Reading 2-I: Standards of Professional Conduct & Guidance manager, center, class, relevant, div

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Session 1: Ethical and Professional Standards
Reading 2-I: Standards of Professional Conduct & Guidance: Professionalism

LOS C.: Misrepresentation.

 

 

A money manager works for a full-service brokerage firm. After meeting with a new client and gathering all relevant information, the money manager says that she thinks her firm can perform all the financial services the new client needs. With respect to Standard I(C), Misrepresentation, this:

A) may not be a violation if the representation was made orally.

B) may not be a violation if the manager's opinion is based upon the factual information gathered.

C) is a violation because she cannot make statements like this under any circumstances.

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There is no violation if the opinion is based upon the factual information gathered and the firm’s actual capabilities. This is true whether or not the representation was written, oral, or electronic. None of the other choices are correct.

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An analyst preparing a report does NOT need to cite the use of which of the following?

A) A recent quote from Alan Greenspan.

B) Charts developed by a colleague in the same firm.

C) Estimates of betas provided by Standard & Poor's.

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Statistics provided by a recognized agency, such as Standard and Poor’s, do not need to be cited. Charts, quotes, and algorithms developed by individuals must be cited when they are used.

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Which of the following is NOT a form of plagiarism?

A) Using factual information published by a recognized financial statistics reporting service without acknowledgment.

B) Presenting statistical forecasts by others with the sources identified but without the qualifying statements that may have been used by the originator.

C) Citing quotations said to be attributable to "leading analysts" or "investment experts" without specific reference.

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Members may not generally use material without acknowledging the original source, but an exception is made for factual information published by recognized financial and statistical reporting services.

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Sandra Bulow, CFA, is responsible for updating her employing firm’s website to include changes in analysis techniques and trading procedures. She is often very delinquent in making these changes, despite working extensive hours. She is aware clients are using the website to make investment decisions, and has received complaints from the sales department as the information on the website if often different from what is presented in sales meetings. Bulow is most likely:

A) in violation of Standard I(C) "Misrepresentation."

B) in violation of Standard III(B) "Fair Dealing."

C) not in violation of any Standard.

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Bulow is most likely in violation of Standard I(C) "Misrepresentation." The web site information is erroneous, and needs to be updated to match the firm’s current practices.

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At the time of its initial public offering (IPO), a mutual fund is invested primarily in junk bonds. As part of its strategy, it is also invested in some zero-coupon U.S. Treasury bonds. The amount of the investment in the Treasury bonds is such that their maturity value equals 90% of the current value of the fund. Which of the following may a CFA Institute member say to her clients concerning the fund at issuance?

A) Since the fund is backed by the U.S. government, you know you will get your money back.

B) A CFA Institute member may not make either of these statements.

C) The fund is virtually default risk free.

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Standard I(C), Misrepresentation, prohibits making statements that mention a guarantee of returns or misrepresent the true nature of the investment.

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Wes Smith, CFA, has been working toward the completion of a Master of Science in Finance. He has passed all the necessary courses and written the necessary thesis. He still must defend the thesis in one month. Smith’s thesis advisor assures him that he will pass the thesis defense. Smith has new business cards printed with “M.S. in Finance” after his name. This is a violation of:

A) none of the Standards if Smith does not make the cards public until after he defends his thesis and receives his degree.

B) Standard VII(B), Reference to CFA Institute, the CFA Designation, and the CFA Program.

C) Standard I(C), Misrepresentation.

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If the cards were distributed today he would be in violation of Standard I(C), Misrepresentation. However, if Smith does not make the cards public until after he receives the degree, there is no violation.

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The following information involves two research analysts at a brokerage firm.

• Erik Bagenot, CFA, is preparing a research report on Global Enterprises, Inc. In preparing the report, he uses materials from many sources. For example, he uses factual information published by Standard & Poor's Corporation without acknowledging the source. He also uses excerpts from a research report prepared by another analyst. Bagenot makes only a slight change in wording for these excerpts, but acknowledges the source.
• Sally Wain, who is currently enrolled in the CFA program, is preparing a research report on Manson Telecommunications. She attends a conference in which several investment experts provide their views about the future prospects of this company. Wain cites several quotations from these investment experts in her report without specific reference.

According to CFA Institute Standards of Professional Conduct involving prohibition against plagiarism, which of the following statements is CORRECT?

A) Wain violated the Standards, but Bagenot did not.

B) Both Bagenot and Wain violated the Standards.

C) Bagenot violated the Standards, but Wain did not.

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Bagenot complied with Standard I(C), which permits publishing factual information from Standard & Poor's without acknowledgment and using excerpts with acknowledgment. Wain committed plagiarism because she failed to give specific references for the quotations that she used.

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All of the following violate Standard I(C), Misrepresentation, EXCEPT:

A) copying a proprietary computerized spreadsheet without seeking authorization from the creators.

B) presenting factual information published by recognized statistical reporting services without acknowledgment.

C) citing quotes attributable to "investment experts" without specific references.

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Standard I(C), Misrepresentation, permits using recognized sources of factual information such as Standard & Poor’s Corporation and Moody’s Investors Service without acknowledgment.

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Marc Randall, CFA, is an investment analyst. During a meeting with a potential client, Randall's boss states that, "You can be sure our investments will always outperform Treasury Bonds because of our fine research staff members, like Marc." Randall knows that this statement is:

A) a violation of fiduciary duties owed to clients under the Standards.

B) a violation of the Standard concerning prohibition against misrepresentation.

C) not in violation of the Code and Standards.

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Under Standard I(C), members are forbidden from guaranteeing a specific rate of return on volatile investments. Therefore, the statement is in violation of the Standard.

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A copyrighted technique for measuring the downside risk of an investment has just been revealed to the public. If an analyst adopts the technique, he must cite the use of the technique in all research reports in which the technique is used EXCEPT:

A) if the analyst does not modify the technique at all.

B) Neither of these answers provide grounds for an exception.

C) if the analyst uses reasonable care and verifies that the technique provides superior results.

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Neither of the answers in this question provide adequate grounds for not citing the source of the methodology. Although “verifying” the technique is a good idea and congruent with the Code and Standards, the analyst still needs to cite the use of the copyrighted technique even after modifying it slightly to avoid violation of Standard I(C), Misrepresentation.