Ethical and Professional Standards 【Reading 4】 system, include, following, fiduciary, effective

prashantsahni

All of the following would be effective components of a formal compliance system EXCEPT:

A) the investor's objectives and constraints should be maintained and reviewed periodically to reflect any changes in the client's circumstances.

B) as a fiduciary under ERISA, the firm will strictly follow pension plan instructions and restrictions, which may include concentrating portfolios in a few securities or industries.

C) the firm prohibits analysts and portfolio managers from using material nonpublic information in making investment recommendations or taking investment action.

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According to Standard III(A) – Loyalty, Prudence, and Care, “members shall use particular care in determining applicable fiduciary duty.” Under ERISA, a fiduciary has the duty to diversify the plan’s investments in order to protect it from the risk of substantial loss. The firm must follow pension plan instructions and restrictions unless they conflict with ERISA or other applicable laws and regulations. Having concentrated portfolios does not constitute effective diversification. An appropriate policy statement would be: “ The firm will follow pension plan documents only to the extent that they are consistent with applicable laws and regulations. The firm will diversify plan assets to minimize the risk of loss.”

kim226

Klaus Gerber, CFA, is a regular contributor to the Internet site WizeGuy. This past week Gerber has been incorrectly quoted as recommending that investors buy shares in Bradford, Inc. He is unaware that this message has been placed on the site as the quote was placed as a prank by an unknown source. This is the third time this has happened over the past month and each time the stock being mentioned moved in price according to the buy or sell recommendation.Fritz Fox, CFA, maintains and updates the WizeGuy site and has learned how to determine if the quotes being attributed to Gerber are actually valid. Several days later, he observes an investment recommendation, posted on the site, to buy Gresham, Inc. The investment recommendation is purported to be from Gerber, but Fox actually knows it to be bogus. He immediately sells 1,000 Gresham short and e-mails Gerber to inform him of the bogus recommendation. Gerber immediately issues a rebuttal, and Gresham falls by 14%. Fox's action is:

A) a violation of the Standard concerning use of material nonpublic information.

B) a violation of the Standard concerning fiduciary duties.

C) not in violation of the Code and Standards.

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Even though the information is false, this fact is known only to Fox and is thus nonpublic information. Since such recommendations have in the past had a significant affect on the price of the security in question, the information is clearly material. Fox is in violation of Standard II(A) Material Nonpublic Information.

kim226

Mark Vernley, CFA, is the owner of an engineering consulting firm called Energetics, Inc., which consults on asset and project valuations in energy-related industries. The firm currently employs 10 professional engineers. Vernley wants to develop and implement adequate compliance procedures for his firm to avoid potential conflicts of interest.  Which of the following statements is least likely to represent an appropriate compliance procedure dealing with conflicts of interest.  Employees at Energetics are required to:

A) deal fairly and objectively with all clients and prospects when providing consultation on asset and project valuations.

B) certify annually that they have maintained familiarity with the compliance procedures and agree to abide by them.

C) report, in writing, on a quarterly basis all securities transactions for their personal portfolios and those in which they have a beneficial interest.

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Standard III(B) – Fair Dealing requires members to deal fairly and objectively with all clients and prospects. Of the statements presented, dealing fairly and objectively with clients is least likely to be a compliance procedure dealing with conflicts of interests. The other statements involve compliance procedures dealing with conflicts of interests.

kim226

All of the following would be effective components of a formal compliance system EXCEPT:

A) all managers must obtain client information to prepare an investment policy statement for each client.

B) investment managers may use soft dollars for the payment of research services, travel, meals, and lodging.

C) the firm has a duty to vote all proxy statements in the best interests of plan participants and beneficiaries.

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The Securities and Exchange Act of 1934, Section 28(e), contains a “safe harbor” provisions allowing investment managers to use soft dollars for research purposes only. Thus, soft dollars represent dollars paid for investment research and cannot be used for items such as travel, meals, and lodging.

kim226

Marc Feldman, a CFA Institute member, is treasurer of zippy.com, and is also Larry Goldman's boss. Feldman is informed of "accounting irregularities of an unknown origin" during an audit by zippy's external accounting firm. There are 3 individuals, including Goldman, handling the accounting function. According to the Code and Standards, Feldman should do all of the following EXCEPT:

A) terminate the accounting staff immediately and issue a press release describing the situation.

B) conduct a thorough investigation of activities.

C) leave the staff in their current jobs and increase supervision while the external auditors complete their work.

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Standard IV(C) spells out responsibilities of supervisors in the Standards of Practice Handbook. Since the investigation is ongoing, it would clearly be inappropriate to terminate the entire accounting staff until their complicity in the wrongdoing is established.

kim226

Williams and Fudd is a major London-based brokerage and investment banking firm. Heritage Group, a money management firm, is the first, second, or third largest holder of each of the securities listed on Williams & Fudd's "PrimeShare #10" equity security list.
Williams and Fudd faxed a preliminary copy of a research update bulletin on Yeshe Corp to Heritage at 7 a.m. on Wednesday the 23rd. The report, a change from a "hold" to a "strong buy", was released to the public at 11 a.m. Between 11:00 and 11:20 a.m., Heritage executed a series of trades with which they bought 1.25 percent of Yeshe's publicly traded stock. This action is:

A) a violation of the Standard concerning priority of transactions, but would conform if Heritage had waited at least 48 hours after the report was issued.

B) a violation of the Standard concerning fair dealing.

C) in accordance with the CFA Institute Code and Standards.

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This action, by giving preferential treatment in the dissemination of investment recommendations and material changes to a favored client, is a violation of Standard III(B) concerning fair dealing.

kim226

Pamela Gee is a portfolio manager. She is planning to establish her own money management firm. She has already informed her employer, Branford, Inc., about her plans. In her remaining time at Branford, she can:

A) start the registration of her new company.

B) solicit Branford colleagues but not Branford clients.

C) inform her current clients about her resignation and let them know how to reach her, in case any problems arise in the future.

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The only action that will not breach Standard IV(A) Loyalty to Employer, is to start the registration of her new company.

kim226

Noah Johnson, CFA, is a broker with a money management company, Factor, Inc. In a conversation with Tom Williams, Johnson describes the activities of Factor and discusses the characteristics of portfolio construction. Which of the following statements would NOT, on its face, be considered a misrepresentation?

A) The portfolio securities were carefully selected by Factor to minimize Williams' risk.

B) Factor guarantees the portfolio will achieve its goal return.

C) If Williams is not satisfied with the current target return, Johnson can always improve it by increasing his T-bills share.

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Standard I(C), Misrepresentation, prohibits CFA charterholders from misrepresenting characteristics of the portfolio or the services that the company can provide. The only statement that can be accepted as plausible is that the securities were selected to minimize the risk.

kim226

Which of the following is NOT considered plagiarism under CFA Institute Standards?

A) Using factual information from a recognized financial information agency without acknowledging the source of the information.

B) Improving an existing report and using it inside the company under a new title without acknowledging the source of the original report.

C) Adjusting an already published model and announcing it as a new model without acknowledging the source of the original model.

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Factual information that is already public and is obtained from a recognized information agency can be used without acknowledgment and is not considered plagiarism. All other options are considered plagiarism.

kim226

Milton Baker, CFA, prepares a research report on the dynamics of a stock price. In his study, he uses a considerable number of information sources, both outside sources and his company’s own research papers, prepared for both internal and public use. The report will first be distributed at the monthly department meeting and then later will be published on the company’s Internet site. He thinks that he may have neglected to mention some of his sources in his reference list but decides that he needs to be concerned about full disclosure of his sources only for the public version of the report, so he will wait to revise his work until after the monthly meeting but before it is published on the internet site. Which Standards does Baker NOT comply with?

A) Standard I(C), Misrepresentation, I(B), Independence and Objectivity, and I(A), Knowledge of the Law.

B) Standard I(C), Misrepresentation, only.

C) Standard I(C), Misrepresentation, and I(A), Knowledge of the Law.

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Baker has some doubts but does not initiate any action presuming they only apply to the publicly disclosed report. The lack of action is a violation of Standard I(A), Knowledge of the Law. He also violates Standard I(C), Misrepresentation, by failing to properly disclose the sources of his information, where necessary.