anshultongia

Jennifer Gates is an individual portfolio manager who only uses mutual funds for her clients; she has therefore never created a portfolio of stocks. She enters an Internet chat room on investments and starts answering questions about investments. She states in the chat room that she has a CFA designation. One woman in particular is interested and questions her about the viability of creating her own stock portfolio. Gates feels that this would be a mistake because she only has $150,000 to invest, and states, "I have experience creating stock portfolios, and it does not make sense to do so with only $150,000." The woman she has chatted with sends her an e-mail and eventually becomes a client of hers. Gates has:

A) violated the Standards by soliciting business over the Internet.

B) violated the Standards by misrepresenting her experience.

C) not violated the Standards.

---

One cannot misrepresent their experience, even over the Internet.

anshultongia

Ned Brenan manages two dozen pension accounts, one of which earned over 25% during the past two years. Brenan tells prospective clients that based on past experience they can expect a 25% return on their funds. Which of the following statements is CORRECT?

A) Brenan has violated both Standard of Professional Conduct III(D), Performance Presentation, and Standard I(C), Misrepresentation.

B) Brenan has violated Standard of Professional Conduct III(D), Performance Presentation, but Brenan has not violated Standard I(C), Misrepresentation.

C) Brenan has not violated Standard of Professional Conduct III(D), Performance Presentation, but Brenan has violated Standard I(C), Misrepresentation.

---

Brenan violated Standard of Professional Conduct III(D) by using only one portfolio’s results to create a false impression of all the portfolios, and Brenan violated Standard of Professional Conduct I(C) by creating the impression that a certain return was assured (he should have used the words “might” or “could” instead of “can”).

anshultongia

Victor Logan is a portfolio manager for McCoy Advisors, and Jack Brisco is the Director of Research for McCoy. Brisco has developed a proprietary model that has been thoroughly researched and is known throughout the industry as the McCoy 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. Brisco 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. Logan has conducted very thorough research on his own, using the same process that Brisco uses to validate his findings. Logan feels the model is missing some key elements that would further reduce the list of acceptable securities to purchase, however, Brisco has refused to look at Logan's research. Frustrated by this, Logan applies his own version of the model, with the justification that he is still only purchasing securities on the buy list. Because of the conflict with Brisco, he does not disclose the use of the model to anyone at McCoy or to clients. Which of the following statements regarding Logan and Brisco is CORRECT? Logan is:

A) violating the Standards by applying his version of the model and by not disclosing it to clients. Brisco is violating the Standards by failing to consider Logan's research.

B) not violating the Standards by applying his version of the model, but is violating the Standards by not disclosing it to clients. Brisco is not violating the Standards.

C) violating the Standards by applying his version of the model and by not disclosing it to clients. Brisco is not violating the Standards.

---

Because the research is thoroughly conducted, and Logan has authority to make individual security selection decisions, Logan is not violating the Standards by applying his model. However, Logan is violating the Standard on communication with clients and prospective clients by excluding relevant factors of the investment process. The use of his model is an important aspect of the investment process and should be disclosed to clients. Brisco is not violating the Standards by not considering Logan’s research.

anshultongia

Jim Kent is an individual investment advisor in San Francisco with 300 clients. Kent uses open-ended mutual funds to implement his investment policy. For most of his clients, Kent has used the Baker fund, a small company growth fund based in Boston, for a portion of their portfolio. As a result he has become very friendly with Keith Dunston, the manager of the fund, whom Kent feels is mainly responsible for Baker's performance. One day Dunston calls Kent and tells him that he will be leaving the fund in four weeks and moving to San Francisco to work for a different money management company. Dunston is seeking suggestions on housing in the area. Baker has not yet announced Dunston's departure. Kent immediately finds a fund that is a suitable replacement for the Baker fund, and over the next two days he calls his 30 clients with the largest dollar investments in the funds and tells them he feels they should switch their holdings. Baker feels the remaining clients' positions are small enough to wait for their annual review to switch funds. Kent has:

A) violated the Standards regarding nonpublic information but has not violated the Standards in failing to deal fairly with clients.

B) violated the Standards by not dealing fairly with clients but has not violated the Standards regarding material nonpublic information.

C) violated the Standards by not dealing fairly with clients and regarding material nonpublic information.

---

Kent must treat all clients fairly in acting on the information, regardless of the size of the investment. The information concerning the fund manager’s departure is not material nonpublic information because its release would have no effect on individual security prices.

anshultongia

Janice Melfi is a portfolio manager for Soprano Advisors. Soprano has developed a proprietary model that has been thoroughly researched and is known throughout the industry as the Soprano 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 use the model to assist them in making portfolio decisions, but, based on their own fundamental research, are allowed to purchase securities not recommended by the model. This fact is not disclosed to the clients, because the head of marketing does not think it is relevant. Which of the following statements regarding the portfolio manager’s investment decisions is CORRECT?

A) Soprano is violating the Standards by not disclosing the fundamental research aspect of the investment process.

B) There is no violation of the Standards.

C) Melfi is violating the Standards by using two investment processes that are in conflict with each other.

---

Soprano is violating the Standard on portfolio investment recommendations and actions by excluding relevant factors of the investment process. The fundamental research aspect is highly relevant to the process and should be disclosed to clients. It is acceptable for Melfi to use two investment processes that may be in conflict with each other and to use a process that was not developed by her.

anshultongia

Ken James has been an independent financial advisor for 15 years. He received his CFA Charter in 1993, but did not feel it helped his business, so he let his dues lapse this year. He still has several hundred business cards with the CFA designation printed on them. His promotional materials state that he received his CFA designation in 1993. James:

A) must cease distributing the cards with the CFA designation, but can continue to use the existing promotional materials.

B) can continue to use the existing promotional materials, and can use the cards until his supply runs out—his new cards cannot have the designation.

C) must cease distributing the cards with the CFA designation and the existing promotional materials.

Use of the CFA designation must be stopped immediately, however, the receipt of the Charter is a matter of fact.

anshultongia

Member compliance on issues relating to corporate governance or to soft dollars is primarily addressed by the Standard concerning:

A) Loyalty, Prudence, and Care.

B) Disclosure of Referral Fees.

C) Disclosure of Conflicts to Clients and Prospects.

---

Fiduciary duty on issues relating to corporate governance or to soft dollars is primarily addressed by Standard III(A), Loyalty, Prudence, and Care.

anshultongia

Patricia Young is an individual investment advisor who uses a computer model to place her clients into an appropriate portfolio. The model uses a range of simulated portfolio returns and presents the probability of achieving clients' return goals. Investors then choose a portfolio that provides a satisfactory probability of achieving their minimum required returns. By using this process, Young is:

A) violating the Standard on suitability.

B) violating the Standard on misrepresenting the expected investment performance.

C) not violating the Standards.

---

The Standard on suitability calls for Young to assess risk tolerance, which is ignored by her process.

anshultongia

In the course of reviewing the Corn Co., an analyst has received comments from management that, while not meaningful by themselves, when pieced together with data he has accumulated from outside sources, lead him to recommend placing Corn Co. on his firm's sell list. What should the analyst do?

A) Show his report to his own manager and counsel for their review since this information has become material once it was combined with his analysis.

B) The comments are non material and the report can be issued as long as he maintains a file of the facts as supplied by management.

C) Not issue the report until the comments are publicly announced.

---

This is an example of the mosaic theory where separate pieces of nonmaterial information are pieced together to make an investment recommendation.

anshultongia

Judy Gonzales is a portfolio manager with Brenly Capital and works on Johnson Company's account. Brenly has a policy against accepting gifts over $25 from clients. The Johnson portfolio has a fantastic year, and in appreciation, the pension fund manager sent Gonzales a rare bottle of wine. Gonzales should:

A) inform her supervisor in writing that she received additional compensation in the form of the wine.

B) present the bottle of wine to her supervisor.

C) return the bottle to the client explaining Brenly's policy.

---

By not returning the bottle she would be violating the Standard on disclosure of conflicts to the employer, which states that employees must comply with prohibitions imposed by their employer.