cfaedu

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) Factor guarantees the portfolio will achieve its goal return.

B) Factor can provide any and all services that Williams could ever possibly want, as an investor.

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

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

---

Answer and Explanation

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.

cfaedu

In order to comply with the CFA Institute Standards, an analyst should:

A) use outside research only after verifying its accuracy.

B) use only his own research in making investment recommendations, because anything else would violate Standard I(B), Independence and Objectivity.

C) use only his company's research when making investment recommendations and use outside research for reports and analysis on stocks.

D) use only statistical data from outside sources when issuing investment recommendations.

---

Answer and Explanation

Standard I(B), Independence and Objectivity: the analyst is allowed to use outside research only after an insightful review. There are no restrictions regarding the exclusive use of outside information or in-house information.

cfaedu

Adam Core, CFA, is a supervisor at a brokerage firm. Recently he discovered a complicated mechanism that brokers are using to obtain referrals of new clients in exchange for reduced commissions and other benefits to existing clients. The new clients are not aware of this practice. Core consults with compliance counsel and initiates an investigation. Which of the following actions violates CFA Institute Standards?

A) Core makes sure that everybody in the company has a copy of the CFA Institute Code and Standards and a copy of the internal compliance system. He starts organizing special seminars on compliance with CFA Institute requirements.

B) Core proceeds with the investigation, coordinating his search with the compliance officer, the supervisors from another departments, the legal advisors, and his manager.

C) Core's first goal is to identify all violators.

D) Core starts collecting information and records on the case, as well as interviewing all involved employees. He decides against immediate limitations on their work, to insure the work of the company will continue undisturbed.

---

Answer and Explanation

Given the possibility of a violation, Core must impose limitations on the normal activities of the suspected employees until the investigation is complete, as explained in Standard IV(C), Responsibilities of Supervisor.

cfaedu

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

C) Improving an existing report and publishing it under a new title outside of the company without acknowledging the source of the original report.

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

---

Answer and Explanation

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.

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.

cfaedu

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) solicit Branford colleagues but not Branford clients.

B) start the registration of her new company.

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

D) prepare a list of information from Branford files that she can use for future reference in client solicitation.

---

Answer and Explanation

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

cfaedu

Marc Feldman, CFA, is manager of corporate investor relations for a high-tech startup, zippy.com, in Boise, Idaho. Feldman is well-known in the high tech community in Boise, and Dragon.com has asked if he will help them organize their investor relations function on a consulting basis. They offer him an all-expenses-paid two-week holiday for two on Australia's Gold Coast in payment. Regarding this offer as a CFA Institute member Feldman is:

A) allowed to accept the offer only with written approval from zippy and from Dragon.

B) allowed to accept the offer only with written approval from zippy.

C) not allowed to accept such an offer since it effectively places him in competition with his employer.

D) not allowed to accept such an offer since the compensation is non-cash and, therefore, is hard to quantify for the purpose of adhering to the Code and Standards.

---

Answer and Explanation

Under Standard IV(A) Loyalty to Employer, and Standard V(B) Additional Compensation Arrangements, Feldman is allowed to accept the offer, but only with written permission from both zippy and Dragon.

cfaedu

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 companys 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 companys 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(A), Knowledge of the Law, and I(B), Independence and Objectivity.

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

---

Answer and Explanation

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.

cfaedu

While copying some of her research materials at work, Mary Jones comes across a few incomplete research notes written by one of her colleagues. As a result of reading the notes, and without further review, Jones immediately changes one of her stock recommendations from sell to buy. Which of the following CFA Institute Standards has Jones violated?

A) Standard I(B), Independence and Objectivity.

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

C) Standard III(A), Loyalty, Prudence, and Care.

D) Standard III(B), Fair Dealing.

---

Answer and Explanation

Jones has violated Standard V(A) by failing to exercise diligence and thoroughness.

cfaedu

Kimberly Olson has recently become a CFA charterholder, and has just started a new job at Securities Online as a junior analyst. After preparing her first research report, Olson decides to consult with one of the senior analysts who make minor corrections to improve the content of the report. Olson makes changes to the report according to the senior analyst. Upon presentation of the report, Olson finds that statements made by the senior analyst contained incorrect information. Which of the following statements is TRUE?

A) Olson did not need to check the additional comments.

B) Olson should have accepted the editing because it came from a senior employee.

C) If Olson attributes those comments to the senior analyst, she cannot be held responsible for incorrect information.

D) Olson should have checked the accuracy of the comments.

---

Answer and Explanation

It is the responsibility of the analyst to confirm that information provided is accurate. The fact that the person editing the report is a senior analyst is irrelevant.

cfaedu

Sally Watson works as an equity portfolio manager for Brunswick Investment Advisers (BIA). Wally Jackson, President and Chief Investment Officer of the firm, is a CFA charterholder who supervises Watson and other investment professionals within the firm. Watson is a candidate in the CFA Program, and she has recently passed the Level II exam. BIA's clients include trusts, foundations, endowments, corporations, and high net worth individuals, including accounts for family and friends of its employees. Jackson and Watson manage client portfolios with a growth strategy and concentrate on holdings in the healthcare, technology, and communications sectors. About 10 percent of BIA accounts are actively managed.

Because BIA uses Accommodate Broker Dealer for executing transactions, Accommodate provides research to BIA regarding holdings in accounts that are actively managed. The fees Accommodate charges BIA competitive, and BIA applies the same basic fee structure to all its clients. BIAs clients do not know about BIAs arrangement to get research information from Accommodate.

The clients do know that Accommodate routinely allocates shares in IPOs that it underwrites to BIA. Jackson is eagerly awaiting the IPO of a new technology company that he intends to allocate across all current portfolios, including the proprietary account and accounts of friends and family. Based upon his research, Jackson feels this IPO has good potential and has been working to get an unusually large number of shares of the IPO.

BIA has recently been awarded two new client accounts, totaling $100 million, which are in the process of completing transitions from other managers. Although an investment objective and guidelines have not been formalized for the accounts, Jackson allocates shares of the IPO across all client accounts on a pro rata basis, including an allocation for these new client accounts.

Watson serves on the board of directors for New Medical Developments, a biotech firm in which she maintains significant stock and options. BIA owns 4.5 percent of New Medicals stock on behalf of its clients. At a special meeting of New Medicals board, Watson learns that Remedy Inc. is preparing a confidential tender offer for all of New Medicals shares outstanding. After the meeting, Watson sends an electronic mail message to Jackson detailing the offer.

Jackson immediately places New Medical Developments on BIAs restricted list so representatives of BIA cannot recommend the stock. As rumors circulate in the investment community about the tender offer, some of Jacksons clients call and ask him to look into the possibility of purchasing stock in New Medical Developments. Jackson is fearful of his situation and puts off such requests. As a result, one client, Craig Mills, files a complaint with CFA Institute that Jackson is not responding to his requests. Knowing the precarious situation he is in, Jackson decides to wait until the tender offer has been announced to address Mills complaint.

CFA Institute becomes suspicious of Mills, because he seems to have a history of trading stocks for which material information soon becomes public. As part of an investigation into possible insider trading activities, CFA Institute asks Jackson to furnish CFA Institute with Mills trading history.

Watson must notify BIA of all the following EXCEPT:

A) her ownership of the stock in New Medical Developments.

B) her position on the board of New Medical Developments.

C) her plans for taking the next CFA exam.

D) any independent consulting work she performs for third parties.

---

Answer and Explanation

Watson does not have to inform BIA about her plans to take a CFA exam. She should be careful, of course, not to misinform BIA of her plans, i.e., say she will when she knows she cannot. All of the other notifications are required. Standard VI(A) requires her to inform BIA about potential conflicts of interest. Standard IV(A) requires her to inform BIA about any consulting work she performs.