LiquidAssets10

Denise Weaver is a portfolio manager who manages a mutual fund and has pension clients. When Weaver receives a proxy for stock in the mutual fund, she gives it to Susan Griffith, her administrative assistant, to complete. When the proxy is for a stock owned in a pension plan, she asks Griffith to send the proxy on to the sponsor of the pension fund. Weaver has:

A) violated the Standards by her policy on mutual fund proxies, but not her policy on pension fund proxies.

B) not violated the Standards.

C) violated the Standards by her policy on mutual fund and pension fund proxies.

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Proxies should be taken seriously, and although it is likely that Griffith can understand some of the issues, it is likely that she is not capable of making responsible decisions on all potential proxy issues. Proxies for a pension plan should be voted in the best interests of the beneficiaries, not the plan sponsor. The sponsor's interests will not always be the same as the beneficiary's interest.

LiquidAssets10

Rachel Young, CFA, is making preparations to start a competitive business before terminating her relationship with her employer, a large money management company. Young asks Dot Wiggins, CFA, to consider joining her. In subsequent discussions with Young, Wiggins learns that Young has not disclosed to her employer ownership of stocks that Young recommended. She also learns that Young has used excerpts from research reports by others with only a slight change in wording without acknowledging the source. Wiggins declines Young’s offer to join the new business but does not dissociate herself from the violations. According to CFA Institute Standards of Professional Conduct, which of the following statements is NOT correct?

A) Wiggins violated Standard I(A) Knowledge of the Law, because she did not dissociate herself from the violations.

B) Young violated Standard IV(A) Loyalty to Employer, because she was making preparations to start a competitive business before terminating her relationship with her employer.

C) Young violated Standard I(C) Misrepresentation, because she did not acknowledge the source of excepts that she used in research reports.

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Young did not violate Standard IV(A) Loyalty to Employer because such preparations are permitted provided that they do not breach Young’s duty of loyalty to her employer. Breaches that would violate Standard IV(A) include soliciting clients or taking records or files while still working for the current employer.

LiquidAssets10

Steve Jones is a portfolio manager for Gregg Advisors. Gregg has developed a proprietary model that has been thoroughly researched and is known throughout the industry as the Gregg model. The model is purely quantitative and screens stocks into buy, hold, and sell categories. The basic philosophy of the model is thoroughly explained to clients. The director of research frequently alters the model based on rigorous research—an aspect that is well explained to clients, although the specific alterations are not continually disclosed. Portfolio managers then make specific sector and security holding decisions, purchasing only securities that are indicated as "buys" by the model. Jones thoroughly understands the model and uses it with all of his clients. Jones is:

A) not violating the Standards either in purchasing stocks without a thorough research basis or in not disclosing all alterations of the model to clients.

B) violating the Standards in purchasing stocks without a thorough research basis and in not disclosing all alterations of the model to clients.

C) violating the Standards in not disclosing all alterations of the model to clients, but not in purchasing stocks without a thorough research basis.

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Jones and Gregg are using reasonable judgment in not continually disclosing all of the alterations of the model. It is acceptable to use a pure quantitative model as a sole basis for purchasing stocks, as long as it is thoroughly researched.

LiquidAssets10

Chuck Daniels has just been hired to manage a security analysis group for Aaron Asset Management. Daniels performed a similar function at another firm and finds the compliance system at Aaron inadequate. He develops a system that he feels is appropriate, but senior management tells him he will have to wait six months to implement the system. Daniels should:

A) resign his position immediately.

B) protest in writing the delay, listing the potential dangers that can occur.

C) decline in writing to accept supervisory responsibility until a satisfactory compliance system is put into place.

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According to the Standard on supervisory responsibilities, Daniels should decline in writing to accept supervisory responsibility until a satisfactory compliance system is put into place.

LiquidAssets10

Brenda Clark is an investment advisor. Two years ago Clark decided to stop calculating a return composite because of the time required to make those calculations. A prospective client asks Clark what she thinks her performance would have been over the past two years. Clark:

A) cannot answer the question because it would be misleading.

B) can answer the question orally but cannot state the numbers in writing.

C) cannot answer the question, nor can she discuss potential future market returns with the prospective client.

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Any discussion of past performance would imply that Clark had made some calculations, which would be misleading. However, Clark need not calculate historical performance to be an advisor. She can also talk about her view on the future of capital markets.

LiquidAssets10

Greg Allen is a security analyst and visits David Dawson, the Chief Financial Officer of Edmonds Company. Dawson reveals a great deal of nonmaterial financial data to Allen, data that Dawson routinely reveals to all security analysts who visit him. From this data and other industry information, Allen conjectures that Edmonds is likely to make a tender offer for another company in the industry, a fact that if true would be considered material to the value of the company. Allen:

A) can publish his conclusion in a research report.

B) should send a copy of the report to Dawson for verification before disseminating the report to clients.

C) must not disseminate the information or use it for trading purposes until the tender offer is announced.

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Releasing information to analysts does not constitute a public release of information. Dawson's information should be considered nonpublic until it is released to the public. Allen has used this information, along with other industry information, to come to his conclusion of a pending tender offer which he can use to trade upon based on the mosaic theory.

LiquidAssets10

Juan Lopez manages accounts for Street Capital. Lopez’s mother is a client of the firm. Lopez does not make trades in his mother’s accounts until all other clients of the firm have been given an opportunity to trade. Lopez has:

A) not violated CFA Institute Standards of Professional Conduct because transactions for clients should have priority over personal transactions and transactions for beneficial owners.

B) violated CFA Institute Standards of Professional Conduct because he is not allowed to trade in family accounts.

C) violated CFA Institute Standards of Professional Conduct because family accounts that are client accounts should be treated like any other firm accounts.

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Standard VI(B) Priority of Transactions. Family accounts that are client accounts should be treated like any other firm accounts. Lopez should refrain from exercising excess caution since his mother is a client of the firm like all other clients.

LiquidAssets10

Randy Wesson is a research analyst for a large brokerage company following the chemical industry. Wesson receives a phone call from his nephew who works part-time in an airport hospitality center for an airline while going to business school. Many meetings take place at the center on any given day. The nephew tells Wesson that while bringing some faxes into a conference room, he overheard executives of Hunt Chemical talking about the likely divestiture of one of their subsidiaries. His nephew wants to know whether that will be good for Hunt. Wesson should:

A) write a research report describing that he learned about the likely divestiture from his nephew who works at the hospitality center.

B) write a research report describing the possibility of a divestiture, but not mention how he learned about it.

C) not use the information.

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The information is material and nonpublic; therefore, Wesson cannot trade or cause others to trade on the information. Any action concerning the information would violate the Standard on material nonpublic information.

LiquidAssets10

Marc Feldman, CFA, is manager of corporate investor relations for a high-tech startup, zippy.com, in Boise, Idaho. Feldman learns that Larry Smith, controller, is altering the accounting records. Feldman advises some of his personal friends to sell short zippy.com. This action:

A) constitutes a violation of the Standard concerning prohibition against misrepresentation.

B) constitutes professional misconduct but not the use of nonpublic information and is a violation of the Code and Standards.

C) constitutes the use of material nonpublic information and is a violation of the Code and Standards.

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The information is apparently nonpublic, and is clearly material since the valuation of securities in the market place is predicated upon financial data and other relevant information. Trading or inducing others to trade is a clear violation of Standard II(A).

LiquidAssets10

Patricia Spraetz is the chief financial officer and compliance officer at Super Selection Investment Advisors.  Super Selection is a medium-sized money management firm which has incorporated the CFA Institute Code of Ethics and Standards of Practice into the firm's compliance manual.
Karen Jackson is a portfolio manager for Super Selection.  She is not a CFA charterholder.  Jackson is friendly with David James, president of AMD, a rapidly growing biotech company.  James has provided Jackson with recommendations in the biotech industry, which she buys for her own portfolio before buying them for her clients.  For three years, Jackson has also served on AMD's board of directors but has never notified Super Selection of this fact.  She has received options and fees as compensation.
Recently, the board of AMD decided to raise capital by voting to issue shares to the public.  This was attractive to board members (including Jackson) who wanted to exercise their stock options and sell their shares to get cash.  When the demand for initial public offerings (IPO) diminished, just before AMD's public offering, James asked Jackson to commit to a large purchase of the offering for her portfolios.  Jackson had previously determined that AMD was a questionable investment but agreed to reconsider at James' request.  Her reevaluation confirmed the stock to be overpriced, but she nevertheless decided to purchase AMD for her clients' portfolios.
Which of the following statements is NOT correct?

A) Jackson violated Standard IV(B) regarding Disclosure of Additional Compensation by not disclosing additional compensation in the form of cash and stock options received from AMD, as its board member to her employer.

B) Jackson did not violate Standard III(A) on Fiduciary Duty to clients because she was bound by her fiduciary duty to AMD and its stockholders as a board member. Therefore, when she reversed her decision to buy AMD shares for Super Selection's clients, portfolios on James' request, her obligation to AMD took precedence.

C) Jackson violated Standard VI(A) regarding Conflicts of interest by not disclosing her board membership and ownership of stock options to her employer.

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Jackson has violated Standard III(A) because her first obligation is to her firm's clients. Standard VI(A) addresses precisely these kinds of situations regarding potential conflict of interest. Given this conflict of interest, Jackson also compromised her objectivity in violation of Standard I(B). Her fiduciary duty to her clients takes precedence over her fiduciary duty to AMD's stockholders under the CFA Institute Code and Standards. By not disclosing her relationship with AMD, she also violated Standard IV(B). Making past personal security transactions ahead of purchase of the same securities for her clients has put Jackson in violation of Standard VI(B). This standard clearly prohibits such actions.