast. Norton is also concerned that the regulatory agency that approves the sale of drugs will repeal IMed’s license to market Mediplex.
Cunningham is a research analyst at Lance’s former employer and has taken over coverage of IMed following Lance’s resignation. Until his promotion to Lance’s former position, Cunningham was a junior analyst covering the oil and gas industry. Although knowledgeable about fundamental financial analysis and equity valuation, he is unfamiliar with IMed and the pharmaceutical industry. Cunningham has been reviewing the past 5 years of IMed’s financial statements and Lance’s research reports in preparation for participating in IMed’s quarterly conference call to discuss its quarterly earnings release. Cunningham is under considerable pressure from his employer to meet or exceed Lance’s reputation and be rated “top analyst” by Investment Professional. His firm’s currently rates IMed as a “strong buy” based on Lance’s last research report. Based on his own preliminary analysis, Cunningham has a hard time justifying a “hold” recommendation. He is puzzled by several of the earnings adjustments that Lance made to achieve his target share price for IMed. He plans to ask Lance about these adjustments at their dinner on April 14th.Hunt has been managing a large cap equity portfolio at Primary Pensions for 5 years. Based almost exclusively on Lance’s buy recommendations in his research report, she began purchasing IMed several years ago just before it made several major acquisitions that contributed to its phenomenal growth and to her portfolio’s performance over the last 5 years. Since Lance moved to IMed, Hunt has been doing some due diligence and has become concerned that the growth of IMed’s earnings is overly dependent on sales of Mediplex. Based on her enthusiasm for IMed and her portfolio’s performance, other managers at Primary Pensions have also taken considerable positions in IMed to the extent that Primary Pensions is IMed’s largest single stockholder. If she is right, Hunt knows that she will need to reduce her portfolio’s holdings. Since Primary Pensions prohibits its employees from owning individual equity securities, Hunt has no personal investment in IMed. However, she had boasted about IMed’s performance to her mother and is aware that her mother’s investment club invested 10 percent of the club’s assets in IMed. Hunt is preparing her questions for the upcoming conference call and her exit strategy if the answers confirm her fears.
Lance, Cunningham, and Hunt met for their regular monthly dinner on April 14th. Cunningham opens the after dinner discussion by questioning Lance about his new job and asks him if he and Hunt should anticipate any surprises at tomorrow’s conference call. Cunningham specifically asks Lance if IMed will meet or beat analyst expectations and the consensus earnings forecast. Lance responds that, under current securities laws, he is unable to discuss details of IMed’s performance with Cunningham and Hunt and that they’ll both be briefed with the other analysts and shareholders on tomorrow’s call. Shortly thereafter, the three friends say their good-byes. Hunt and Cunningham wish Lance well on the next day’s conference call.
What Standard governs Lance’s response to Cunningham’s question and is he in compliance?

Standard

Compliance

A) VII: Responsibilities as a CFA Institute Member or CFA Candidate Yes

B) I: Professionalism Yes

C) III: Duties to Clients No

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Lance’s response to Cunningham’s question is covered under Standard I(A) which requires members to maintain knowledge of and comply with applicable laws and regulations (including the CFA Institute’s Code of Ethics and Standards of Professional Conduct). In this case, Lance specifically references the requirements of securities laws not to discuss IMed’s performance in advance of the quarterly conference call. If he had done so, he would have disclosed material nonpublic information, since he knows that information about the decline in sales of Mediplex will have an adverse affect on IMed’s share price. In addition, Standard I(A) prohibits Lance from knowingly participating or assisting in any violation of such laws. If Lance had responded in any other way to Cunningham’s question he would potentially have assisted Cunningham and Hunt in violating Standard II(A), Material Nonpublic Information. (Study Session 1, LOS 2.a,b)

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Hunt’s concerns about IMed increased after her dinner with Cunningham and Lance. She believes that Lance would have told them if IMed’s earnings would meet analysts’ expectations. She is convinced that Lance’s failure to “look her in the eye” when he answered Cunningham’s question confirms her suspicions that IMed is in trouble and is determined to start selling Primary Pensions’ shares of IMed first thing in the morning.
Based on her conclusions from the dinner with Lance and Cunningham, which of the following best describes the actions Hunt should take regarding IMed?

A) Hunt cannot sell IMed and cannot encourage others to sell IMed.

B) Hunt can both tell her mother to sell the investment club’s shares of IMed and sell the shares in the Primary Pensions’ portfolio.

C) Hunt can sell the IMed shares in the Primary Pensions’ portfolio but cannot encourage her mother to sell the investment club’s shares.

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According to Standard V(A), Diligence and Reasonable Basis, Hunt is required to exercise diligence and thoroughness in taking investment actions and she is required to have a reasonable and adequate basis, supported by appropriate research and investigation, for such actions. Her conclusions about Lance’s response and actions during the dinner do not constitute a reasonable and adequate basis for selling IMed shares from Primary Pensions’ portfolio.

In addition, even if Hunt were to reach the same conclusion after developing a reasonable basis for selling IMed shares, she would be able to sell Primary Pensions’ share of IMed but would be prohibited under Standard VI(B), Priority of Transactions, from telling her mother and encouraging her to sell the investment club’s shares until after she sells the shares in the Primary Pensions portfolio. Members must ensure that transactions for clients and employers have priority over transactions in securities or other investments of which a member is a beneficial owner so that such personal transactions do not operate adversely to their clients’ or employer’s interests. Hunt’s relationship to her mother could reasonably be assumed to constitute an “indirect” interest in the investment club’s securities. (Study Session 1, LOS 2.a,b)

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If Lance had disclosed material that was nonpublic information about the decline of sales of Mediplex and its effect on IMed’s earnings, Cunningham would have been least likely to be obligated to do which of the following?

A) Make reasonable efforts to achieve public dissemination of material nonpublic information disclosed in a breach of duty.

B) Inform the appropriate regulatory authority that Lance had violated securities laws.

C) Not trade in shares of IMed.

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Unless required by law, the Code of Ethics and Standards of Professional Conduct do not require members to report legal violations to the appropriate governmental or regulatory authority. Such disclosure may be prudent in certain circumstances. Cunningham would be prohibited under Standard II(A), Material Nonpublic Information, from trading in the securities of IMed or causing others to trade by issuing a research report incorporating the material nonpublic information before that information is made public by IMed. Cunningham would also be required to make reasonable efforts to have Lance and IMed make public disclosure of the information. (Study Session 1, LOS 2.a,b)

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Dinners with Lance, Cunningham and Hunt at Cunningham’s exclusive country club usually cost more than $200 per person. When he and Lance worked for the same broker-dealer and Hunt was a client, Cunningham has always paid the bill.
Which Standard will Lance violate if he continues to allow Cunningham to pay for dinner?

A) Standard IV(B), Additional Compensation Arrangements.

B) Standard I(B), Independence and Objectivity.

C) Standard III(B), Fair Dealing.

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Over the course of a year, Lance will have received gifts of more $2400 from Cunningham. Standard I(B), Independence and Objectivity, covers receipt of gifts from external parties that may try to influence members’ professional actions to the possible detriment of Lance’s employer, IMed, and the investing public. Even though Lance and Cunningham are long-time friends and former colleagues at Cunningham’s employer, the potential for undue influence exists. Lance should be particularly concerned given Cunningham’s inappropriate question regarding IMed’s earnings. In determining how best to comply with Standard I(B), Lance should no longer permit Cunningham to pay for his dinner and, given the prestigious nature of the country club, should also consider moving the monthly dinner to a different venue to avoid the appearance of impropriety. (Study Session 1, LOS 2.a,b)

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Cunningham arrives in his office early on the day of the conference call. He has conducted an extensive analysis of IMed’s financial statements and has reviewed his assessment of Lance’s conclusions in the report that Lance issued before his departure. He regrets having asked Lance about IMed’s earnings at the previous night’s dinner and decides to ask Lance some very pointed questions in public during the conference call, especially regarding Lance’s inclusion of some significant non-recurring gains in operating income. Based on his own knowledge and experience, Cunningham doesn’t believe that Lance’s target price for IMed would be sustained. He decides that, if he doesn’t get clear answers to his questions on the call, he will recommend to client’s in his research report that IMed’s rating drop to “hold”. Cunningham’s research report and recommendation is sent to all of his firm’s clients and is not directed to a specific client.
In conducting his analysis and developing his recommendation, which of the following requirements of Standard V, Investment Analysis, Recommendations and Actions, would Cunningham least likely be concerned with?

A) Consider the appropriateness and suitability of investment recommendations for each client.

B) Clearly differentiate fact from opinion in making recommendations.

C) Exercise diligence and thoroughness in making investment recommendations.

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The research report and recommendation prepared by Cunningham is sent to all relevant clients of the broker-dealer and is not directed toward a particular client or portfolio. In simple terms, Cunningham’s responsibility is to develop a forecast of IMed’s share price and to make a general recommendation to buy, sell, or hold shares of IMed based on the difference between the current market price and his forecast. Cunningham does not interact with individual clients and is not making a specific recommendation to a client to take an investment action. He is not expected to have knowledge of the risk and return objectives, portfolio holdings or unique circumstances and constraints of individual clients. Therefore, he does not have a responsibility to consider the suitability of his recommendation for each client of the firm. Cunningham’s research report should contain sufficient information so that individual clients and their investment advisors can judge the appropriateness and suitability to the client’s particular situation. (Study Session 1, LOS 2.a,b)

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Lance is very nervous before the conference call. Norton, IMed’s president, has told him that he must not disclose the decline in sales of Mediplex.
During the call, Hunt asks Lance whether the rumors of the side effects of Mediplex are true and whether these rumors have negatively impacted sales. Lance assures Hunt that Mediplex sales are strong and that IMed is confident that sales will continue to rise for the remainder of the year.
Which of the following best describes Lance’s actions when he stated that sales of Mediplex were strong?

A) Lance violated Standard I(D), Misconduct.

B) Lance complied with Standard IV(A), Loyalty to Employer.

C) Lance violated Standard III(B), Fair Dealing.

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Lance violated Standards I(D), Misconduct, when he lied about the sales of Mediplex. Under Standard I(D), members are prohibited from engaging in any professional conduct involving dishonesty, fraud, deceit, or misrepresentation or commit any act that reflects adversely on their dishonesty, trustworthiness, or professional misconduct. Neither Standard IV(A), Loyalty to Employer, which relates to independent practice that could result in compensation or other benefit in competition with their employer and does not relate in this situation nor Standard III(B), Fair Dealing, which relates to dealing fairly and objectively when making recommendations to clients, are relevant or apply to this situation. Lance is also NOT in compliance with Standard I, Professionalism, because he violated Standard I(D), Misconduct. (Study Session 1, LOS 2.a,b)

anshultongia

Michael Smyth is Senior Vice President of equity investments at Systematic Investment Advisors, Inc. (SIA). He manages a team of analysts and portfolio managers and is responsible for maintaining and developing client relationships. SIA is located in a small European country and provides investment management services to high net worth individuals. Smyth is also a Level III Candidate for the CFA designation.
One of Smyth’s clients is the Muller-Durand family. He had a long relationship with Helmut Muller. Before Muller’s untimely death, he gave Smyth full discretion over his portfolio based on an investment policy statement that had been refined continuously over the years.

• Muller was the president of a publicly traded manufacturing company, Comax, and 20% of his portfolio’s assets were invested in Comax equity. His contract with Comax prohibited his selling his Comax shares while he was employed.
• Muller had little liquidity needs. His children were grown and his salary at Comax was sufficient to cover his annual expenditures as well as contribute to his investment portfolio.
• A former Chartered Accountant, Muller had been extremely knowledgeable and comfortable with the investment decision-making process.
• Smyth owns 10,000 shares of Comax and serves on Comax’s board.
• Smyth played golf with Muller on a regular basis and, with Muller's help, developed many client relationships from these outings.

SIA has a soft dollar arrangement with a local brokerage firm, First Brokerage, owned by Smyth’s sister.

• Muller had agreed in writing that all trades in his portfolio would be directed to First Brokerage.
• Smyth purchased new carpets for his office with client brokerage. He believes that his managers make better investment decisions when their environment is pleasant and comfortable.
• Smyth attended an industry conference in the Bahamas with soft dollars. The program is devoted to improving management of the investment advisory firm. He believes that a well-run firm makes better investment decisions.
• Smyth consistently uses soft dollars to purchase research reports from an independent research firm that does in-depth analysis of a company’s financial reporting. Several of his managers have commented on the quality and usefulness of these reports to their analysis and decision-making.

Smyth has an appointment to meet with Muller’s widow, Wilhelmina Durand, who, as an artist, left management of their financial assets to her husband. She is meeting with Smyth to better understand her financial position.Which of the following Standards is most relevant regarding Smyth’s meeting with Durand?

A) Standard III(C), Suitability.

B) Standard III(A), Loyalty, Prudence, and Care.

C) Standard III(E), Preservation of Confidentiality.

Standard III(C), Suitability, is most relevant for Smyth's meeting with Wilhelmina Durand. This Standard requires Smyth to make a reasonable inquiry into Durand’s financial situation, investment experience, and investment objectives prior to making any recommendations about her portfolio. Smyth must also consider the appropriateness of the existing portfolio and investment policy statement for Durand. Standard III(A) also has some relevance since Smyth is in a position of trust with respect to Durand, and Smyth must ensure that his and SIA’s goals do not conflict with Durand’s. (Study Session 1, LOS 2.a,b)

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Standard VI(A), Disclosures of Conflicts, requires Smyth to disclose all matters, including beneficial ownership of securities of other investments, that could be expected to impair the member’s ability to make unbiased and objective recommendations. Which of the following matters would least likely be disclosed to Durand?

A) Smyth owns shares in Comax.

B) SIA has a soft dollar arrangement with a brokerage firm owned by Smyth’s sister.

C) Smyth played golf with Muller on a regular basis and developed client relationships.

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Smyth playing golf with Muller is not a conflict with respect to his relationship with Durand and he need not disclose to her that he played golf with Muller. Muller was his client at the time and there was full disclosure that Smyth developed new client relationships. All the other matters must be disclosed. Smyth must get Durand’s approval to continue to direct brokerage from her portfolio to his sister’s firm. As a director and shareowner of Comax, he has a potential conflict of interest when making a recommendation regarding Durand’s Comax shares. (Study Session 1, LOS 2.a,b)

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Which of the following best describes Smyth’s compliance with the CFA Institute Soft Dollar Standards in his use of client brokerage?

A) Purchase of research reports is an allowable use of client brokerage.

B) Purchase of research reports and attending the conference are allowable uses of client brokerage.

C) Purchase of both research reports and carpeting are allowable uses of client brokerage.

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The primary principles regarding use of client brokerage are (1) brokerage is the property of the client and (2) the investment manager has an ongoing responsibility to seek to obtain best execution, minimize transaction costs, and use client brokerage to benefit clients. Consequently, contingent on disclosure of the soft dollar arrangement to clients whose portfolios might be affected, the CFA Institute Soft Dollar Standards permit client brokerage only to be used to purchase research; that is, goods and services, the primary use of which directly assists the investment manager in the investment decision-making process and not in the management of the firm. Therefore, the only allowable use of soft dollars by Smyth is purchase of the research reports. The purchase of the carpeting to create a more pleasant environment would, at best, only contribute indirectly to the investment manager and use of client brokerage is not permitted. Conferences may sometimes be considered research if their programs are designed to improve the investment decision-making process. In Smyth’s case, the conference he attended only had sessions on the management of the investment management firm, not the investment decision-making process. (Study Session 1, LOS 3.b)

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Smyth would like to continue to direct brokerage from Durand’s portfolio to his sister’s brokerage firm. In order to continue the arrangement and comply with the CFA Institute Soft Dollar Standards, which of the following disclosures are required?

A) Smyth must clearly disclose, with specificity and in “plain language,” its policies with respect to all Soft Dollar Arrangements.

B) Smyth must clearly disclose that his duty as the investment manager is to continue to seek to obtain best execution.

C) Smyth must disclose that directed brokerage arrangements that require the investment manager to commit a certain percentage of brokerage might affect his ability to seek to obtain best execution.

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Investment managers are required to clearly disclose, with specificity and in “plain language,” policies with respect to all Soft Dollar Arrangements. Because brokerage is an asset of the client, not the investment manager, the practice of client-directed brokerage does not violate the CFA Institute Soft Dollar Standards. However, directed brokerage arrangements have no required disclosures beyond those required for other soft dollar arrangements. Several disclosures are recommended. Because directed brokerage may impede the investment manager’s ability to seek to obtain best execution, which is one of the investment manager’s fundamental responsibilities, it is recommended that investment managers disclose his duty to seek to obtain best execution and that arrangements to commit a certain percentage of brokerage may affect his ability to do so. For all soft dollar arrangements, it is recommended, but not required, that, on request from the client, investment managers provide a description of the product or service obtained through brokerage generated from the client’s account. (Study Session 1, LOS 3.b)

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After determining Durand’s risk and return objectives, liquidity needs, tax considerations, and unique circumstances, Smyth has decided that he must reduce Durand’s holdings of Comax shares. He has several other clients, whom he met through Muller, who also have significant holdings in Comax. Smyth has also decided to reduce his own holdings in Comax since his term as a director of Comax will be up in June. He does not plan to seek reappointment but as a member of the audit committee he is privy to information about a tender offer. Smyth realizes this is a complex situation.
Of the following Standards, determine which would least likely help Smyth decide what actions with respect to selling shares of Comax would be in compliance with the CFA Institute Standards of Practice.

A) Standard III(B), Fair Dealing.

B) Standard VI(A), Disclosure of Conflicts.

C) Standard III(C), Suitability.

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Standard III(C), Suitability, is the standard least likely to provide Smyth with guidance when he considers selling Durand’s holdings of Comax. This standard describes members’ responsibilities in developing appropriate recommendations and taking suitable actions. To reach the point where he has decided to sell Durand’s shares, Smyth would already have met these requirements. He has determined Durand’s and his other clients’ requirements and has recommended an appropriate and suitable investment action. His concern is how to implement his recommendation and be in compliance with the Standards of Professional Conduct.

Smyth has several problems with respect to selling shares of Comax from Durand’s portfolio and the portfolios of his other clients. First, he must comply with Standard III(B) and deal fairly and objectively with all clients and prospects when taking this investment action. Smyth must disclose his ownership of Comax to all affected clients according to Standard VI(A) and ensure that transactions for clients take precedence over transactions on his own behalf according to Standard VI(B). (Study Session 1, LOS 2.a,b)

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Since Smyth is a director of Comax and a member of the audit committee, what additional Standard is specifically applicable to Smyth’s decision to sell his and his clients’ shares of Comax?

A) Standard VII, Responsibilities as a CFA Institute Member or CFA Candidate.

B) Standard IV, Duties to Employers.

C) Standard II, Integrity of Capital Markets.

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As a director and member of Comax’s audit committee, Smyth possesses material nonpublic information about a tender offer. Therefore, Smyth must be particularly concerned about complying with Standard II(A), Material Nonpublic Information. Under this standard, Smyth may not trade nor cause others until the information becomes public. (Study Session 1, LOS 2.a,b)

anshultongia

Greg Allen is a security analyst and visits David Dawson, the Chief Financial Officer of Edmonds Company. Dawson reveals a great deal of nonmaterial financial data to Allen, data that Dawson routinely reveals to all security analysts who visit him. From this data and other industry information, Allen conjectures that Edmonds is likely to make a tender offer for another company in the industry, a fact that if true would be considered material to the value of the company. Allen:

A) must not disseminate the information or use it for trading purposes until the tender offer is announced.

B) can publish his conclusion in a research report.

C) should send a copy of the report to Dawson for verification before disseminating the report to clients.

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Releasing information to analysts does not constitute a public release of information. Dawson's information should be considered nonpublic until it is released to the public. Allen has used this information, along with other industry information, to come to his conclusion of a pending tender offer which he can use to trade upon based on the mosaic theory.

anshultongia

Jim Taylor works as a portfolio manager for Rose Capital and also serves as president of the Little League board of directors in his town. He receives no money from Little League, however the local golf club provides him with a free membership for volunteering his time on the Little League board. Taylor's involvement with Little League is in his company biography, but the club membership has not been disclosed to Rose or his clients. Taylor has:

A) violated the Standards by not disclosing the club membership to Rose, but not by failing to disclose it to clients.

B) not violated the Standards.

C) violated the Standards by not disclosing the club membership to Rose and failing to disclose it to clients.

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He must disclose any compensation to his employer if it conflicts with his employers/clients interests. However, this relationship does not likely represent any conflict of interest.

anshultongia

Brenda Simone is a money manager and the Blue Streets Pension Fund is one of her clients. The director of the pension fund calls Simone and asks her to use a particular broker so that the fund can obtain some research services with the soft dollars from that broker. Simone believes that the desired broker will provide the same price and execution as the normal broker that Simone uses. Simone does as the client wishes. Simone has:

A) not violated the Standards as long as the research provided by the broker will benefit the plan beneficiaries.

B) not violated the Standards as long as the research provided by the broker will benefit Blue Streets.

C) violated the Standards.

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Simone must ensure that the research benefits the parties to whom she owes fiduciary duty, which are the plan participants.

anshultongia

Which of the following actions is least likely to prevent the misuse of insider information?

A) Placing securities on a restricted list when the firm is in possession of material nonpublic information.

B) Controlling relevant interdepartmental information.

C) Monitoring all the phone calls made by the brokers.

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Standard II(A), Material Nonpublic Information, applies in this situation. Standard II(A) suggests the use of "fire walls" to protect the firm and to conform to the Standards. A fire wall is an information barrier designed to prevent the communication of material nonpublic information between departments of a firm. Although the fire wall system should provide a means to review transactions, it is not feasible to monitor all communications into/out of departments. Placing sensitive securities/firms on "watch, "restricted," or "rumor" lists helps management target monitoring of transactions.

anshultongia

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) not violating the Standards.

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

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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.

anshultongia

Brenda Clark is an investment advisor. Two years ago Clark decided to stop calculating a return composite because of the time required to make those calculations. A prospective client asks Clark what she thinks her performance would have been over the past two years. Clark:

A) can answer the question orally but cannot state the numbers in writing.

B) cannot answer the question, nor can she discuss potential future market returns with the prospective client.

C) cannot answer the question because it would be misleading.

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Any discussion of past performance would imply that Clark had made some calculations, which would be misleading. However, Clark need not calculate historical performance to be an advisor. She can also talk about her view on the future of capital markets.

anshultongia

While having a conversation with a prospective client, John Henry states that his performance across all of his past clients over the past five years was over 20%, which was 200 basis points higher than his benchmark. He tells the client that while the benchmark may rise or fall over time, his excess performance will remain consistent. Henry violated the Standards of Professional Conduct because:

A) he cannot discuss prospective future performance in any manner.

B) the statement of excess performance is misleading with respect to its certainty.

C) he cannot discuss performance without clearly stating that the composite does not conform to GIPS.

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Guaranteeing performance on investments that are inherently volatile is misleading to clients.