Reading 2-I: Standards of Professional Conduct & Guidance receives, invitation, business, class, div

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

LOS B.: Independence and Objectivity.

 

 

An analyst who is a CFA Institute member receives an invitation from a business associate’s firm to spend the weekend in a high-quality resort. In order to abide by the Standards, the analyst should (may):

A) refuse the invitation if the associate is from a firm he analyzes for his employer.

B) obtain written consent from his supervisor if the offer is contingent on achieving a target investment return.

C) do both of the actions listed here.

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According to Standard I(B) Independence and Objectivity, the analyst should refuse the invitation if it is from a firm the analyst covers for his employer. The analyst can accept the invitation if it is from a client but the analyst must get written consent from his employer if the offer is contingent on future performance, to comply with Standard IV(B) Additional Compensation Arrangements.

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Susan Nielsen, CFA, is an equity research analyst on a fact-finding property tour with 6 other analysts to learn about Just Kittens, Inc. Just Kittens sells tungsten ball-bearings and has 16 warehouses, and 20 manufacturing, research, and wholesale sales outlets scattered over 8 countries – mostly emerging markets. Because of the remote location of some of the facilities, commercial travel is effectively unavailable. Just Kittens charters a jet and various busses to take the research analysts to the properties. If Nielsen accepts these accommodations, she is most likely:

A) not in violation of Standard I(B) "Independence and Objectivity" because commercial travel is effectively unavailable.

B) in violation of Standard I(B) "Independence and Objectivity."

C) not in violation of Standard I(B) "Independence and Objectivity" because best practices dictate that better access to company executives is likely to lead to more accurate and timely information.

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Nielsen is not in violation of Standard I(B) "Independence and Objectivity" because commercial travel is effectively unavailable.

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Tony Calaveccio, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto. He places trades for the fund with Worldwide Brokerage. Worldwide is holding a conference in Amsterdam and has offered to pay for Calaveccio's airfare, meals, and accommodations associated with his attendance of the conference. The conference concerns European small cap securities and the EASDAQ. He decides that he will accept their offer and attend the conference. In order to comply with the Code and Standards, he:

A) may attend, but he must disclose the arrangement to TrustCo's clients and prospects as required under Standard IV.B.

B) may attend, but he must disclose the arrangement to his employer as a gift.

C) should not attend unless he pays for the trip himself.

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Under Standard I(B) gifts, benefits, compensation, or consideration cannot be accepted if the purpose was to influence or reward. Token items are OK. Worldwide Brokerage is not a client of Calaveccio but an entity that he does business with. As such Worldwide could influence Calaveccio to always do business with them which could be to the detriment of his fund if the execution of their trades starts to deteriorate compared to their competitors.

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An analyst is told by his supervisor that when he feels he should write a buy recommendation he is free to do so, and when he feels he should write a sell recommendation he should check with the supervisor first. This practice is:

A) in violation of Standard I(B), Independence and Objectivity.

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

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

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The policy dictated by the supervisor would infringe upon the analyst’s independence and objectivity . It would probably discourage the analyst from making sell recommendations and, furthermore, present the opportunity for the supervisor to try and change the analyst’s mind.

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According to CFA Institute Standards of Professional Conduct, which of the following is least likely a compliance procedure for maintaining independence and objectivity in making investment recommendations or taking investment action?

A) Create a restricted list so that the firm disseminates only factual information about a controversial company.

B) Restrict special cost arrangements related to travel.

C) Maintain files to support investment recommendations.

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Maintaining files to support investment recommendations is not a compliance procedure for Standard I(B): Independence and Objectivity, but it is a compliance procedure for Standard V(C): Record Retention.

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All of the following would be permitted according to the CFA Institute Standards of Professional Conduct EXCEPT:

A) air transportation paid by a corporate issuer for travel to a major metropolitan airport.

B) token gifts received from clients.

C) use of an issuer’s corporate aircraft when commercial transportation is not available.

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In order to maintain independence and objectivity, members and candidates should restrict special reimbursement arrangements concerning commercial transportation and hotel charges. Use of corporate aircraft is permitted when commercial transportation is not available.

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Francisco Perez, CFA, CPA, is a portfolio manager for an investment advisory firm. Due to the prominence of his position, he is often invited to attend free marketing and educational events hosted by firms which seek to inform the investment community about their investment processes. One such firm, Unlimited Horizons, has invited Perez to attend free educational events which qualify for Continuing Education credits which could help Perez maintain his CPA designation. Perez should most likely:

A) accept the invitation as no cash compensation is involved and the primary intent is to educate and inform the investment community.

B) decline to attend the event as it could result in a violation of Standard I(A) "Knowledge of the Law."

C) decline to attend the event as it could result in a violation of Standard I(B) "Independence and Objectivity."

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Perez should decline the invitation as it creates the impression of lack of independence. If he does not accept the free continuing education courses, he would have to pay for them some other way so the free courses are a form of compensation. Nothing in the vignette suggests the free classes are illegal.

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An analyst has been writing research reports on a company for many years. As part of the analyst’s continuing research efforts, the analyst allows the firm to fly him to the firm’s headquarters and put him up in the guest quarters the company has for all corporate visitors. According to Standard I(B), Independence and Objectivity, this is:

A) a violation if the headquarters are within reasonable driving distance from the analyst's home.

B) a violation no matter what the circumstances.

C) not a violation under any circumstances.

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If such a trip is “out-of-the-way,” payment by the company for the trip is acceptable. If the headquarters are within reasonable driving distance, the analyst should drive there.

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Tony Calaveccio, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto. He places trades for the fund with River City Brokerage. River City presents Calaveccio with a bottle of inexpensive wine at Christmas each year. Calaveccio does not disclose this fact in the prospectus of the small cap venture fund. This action is:

A) not in violation of the Code and Standards.

B) in violation of the Standard concerning disclosure of additional compensation arrangements.

C) in violation of the Standard concerning disclosure of conflicts to clients and prospects.

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Under Standard I(B) Independence and Objectivity, members are advised to "use reasonable care" in order to maintain independence. While it is clearly understood that gifts from various entities have the potential to affect a member's independence and objectivity, a member can accept token gifts as long as they are not intended to influence or reward.