kasinkei

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) Both of these statements must be disclosed to clients.

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

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

kasinkei

Lee Hurst, CFA, is an equity research analyst who has recently left a large firm to start independent practice. He is able to re-create several of his previous recommendation reports from memory, based on sources obtained at his previous employer. He publishes the reports and obtains several new clients. Hurst is most likely:

A) in violation of Standard V(C) “Record Retention.”

B) not in violation of any Standard.

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

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Hurst is most likely in violation of Standard V(C) "Record Retention" because the supporting documentation is unavailable. He needs to recreate the supporting records based on information gathered through public sources or the covered company.

kasinkei

Four months ago Lance Tuipuloto, CFA, analyzed three equity securities for Janet Scadden. However, Scadden decided to invest in bonds instead. Tuipuloto now wants to destroy the records from the stock analysis. Is this action in compliance with Standard V(C)?

A) Yes. Tuipuloto only needs to keep the records for 90 days.

B) No.

C) Yes. Tuipuloto does not need to keep the records because his advice was not followed.

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According to Standard V(C), Record Retention, the files should be not be destroyed. The CFA Institute recommends keeping all records for at least 7 years.

kasinkei

Ten years ago Lance Tuipuloto, CFA, met with Horace and Nichole Scadden to discuss potential investments, but these prospects never became clients. Tuipuloto now wants to destroy the records from the meeting with the prospective clients. Is this action in compliance with Standard V(C)?

A) Yes; the prospects never became clients.

B) No.

C) Yes; A sufficient number of years have passed since the meeting.

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According to Standard V(C), Record Retention, the files may be destroyed. The CFA Institute recommends keeping all records for at least 7 years. Given that more than 7 years have passed since Tuipuloto‘s meeting with the Scaddens, it is not against Standard V(C) to get rid of the records from that meeting.

rgonzalez

An analyst has constructed an investment policy statement (IPS) and a portfolio for a new client, Stephanie Sasser. He has also provided written guidelines on the processes used to make investment management decisions. Six month later, Sasser questions the analyst about several portfolio holdings. Due to a large allocation in financial services stocks during a severe market downturn, her portfolio has underperformed the benchmark by a large margin. Although the analyst remembers discussing the over-allocation with Sasser, and receiving her approval, he is unable to find supporting documents. Which of the following Standards has the analyst most likely violated?

A) Standard V(C) Record Retention.

B) Standard V(B) Communications with Clients and Prospective Clients.

C) Standard V(A) Diligence and Reasonable Basis.

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Standard V(C) Record Retention requires analysts to develop and maintain “…records to support their investment analysis, recommendations…with clients and prospective clients.” The analyst is unable to document the over-allocation with respect to the benchmark; this is most likely a violation of Standard V(C).

rgonzalez

An analyst who routinely purges the files that support his research and recommendations:

A) is acting in accordance to Standard III(E), Preservation of Confidentiality.

B) is acting in accordance to Standard IV(A), Loyalty to Employer.

C) may be violating Standard V(C), Record Retention.

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According to Standard V(C), a member shall “maintain appropriate records” to support recommendations. Neither of the other choices would apply to this action.

rgonzalez

Nicole Wise, CFA, is an analyst at Chicago Securities. She attends a meeting with management of one of the companies that she covers. During the meeting, management expresses great optimism about the company’s recent acquisition of a new business. Wise is excited about these prospects and issues a research report that states that the company is about to achieve significant success with the new acquisition. Wise has:

A) violated CFA Institute Standards of Professional Conduct because she did not check the accuracy of the statements that management made.

B) not violated CFA Institute Standards of Professional Conduct because she had reasonable reason to believe that the statements in her report were true.

C) violated CFA Institute Standards of Professional Conduct because she misrepresented the optimism by turning it to certainty.

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Standard V(B), Communication with Clients and Prospective Clients. Members must distinguish between fact and opinion in the presentation of a research report or investment recommendation. Wise violated the standard because she misrepresented management’s enthusiasm by turning it into certainty.

rgonzalez

An analyst finds a stock that has had a low beta given its historical return, but its total risk has been commensurate with its return. When writing a research report about the stock for clients with well-diversified portfolios, according to Standard V(B), Communication with Clients and Prospective Clients, the analyst needs to mention:

A) the relationship of the historical beta and return only.

B) both the historical beta and total risk and return.

C) the relationship of the historical total risk to return only.

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Using reasonable judgment, an analyst may exclude certain factors from research reports. Since the report will be delivered to clients with well-diversified portfolios, total risk is not as important as beta. Given that the total risk has been only commensurate with historical return, furthermore, then the analyst is not negligent by not mentioning it.

rgonzalez

An analyst finds a stock with historical returns that are not correlated with interest rate changes. The analyst writes a report for his clients that have large allocations in fixed-income instruments and emphasizes the observed lack of correlation. He feels the stock would be of little value to investors whose portfolios are comprised primarily of equities. The clients with allocations of fixed income instruments are the only clients to see the report. According to Standard V(B), Communication with Clients and Prospective Clients, the analyst has:

A) not violated the Standard.

B) violated the Standard concerning fair dealings with all clients.

C) violated the article in the Standard concerning facts and opinions.

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Recommending a stock whose return is uncorrelated with interest rate changes is appropriate for the clients described in the problem. Emphasizing the lack of correlation is appropriate as long as the analyst makes no guarantees concerning the relationship in the future. Reporting historical correlation is a presentation of fact, and is not in violation. The analyst is free to show the report only to investors for whom the investment is appropriate.

rgonzalez

Midland Investment Banking issues a prospectus for its open-end Midland Gold Fund. In the prospectus, the investment policy is disclosed as, "We will maintain an investment posture of 50% or more in gold stocks and/or bullion, depending upon market conditions." This policy is maintained until the price of gold falls by 20%, leaving the fund 40% invested in gold stocks and bullion. Management decides that since the allocation was affected by market conditions, no action to either change the investment policy or to rebalance the portfolio is required. This decision is:

A) in violation of the Standard concerning disclosure of investment processes.

B) in violation of the Standard concerning fiduciary duties to clients.

C) under the circumstances, not in violation of the Code and Standards.

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Standard V(B) Communication with Clients and Prospective Clients requires members to disclose "general principles and investment processes" to clients and to "promptly disclose any changes that might significantly affect those processes." Under the Standard, Midland management is required either to:

• rebalance the portfolio in a timely manner so as to maintain compliance with the investment policy or
• communicate an intended change in that policy well in advance of the actual change so as to afford investors time to act prior to the change in investment policy taking place.

Midland is in violation of the Standard.