mouse123

Sharon West is a CFA charterholder and trust officer for REO Trust Company. Soon after beginning work for REO, West finds that REO has been conducting all its securities transactions through her brother who is a registered representative. West's brother charges REO commissions that are equal to the lowest available from another broker. West's brother tells her that if she continues doing business with him, he will give her a substantial discount on all personal transactions she conducts through him. West:

A) must inform her employer of the arrangement because she is doing business with a member of her immediate family.

B) does not need to inform her employer of the arrangement because the commissions her brother charges the firm are the lowest possible.

C) must inform her employer of the arrangement because it provides her with additional compensation.

---

Members are required to disclose to their employer in writing all monetary compensation or other benefit they receive in addition to the employer’s compensation. The discounting of West’s commissions is a benefit that must be disclosed.

mouse123

Selma Brown, CFA, is a portfolio manager for Mainland Securities. Rick Wood, one of her clients and owner of Wood Fitness Centers, offers to permit Brown and her immediate family to use the facilities at his fitness centers at no cost during 2003. To get this benefit, Brown must achieve on Wood’s portfolio at least a 2-percentage point return above the total return on the S&P’s 500 index during 2002. Brown orally informs her immediate supervisor of the nature and duration of the proposed arrangement.
Arnold Turley, a CFA Institute member, is a portfolio analyst at Mainland Securities. He was just elected to the Board of Directors for Omega Services, which pays him $1,000 plus expenses for attending each of its quarterly board meetings. Turley e-mails Mainland’s compliance officer informing her of this arrangement with Omega and receives a reply informing him that the agreement is acceptable.
Did Brown or Turley violate CFA Institute Standards of Professional Conduct?

A) Brown: No, Turley: No.

B) Brown: Yes, Turley: Yes.

C) Brown: Yes, Turley: No.

---

Brown violated Standard IV(B), Additional Compensation Arrangements, because she must disclose in writing other benefits to be received for services that are in addition to compensation conferred by her employer. Turley did not violate Standard IV(B) because he received consent from his employer in writing, which includes e-mail.

mouse123

Jane Talbot, CFA, is a portfolio manager at Cavalier Investments. Talbot manages the account of Wendall Wilcox. The performance of Wilcox's portfolio has been below that of the benchmark portfolio, the S&P 500, for the past several years. In an effort to enhance his portfolio's performance, Wilcox offers to pay Talbot $2,000 each year that his portfolio's return exceeds that of the S&P 500. Wilcox suggests this arrangement last for the next three years. The amount that Wilcox agrees to pay Talbot is in addition to the compensation that Talbot will receive from his employer and the standard fee that Wilcox will pay Cavalier for managing his portfolio over the three-year period. Talbot agrees to the arrangement proposed by Wilcox and informs Cavalier in writing of the terms of the agreement under which she will receive additional compensation. According to CFA Institute Standards of Professional Conduct Talbot must disclose:

A) the nature and amount of compensation plus the duration of the agreement.

B) both the nature and amount of compensation only.

C) the nature of the compensation only.

---

Procedures for compliance for Standard IV(B) indicate that the written report should state the terms of any oral or written agreement under which Talbot will receive additional compensation including the nature of the compensation, the amount of compensation and the duration of the agreement.

mouse123

Karen Dalby, CFA, volunteers on her church’s finance board but receives no cash compensation so she does not report the arrangement to her employer. Board compensation is limited to an annual retreat to Hawaii, but the accommodations are modest. Dalby does not enjoy the retreat and often considers skipping the event entirely. Dalby is most likely:

A) not in violation of the Code and Standards.

B) in violation of Standard IV(A) "Loyalty."

C) in violation of Standard IV(B) "Additional Compensation Arrangements."

---

Dalby is in violation of Standard IV(B) "Additional Compensation Arrangements." Nonmonetary compensation may still create a conflict of interest.

mouse123

All of the following are poor examples of supervisory responsibility EXCEPT:

A) Proper supervision is not exercised because the supervisor's income is partially based on unsupervised or improper trading activity.

B) Poor procedures allow a portfolio manager to designate a trade to an account or portfolio after the outcome of the trade is known.

C) Incorporating a professional conduct evaluation as part of an employee’s performance review.

---

According to Standard IV(C), supervisors must make reasonable efforts to detect and prevent violations of laws, rules, regulations, and the Code and Standards by anyone under their authority. Incorporating a professional conduct evaluation as part of an employee’s performance review is a recommended compliance procedure.

mouse123

Which of the following statements about Standard IV(C) Responsibilities of Supervisors is least accurate?

A) If the supervisor makes a reasonable effort to detect violations, but fails to detect a violation that occurs, she is in compliance with Standard IV(C).

B) If no effort is made to detect violations, the supervisor is in violation of Standard IV(C) even if no violations by her subordinates have occurred.

C) If a subordinate violates a securities law, her supervisor is in violation of Standard IV(C).

---

Standard IV(C) Responsibilities of Supervisors requires members to make a reasonable effort to detect violations by their subordinates. Violations by subordinates do not necessarily mean the supervisor has violated this Standard.

mouse123

A manager has pointed out that his firm has experienced significant expansion over the past few years. Until recently, its Legal Department was responsible for the firm's compliance activities. Now, however, the legal and compliance functions have been separated. A compliance officer has been formally designated and a comprehensive compliance program has been put in place.In order to function effectively, the compliance officer must have the authority:

A) to hire and fire personnel.

B) to affect, control, and guide employee behavior and to respond to employee misconduct.

C) which is consistent with the most senior partner or executive officer in the firm.

---

Compliance officers must be able to guide employee behavior and respond to employee misconduct, otherwise there will be no effective compliance procedures in place. Unless the compliance officer can effectuate compliance procedures, the compliance program has no chance of responding to or preventing violations of the Standards.

mouse123

According to the CFA Institute Standards of Professional Conduct, which of the following statements about members with supervisory responsibility is NOT correct? Members with supervisory responsibility:

A) must make reasonable efforts to detect violation of laws, rules, regulations, and the Code and Standards.

B) are relieved of their supervisory responsibility if they delegate their supervisory duties to other members of CFA Institute.

C) are expected to have in-depth knowledge of the Code and Standards and to apply this knowledge in discharging their supervisory responsibilities.

---

Although members who supervise large numbers of employees may delegate supervisory duties, such delegation does not relieve them of their supervisory responsibility.

mouse123

A firm recently hired Jill Taylor to be a managing supervisor in the firm. Taylor knows that all of her subordinate supervisors are members of CFA Institute and that they have a compliance system in place with respect to the Code and Standards. Under these conditions Taylor needs to:

A) neither of these choices.

B) rely on the current compliance system since the subordinate supervisors are subject to the Code and Standards.

C) review the compliance system for its adequacy.

---

According to Standard IV(C), Responsibilities of Supervisors, Taylor must make reasonable efforts to detect violations of law, rules, regulations, and Code and Standards. This responsibility is not eliminated because the Taylor’s subordinates are CFA Charterholders. Taylor should review the compliance system and report any inadequacies to senior management.

mouse123

According to Standard IV(C), a CFA Institute member who is in a supervisory role must have which of the following?

A) Both of these.

B) A graduate degree.

C) An in-depth knowledge of the Code and Standards.

---

The only requirement for a supervisor is an in-depth knowledge of the Code and Standards. Neither of the other choices are required.