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Phil Trobb, CFA, is preparing a purchase recommendation on Aneas Lumber for his research firm. All of the following are potential conflicts of interest EXCEPT:

A) Trobb's research firm has a large stake of ownership in Aneas Lumber.

B) Trobb's cousin repairs machines for Aneas.

C) Aneas hires Trobb as a consultant to analyze Aneas' financial statements.

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Standard VI(A) defines what constitutes a conflict of interest with regard to clients, prospective clients, and employers. All of these represent potential conflicts of interest with the exception of the cousin working for Aneas Lumber in a job that is unrelated to the Aneas’ financing.

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The following scenarios involve two analysts at Dupree Asset Management, a small New York-based company with about $150 million in assets under management. Dupree restricts personal trading of stocks analyzed, corporate directorships, trustee positions, and other special relationships that could reasonably be considered a conflict of interest with their responsibilities to their employer.

• Ray Bolt, CFA, is a senior investment analyst. Bolt was recently elected to the board of trustees of his alma mater, Midwest University, and was appointed as the chairman of the University's endowment committee. Midwest has more than $2 billion in its endowment. Bolt must travel from New York to Chicago eight times a year to attend meetings of the board of trustees and endowment committee. Bolt did not inform Dupree of his involvement with Midwest University.
• Wanda Delvecco, a candidate in the CFA Program, is a junior investment analyst. She recently wrote a research report on Aveco Communications and recommended the stock for Dupree's "buy" list. Delvecco bought 200 shares of Aveco stock for her personal account 12 months before she wrote her research report. Over the past 12 months, the stock's price has been in the $20-42 price range. Delvecco has not informed Dupree of her ownership of Aveco stock.

According to CFA Institute Standards of Professional Conduct, which the following statements about Bolt and Delvecco's actions is CORRECT?

A) Both Bolt and Delvecco violated the Standards.

B) Delvecco violated the Standards, but Bolt did not.

C) Neither Bolt nor Delvecco violated the Standards.

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Standard VI(A), Disclosure of Conflicts, requires that Bolt inform Dupree of his involvement with Midwest University given that Bolt's new role can be expected to be time consuming and possibly affect his responsibilities at Dupree. Delvecco is required to disclose her ownership of Aveco stock before conducting the research report because such ownership could bias her objectivity in making a recommendation. She should have discussed owning the stock with her supervisor before beginning to write the research report on Aveco.

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An analyst has been covering a particular firm for years. Recently, the analyst’s uncle died and left the analyst a sizable position in the firm’s stock. The analyst needs to:

A) refuse to receive the stock in the first place.

B) disclose the ownership of the stock to his supervisor.

C) do nothing since the analyst did not purchase the stock.

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The only thing the analyst needs to do is to disclose the ownership of the stock to his supervisor in accordance to Standard VI(A), Disclosure of Conflicts. Refusing to receive the stock could be acceptable option, but is not required.

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Ryan Brown, CFA, is an analyst with a large insurance company. His personal portfolio includes a significant investment in QRS common stock that his firm does not currently follow. The director of the research department asked Brown to analyze QRS and write a report about its investment potential. Based on CFA Institute Standards of Professional Conduct, Brown should:

A) disclose the ownership of the stock to his employer and in the report.

B) sell his shares of QRS before completing the report.

C) decline to write the report without specific approval of his supervisor.

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Members are required to act on behalf of their clients, placing their clients’ interests ahead of their own. Brown should disclose his personal ownership of QRS to his employer and also in the report.

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Abner Flome, CFA, is writing a research report on Paulsen Group, an investment advisory firm. Flome’s brother-in-law holds shares of Paulsen stock. Flome has recently interviewed for a position with Paulsen and expects a second interview. According to the Standards, Flome’s most appropriate action is to disclose in the research report:

A) his brother-in-law’s holding of Paulsen stock and that he is being considered for a job at Paulsen.

B) his brother-in-law’s holding of Paulsen stock.

C) that he is being considered for a job at Paulsen.

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The possibility of employment with Paulsen creates a potential conflict of interest which Flome must disclose. Standard VI(A) Disclosure of Conflicts does not require disclosure of his brother-in-law’s ownership of Paulsen stock.

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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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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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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) not in violation of any Standard.

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

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

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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.

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According to CFA Institute Standards of Professional Conduct, members should do all of the following to meet the compliance procedures for having a reasonable basis for recommendations, EXCEPT:

A) analyze the client's investment needs.

B) analyze the investment's basic characteristics before recommending a specific investment to a broad client group.

C) distribute a detailed, written research report to clients with each recommendation.

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Standard V(C), Record Retention, requires that members maintain appropriate records to support the reasonableness of such recommendations or actions, but they are not required to distribute a research report with each recommendation.

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Ethyl Redd recently joined Bloomington Investments as a research analyst. After spending an afternoon looking through the research team’s archives, Redd is not sure Bloomington maintains the records that support the team’s analysis and recommendations for the minimum 7-year period called for by Standard V(C), Record Retention. What is Redd’s most appropriate course of action?

A) Decline to participate in any new research until she can verify that the firm is in compliance with the Standard.

B) Keep her own copies of the relevant records and maintain them at home for a minimum 7-year holding period.

C) Review the firm’s record retention procedures with her supervisor or compliance officer to ensure that they comply with the Standard, or suggest ways to bring them into compliance.

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Standard V(C), Record Retention requires that members maintain all records supporting analysis, recommendations, actions, and all other investment related communications with clients and prospects. The recommended procedures for compliance with Standard V(C) state that the record-keeping requirement is generally the firm’s responsibility. These records are the property of the firm, so Redd keeping her own copies at home could potentially violate Standard IV(A), Loyalty. Redd’s best course of action is to review the firm’s procedures with her supervisor and recommend any improvements that are necessary to bring them into compliance with Standard V(C).