anshultongia

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

B) can publish his conclusion in a research report.

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

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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.

anshultongia

Michael Smyth is Senior Vice President of equity investments at Systematic Investment Advisors, Inc. (SIA). He manages a team of analysts and portfolio managers and is responsible for maintaining and developing client relationships. SIA is located in a small European country and provides investment management services to high net worth individuals. Smyth is also a Level III Candidate for the CFA designation.
One of Smyth’s clients is the Muller-Durand family. He had a long relationship with Helmut Muller. Before Muller’s untimely death, he gave Smyth full discretion over his portfolio based on an investment policy statement that had been refined continuously over the years.

• Muller was the president of a publicly traded manufacturing company, Comax, and 20% of his portfolio’s assets were invested in Comax equity. His contract with Comax prohibited his selling his Comax shares while he was employed.
• Muller had little liquidity needs. His children were grown and his salary at Comax was sufficient to cover his annual expenditures as well as contribute to his investment portfolio.
• A former Chartered Accountant, Muller had been extremely knowledgeable and comfortable with the investment decision-making process.
• Smyth owns 10,000 shares of Comax and serves on Comax’s board.
• Smyth played golf with Muller on a regular basis and, with Muller's help, developed many client relationships from these outings.

SIA has a soft dollar arrangement with a local brokerage firm, First Brokerage, owned by Smyth’s sister.

• Muller had agreed in writing that all trades in his portfolio would be directed to First Brokerage.
• Smyth purchased new carpets for his office with client brokerage. He believes that his managers make better investment decisions when their environment is pleasant and comfortable.
• Smyth attended an industry conference in the Bahamas with soft dollars. The program is devoted to improving management of the investment advisory firm. He believes that a well-run firm makes better investment decisions.
• Smyth consistently uses soft dollars to purchase research reports from an independent research firm that does in-depth analysis of a company’s financial reporting. Several of his managers have commented on the quality and usefulness of these reports to their analysis and decision-making.

Smyth has an appointment to meet with Muller’s widow, Wilhelmina Durand, who, as an artist, left management of their financial assets to her husband. She is meeting with Smyth to better understand her financial position.Which of the following Standards is most relevant regarding Smyth’s meeting with Durand?

A) Standard III(C), Suitability.

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

C) Standard III(E), Preservation of Confidentiality.

Standard III(C), Suitability, is most relevant for Smyth's meeting with Wilhelmina Durand. This Standard requires Smyth to make a reasonable inquiry into Durand’s financial situation, investment experience, and investment objectives prior to making any recommendations about her portfolio. Smyth must also consider the appropriateness of the existing portfolio and investment policy statement for Durand. Standard III(A) also has some relevance since Smyth is in a position of trust with respect to Durand, and Smyth must ensure that his and SIA’s goals do not conflict with Durand’s. (Study Session 1, LOS 2.a,b)

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Standard VI(A), Disclosures of Conflicts, requires Smyth to disclose all matters, including beneficial ownership of securities of other investments, that could be expected to impair the member’s ability to make unbiased and objective recommendations. Which of the following matters would least likely be disclosed to Durand?

A) Smyth owns shares in Comax.

B) SIA has a soft dollar arrangement with a brokerage firm owned by Smyth’s sister.

C) Smyth played golf with Muller on a regular basis and developed client relationships.

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Smyth playing golf with Muller is not a conflict with respect to his relationship with Durand and he need not disclose to her that he played golf with Muller. Muller was his client at the time and there was full disclosure that Smyth developed new client relationships. All the other matters must be disclosed. Smyth must get Durand’s approval to continue to direct brokerage from her portfolio to his sister’s firm. As a director and shareowner of Comax, he has a potential conflict of interest when making a recommendation regarding Durand’s Comax shares. (Study Session 1, LOS 2.a,b)

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Which of the following best describes Smyth’s compliance with the CFA Institute Soft Dollar Standards in his use of client brokerage?

A) Purchase of research reports is an allowable use of client brokerage.

B) Purchase of research reports and attending the conference are allowable uses of client brokerage.

C) Purchase of both research reports and carpeting are allowable uses of client brokerage.

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The primary principles regarding use of client brokerage are (1) brokerage is the property of the client and (2) the investment manager has an ongoing responsibility to seek to obtain best execution, minimize transaction costs, and use client brokerage to benefit clients. Consequently, contingent on disclosure of the soft dollar arrangement to clients whose portfolios might be affected, the CFA Institute Soft Dollar Standards permit client brokerage only to be used to purchase research; that is, goods and services, the primary use of which directly assists the investment manager in the investment decision-making process and not in the management of the firm. Therefore, the only allowable use of soft dollars by Smyth is purchase of the research reports. The purchase of the carpeting to create a more pleasant environment would, at best, only contribute indirectly to the investment manager and use of client brokerage is not permitted. Conferences may sometimes be considered research if their programs are designed to improve the investment decision-making process. In Smyth’s case, the conference he attended only had sessions on the management of the investment management firm, not the investment decision-making process. (Study Session 1, LOS 3.b)

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Smyth would like to continue to direct brokerage from Durand’s portfolio to his sister’s brokerage firm. In order to continue the arrangement and comply with the CFA Institute Soft Dollar Standards, which of the following disclosures are required?

A) Smyth must clearly disclose, with specificity and in “plain language,” its policies with respect to all Soft Dollar Arrangements.

B) Smyth must clearly disclose that his duty as the investment manager is to continue to seek to obtain best execution.

C) Smyth must disclose that directed brokerage arrangements that require the investment manager to commit a certain percentage of brokerage might affect his ability to seek to obtain best execution.

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Investment managers are required to clearly disclose, with specificity and in “plain language,” policies with respect to all Soft Dollar Arrangements. Because brokerage is an asset of the client, not the investment manager, the practice of client-directed brokerage does not violate the CFA Institute Soft Dollar Standards. However, directed brokerage arrangements have no required disclosures beyond those required for other soft dollar arrangements. Several disclosures are recommended. Because directed brokerage may impede the investment manager’s ability to seek to obtain best execution, which is one of the investment manager’s fundamental responsibilities, it is recommended that investment managers disclose his duty to seek to obtain best execution and that arrangements to commit a certain percentage of brokerage may affect his ability to do so. For all soft dollar arrangements, it is recommended, but not required, that, on request from the client, investment managers provide a description of the product or service obtained through brokerage generated from the client’s account. (Study Session 1, LOS 3.b)

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After determining Durand’s risk and return objectives, liquidity needs, tax considerations, and unique circumstances, Smyth has decided that he must reduce Durand’s holdings of Comax shares. He has several other clients, whom he met through Muller, who also have significant holdings in Comax. Smyth has also decided to reduce his own holdings in Comax since his term as a director of Comax will be up in June. He does not plan to seek reappointment but as a member of the audit committee he is privy to information about a tender offer. Smyth realizes this is a complex situation.
Of the following Standards, determine which would least likely help Smyth decide what actions with respect to selling shares of Comax would be in compliance with the CFA Institute Standards of Practice.

A) Standard III(B), Fair Dealing.

B) Standard VI(A), Disclosure of Conflicts.

C) Standard III(C), Suitability.

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Standard III(C), Suitability, is the standard least likely to provide Smyth with guidance when he considers selling Durand’s holdings of Comax. This standard describes members’ responsibilities in developing appropriate recommendations and taking suitable actions. To reach the point where he has decided to sell Durand’s shares, Smyth would already have met these requirements. He has determined Durand’s and his other clients’ requirements and has recommended an appropriate and suitable investment action. His concern is how to implement his recommendation and be in compliance with the Standards of Professional Conduct.

Smyth has several problems with respect to selling shares of Comax from Durand’s portfolio and the portfolios of his other clients. First, he must comply with Standard III(B) and deal fairly and objectively with all clients and prospects when taking this investment action. Smyth must disclose his ownership of Comax to all affected clients according to Standard VI(A) and ensure that transactions for clients take precedence over transactions on his own behalf according to Standard VI(B). (Study Session 1, LOS 2.a,b)

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Since Smyth is a director of Comax and a member of the audit committee, what additional Standard is specifically applicable to Smyth’s decision to sell his and his clients’ shares of Comax?

A) Standard VII, Responsibilities as a CFA Institute Member or CFA Candidate.

B) Standard IV, Duties to Employers.

C) Standard II, Integrity of Capital Markets.

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As a director and member of Comax’s audit committee, Smyth possesses material nonpublic information about a tender offer. Therefore, Smyth must be particularly concerned about complying with Standard II(A), Material Nonpublic Information. Under this standard, Smyth may not trade nor cause others until the information becomes public. (Study Session 1, LOS 2.a,b)

anshultongia

Christopher Lance, CFA, Chuck Cunningham, and Lucy Hunt, CFA, went to graduate school together and have remained close friends ever since. Lance and Hunt earned their CFA charters this past June and Cunningham is a Level III candidate. Lance, Cunningham, and Hunt have dinner every month at Cunningham’s country club, one of the most prestigious in the metropolitan area where they live.Lance was a well-respected research analyst covering the pharmaceutical industry at an international broker-dealer before accepting a job as Vice President, Investor Relations, at IMed, a large multinational pharmaceutical company that he covered as an analyst. Since he started coverage of IMed, Lance had consistently been named “top analyst” of the pharmaceutical industry by Investment Professional, the leading journal of the investment industry.
In his new position at IMed, Lance is the principal spokesperson on the company’s financial performance and is responsible for developing and maintaining good relationships with the company’s shareholders, especially large institutional investors, and with approximately 30 research analysts who issue research reports and make recommendations about publicly-traded equity and debt securities. It is April 12th and Lance is preparing to conduct the next conference call following the release on April 15th of IMed’s quarterly earnings. Participating in the call will be Lance’s former colleague and good friend, Cunningham, and the other analysts who cover IMed. In addition, Hunt, a portfolio manager at Primary Pensions, a major institutional investor, has told Lance she will also be on the call. Primary Pensions has accumulated the largest single holding in IMed equity. Lance is concerned about this call because IMed’s president, Bill Norton, has just told the management team that sales of Mediplex, its new cancer drug, have begun to sag after rumors of serious side effects, including death, have hit the press. Norton told Lance that if sales continue to fall that this year’s earnings would be considerably less than the current consensus forecast. Norton is also concerned that the regulatory agency that approves the sale of drugs will repeal IMed’s license to market Mediplex.
Cunningham is a research analyst at Lance’s former employer and has taken over coverage of IMed following Lance’s resignation. Until his promotion to Lance’s former position, Cunningham was a junior analyst covering the oil and gas industry. Although knowledgeable about fundamental financial analysis and equity valuation, he is unfamiliar with IMed and the pharmaceutical industry. Cunningham has been reviewing the past 5 years of IMed’s financial statements and Lance’s research reports in preparation for participating in IMed’s quarterly conference call to discuss its quarterly earnings release. Cunningham is under considerable pressure from his employer to meet or exceed Lance’s reputation and be rated “top analyst” by Investment Professional. His firm’s currently rates IMed as a “strong buy” based on Lance’s last research report. Based on his own preliminary analysis, Cunningham has a hard time justifying a “hold” recommendation. He is puzzled by several of the earnings adjustments that Lance made to achieve his target share price for IMed. He plans to ask Lance about these adjustments at their dinner on April 14th.Hunt has been managing a large cap equity portfolio at Primary Pensions for 5 years. Based almost exclusively on Lance’s buy recommendations in his research report, she began purchasing IMed several years ago just before it made several major acquisitions that contributed to its phenomenal growth and to her portfolio’s performance over the last 5 years. Since Lance moved to IMed, Hunt has been doing some due diligence and has become concerned that the growth of IMed’s earnings is overly dependent on sales of Mediplex. Based on her enthusiasm for IMed and her portfolio’s performance, other managers at Primary Pensions have also taken considerable positions in IMed to the extent that Primary Pensions is IMed’s largest single stockholder. If she is right, Hunt knows that she will need to reduce her portfolio’s holdings. Since Primary Pensions prohibits its employees from owning individual equity securities, Hunt has no personal investment in IMed. However, she had boasted about IMed’s performance to her mother and is aware that her mother’s investment club invested 10 percent of the club’s assets in IMed. Hunt is preparing her questions for the upcoming conference call and her exit strategy if the answers confirm her fears.
Lance, Cunningham, and Hunt met for their regular monthly dinner on April 14th. Cunningham opens the after dinner discussion by questioning Lance about his new job and asks him if he and Hunt should anticipate any surprises at tomorrow’s conference call. Cunningham specifically asks Lance if IMed will meet or beat analyst expectations and the consensus earnings forecast. Lance responds that, under current securities laws, he is unable to discuss details of IMed’s performance with Cunningham and Hunt and that they’ll both be briefed with the other analysts and shareholders on tomorrow’s call. Shortly thereafter, the three friends say their good-byes. Hunt and Cunningham wish Lance well on the next day’s conference call.
What Standard governs Lance’s response to Cunningham’s question and is he in compliance?

Standard

Compliance

A) VII: Responsibilities as a CFA Institute Member or CFA Candidate Yes

B) I: Professionalism Yes

C) III: Duties to Clients No

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Lance’s response to Cunningham’s question is covered under Standard I(A) which requires members to maintain knowledge of and comply with applicable laws and regulations (including the CFA Institute’s Code of Ethics and Standards of Professional Conduct). In this case, Lance specifically references the requirements of securities laws not to discuss IMed’s performance in advance of the quarterly conference call. If he had done so, he would have disclosed material nonpublic information, since he knows that information about the decline in sales of Mediplex will have an adverse affect on IMed’s share price. In addition, Standard I(A) prohibits Lance from knowingly participating or assisting in any violation of such laws. If Lance had responded in any other way to Cunningham’s question he would potentially have assisted Cunningham and Hunt in violating Standard II(A), Material Nonpublic Information. (Study Session 1, LOS 2.a,b)

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Hunt’s concerns about IMed increased after her dinner with Cunningham and Lance. She believes that Lance would have told them if IMed’s earnings would meet analysts’ expectations. She is convinced that Lance’s failure to “look her in the eye” when he answered Cunningham’s question confirms her suspicions that IMed is in trouble and is determined to start selling Primary Pensions’ shares of IMed first thing in the morning.
Based on her conclusions from the dinner with Lance and Cunningham, which of the following best describes the actions Hunt should take regarding IMed?

A) Hunt cannot sell IMed and cannot encourage others to sell IMed.

B) Hunt can both tell her mother to sell the investment club’s shares of IMed and sell the shares in the Primary Pensions’ portfolio.

C) Hunt can sell the IMed shares in the Primary Pensions’ portfolio but cannot encourage her mother to sell the investment club’s shares.

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According to Standard V(A), Diligence and Reasonable Basis, Hunt is required to exercise diligence and thoroughness in taking investment actions and she is required to have a reasonable and adequate basis, supported by appropriate research and investigation, for such actions. Her conclusions about Lance’s response and actions during the dinner do not constitute a reasonable and adequate basis for selling IMed shares from Primary Pensions’ portfolio.

In addition, even if Hunt were to reach the same conclusion after developing a reasonable basis for selling IMed shares, she would be able to sell Primary Pensions’ share of IMed but would be prohibited under Standard VI(B), Priority of Transactions, from telling her mother and encouraging her to sell the investment club’s shares until after she sells the shares in the Primary Pensions portfolio. Members must ensure that transactions for clients and employers have priority over transactions in securities or other investments of which a member is a beneficial owner so that such personal transactions do not operate adversely to their clients’ or employer’s interests. Hunt’s relationship to her mother could reasonably be assumed to constitute an “indirect” interest in the investment club’s securities. (Study Session 1, LOS 2.a,b)

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If Lance had disclosed material that was nonpublic information about the decline of sales of Mediplex and its effect on IMed’s earnings, Cunningham would have been least likely to be obligated to do which of the following?

A) Make reasonable efforts to achieve public dissemination of material nonpublic information disclosed in a breach of duty.

B) Inform the appropriate regulatory authority that Lance had violated securities laws.

C) Not trade in shares of IMed.

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Unless required by law, the Code of Ethics and Standards of Professional Conduct do not require members to report legal violations to the appropriate governmental or regulatory authority. Such disclosure may be prudent in certain circumstances. Cunningham would be prohibited under Standard II(A), Material Nonpublic Information, from trading in the securities of IMed or causing others to trade by issuing a research report incorporating the material nonpublic information before that information is made public by IMed. Cunningham would also be required to make reasonable efforts to have Lance and IMed make public disclosure of the information. (Study Session 1, LOS 2.a,b)

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Dinners with Lance, Cunningham and Hunt at Cunningham’s exclusive country club usually cost more than $200 per person. When he and Lance worked for the same broker-dealer and Hunt was a client, Cunningham has always paid the bill.
Which Standard will Lance violate if he continues to allow Cunningham to pay for dinner?

A) Standard IV(B), Additional Compensation Arrangements.

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

C) Standard III(B), Fair Dealing.

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Over the course of a year, Lance will have received gifts of more $2400 from Cunningham. Standard I(B), Independence and Objectivity, covers receipt of gifts from external parties that may try to influence members’ professional actions to the possible detriment of Lance’s employer, IMed, and the investing public. Even though Lance and Cunningham are long-time friends and former colleagues at Cunningham’s employer, the potential for undue influence exists. Lance should be particularly concerned given Cunningham’s inappropriate question regarding IMed’s earnings. In determining how best to comply with Standard I(B), Lance should no longer permit Cunningham to pay for his dinner and, given the prestigious nature of the country club, should also consider moving the monthly dinner to a different venue to avoid the appearance of impropriety. (Study Session 1, LOS 2.a,b)

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Cunningham arrives in his office early on the day of the conference call. He has conducted an extensive analysis of IMed’s financial statements and has reviewed his assessment of Lance’s conclusions in the report that Lance issued before his departure. He regrets having asked Lance about IMed’s earnings at the previous night’s dinner and decides to ask Lance some very pointed questions in public during the conference call, especially regarding Lance’s inclusion of some significant non-recurring gains in operating income. Based on his own knowledge and experience, Cunningham doesn’t believe that Lance’s target price for IMed would be sustained. He decides that, if he doesn’t get clear answers to his questions on the call, he will recommend to client’s in his research report that IMed’s rating drop to “hold”. Cunningham’s research report and recommendation is sent to all of his firm’s clients and is not directed to a specific client.
In conducting his analysis and developing his recommendation, which of the following requirements of Standard V, Investment Analysis, Recommendations and Actions, would Cunningham least likely be concerned with?

A) Consider the appropriateness and suitability of investment recommendations for each client.

B) Clearly differentiate fact from opinion in making recommendations.

C) Exercise diligence and thoroughness in making investment recommendations.

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The research report and recommendation prepared by Cunningham is sent to all relevant clients of the broker-dealer and is not directed toward a particular client or portfolio. In simple terms, Cunningham’s responsibility is to develop a forecast of IMed’s share price and to make a general recommendation to buy, sell, or hold shares of IMed based on the difference between the current market price and his forecast. Cunningham does not interact with individual clients and is not making a specific recommendation to a client to take an investment action. He is not expected to have knowledge of the risk and return objectives, portfolio holdings or unique circumstances and constraints of individual clients. Therefore, he does not have a responsibility to consider the suitability of his recommendation for each client of the firm. Cunningham’s research report should contain sufficient information so that individual clients and their investment advisors can judge the appropriateness and suitability to the client’s particular situation. (Study Session 1, LOS 2.a,b)

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Lance is very nervous before the conference call. Norton, IMed’s president, has told him that he must not disclose the decline in sales of Mediplex.
During the call, Hunt asks Lance whether the rumors of the side effects of Mediplex are true and whether these rumors have negatively impacted sales. Lance assures Hunt that Mediplex sales are strong and that IMed is confident that sales will continue to rise for the remainder of the year.
Which of the following best describes Lance’s actions when he stated that sales of Mediplex were strong?

A) Lance violated Standard I(D), Misconduct.

B) Lance complied with Standard IV(A), Loyalty to Employer.

C) Lance violated Standard III(B), Fair Dealing.

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Lance violated Standards I(D), Misconduct, when he lied about the sales of Mediplex. Under Standard I(D), members are prohibited from engaging in any professional conduct involving dishonesty, fraud, deceit, or misrepresentation or commit any act that reflects adversely on their dishonesty, trustworthiness, or professional misconduct. Neither Standard IV(A), Loyalty to Employer, which relates to independent practice that could result in compensation or other benefit in competition with their employer and does not relate in this situation nor Standard III(B), Fair Dealing, which relates to dealing fairly and objectively when making recommendations to clients, are relevant or apply to this situation. Lance is also NOT in compliance with Standard I, Professionalism, because he violated Standard I(D), Misconduct. (Study Session 1, LOS 2.a,b)

anshultongia

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

B) can publish his conclusion in a research report.

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.

anshultongia

Greg Hartsburg, a CFA charterholder, is a leading health-care industry analyst for Reynolds and Co., a New York-based brokerage firm. He has ten years of industry experience and has appeared on the Wall Street Journal’s roster of all-star analysts for four straight years.
Hartsburg initiates coverage on Northern Lights Medical Equipment, a Minnesota-based company that designs medical equipment. Hartsburg owns shares of Northern Lights in his personal trading account, a stake of which his company is aware.
Maria Voltaire, a junior analyst working under Hartsburg, has asked the senior analyst to help her prepare for the 2009 Level III CFA exam. He makes himself available to answer her questions on specific topics during the course of her study and gives her two days off, with pay, to study during the week before the exam. He also discusses with her in detail his recollection of the topical areas covered on the 2007 Level III exam, which he took and passed.
One of Reynolds’ traders tells Hartsburg that he believes Voltaire is trading in her own account based on information she gathers from research reports written by analysts in the office before the reports are publicly released.
Hartsburg attends an analysts’ conference in Toronto. At dinner he is seated close to a table that includes a number of leading analysts in the health-care industry. Hartsburg overhears parts of the conversation, in which the group discusses new trends in the health-care industry as a result of the changing political climate in Washington. The consensus at the table is that trends in the industry are favorable over the next four or five years.
Hartsburg has been in the process of preparing his own detailed industry analysis in which he reaches similar conclusions. The conversation he overhears confirms his own analysis, though one of the analysts, Phil Houston, makes some points about competition in the medical-device area that Hartsburg had not considered. On the plane home that evening, Hartsburg rereads the financial statements of two companies he covers, then concludes that Houston’s points about competition are correct.
When he returns home, Hartsburg completes his industry report. In the report he wants to use Houston’s ideas. But Houston works for a rival firm, and as a matter of policy, Reynolds does not refer to rival companies in its reports. So Hartsburg pulls some numbers from 10-K reports for context, starts with Houston’s premise, and makes a similar point in his own words.
Hartsburg is planning to leave Reynolds at the end of the month to take a position as a portfolio manager at Lone Pine Investments. He has disclosed to Reynolds, in the form of an e-mail message to his supervisor, his intention to take with him to his new position a fundamental factor model that he developed before coming to Reynolds and further refined during his time at Reynolds.
He also discloses plans to take with him three sample client investment policy statements (with the client names eliminated) to use as templates in the development of policy statements for his new clients at Lone Pine. In the e-mail to his supervisor, Hartsburg promises he will not solicit the business of these three clients.
Reynolds hires an outside firm to create a company website. Hartsburg is featured in promotional materials touting the firm’s performance. The material reads, in part, “Greg Hartsburg is a Chartered Financial Analyst (CFA) with 10 years of experience in the investment industry. He has appeared on the Wall Street Journal’s roster of all-star analysts for four years in a row.”In order to conform to the Code and Standards with relation to Northern Lights stock, Hartsburg MUST:

A) ask the company to assign another analyst to cover the stock in an effort to avoid the conflict of interest.

B) directly disclose his holdings or have his company issue a generic disclaimer about analyst stock ownership.

C) sell the shares before issuing the report.

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If the brokerage uses language related to the analysts’ potential stock ownership, that should satisfy the requirements of Standard VI(A): Disclosure of Conflicts. The other answers would satisfy the Standard, but are not REQUIRED. Requiring the selling of shares or requesting another analyst is overkill, as analysts are not prohibited from owning stocks they cover. (Study Session 1, LOS 2.a,b)

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Hartsburg’s efforts to help Voltaire pass the CFA exam:

A) violate both Standard I(D): Misconduct and Standard VII(A): Conduct as Members and Candidates in the CFA Program.

B) conform to all relevant standards.

C) conform to Standard I(D): Misconduct, but violate Standard VII(A): Conduct as Members and Candidates in the CFA Program.

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Hartsburg violated Standard VII(A) when he discussed with Voltaire in detail his recollection of the topical areas covered on the 2007 Level III exam. (Study Session 1, LOS 2.a,b)

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With respect to the allegation that Voltaire is front-running research recommendations, Hartsburg’s first priority, under CFA Institute Standard IV(C) concerning supervisory responsibilities, should be to:

A) report the situation to his supervisor.

B) freeze Voltaire’s trading account and begin documenting her conduct as a precursor to possible termination.

C) promptly initiate an investigation.

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Standard IV(C) calls for supervisors to “prevent any violation of applicable statutes, regulation, or provisions of the Code and Standards.” While reporting the situation to a superior and discussing the situation with Voltaire are good ideas, he should first investigate the situation to see if these actions are warranted. Freezing Voltaire’s trading account is premature, as Hartsburg has not yet investigated the situation to find out whether a violation is actually taking place. (Study Session 1, LOS 2.a,b)

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Regarding Hartsburg’s report on the health-care industry, his actions:

A) conform to Standard I(C) concerning misrepresentation; and conform to Standard II(A) concerning the use of nonpublic information.

B) fail to conform to Standard II(A) concerning the use of nonpublic information; and conform to Standard V(A) concerning diligence and reasonable basis.

C) fail to conform to Standard I(C) concerning misrepresentation; but conform to Standard V(A) concerning diligence and reasonable basis.

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While Hartsburg used Houston’s ideas in his report, he did not quote or paraphrase Houston. That is not a violation of the plagiarism standard. Houston’s statement was innocently overheard in a public place, and as such is not material nonpublic information. Hartsburg has a reasonable basis for his research, and the conversation he overheard merely confirmed his own analysis. The independence standard does not apply in this situation. (Study Session 1, LOS 2.a,b)

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Which statement about Hartsburg’s actions prior to his leaving Reynolds is most accurate? His actions regarding the factor model:

A) conform to Standard IV(A): Loyalty to Employer, as do his actions regarding the investment-policy statements.

B) do not conform to Standard IV(A): Loyalty to Employer, but his actions regarding the investment-policy statements do.

C) do not conform to Standard IV(A): Loyalty to Employer, nor do his actions regarding the investment-policy statements.

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According to Standard IV(A): Loyalty to Employer, Hartsburg cannot, without the consent of Reynolds, his current employer, take with him any property that rightfully belongs to Reynolds. Merely disclosing to his supervisor his intention to take the model and the investment policy statements with him does not constitute consent on the part of Reynolds, and as such could be considered misappropriation. Therefore his actions regarding both the model and the policy statements fail to conform to Standard IV(A). (Study Session 1, LOS 2.a,b)

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Reynolds’ promotional material conforms to:

A) Standard I(C) regarding misrepresentation, but not Standard III(D) concerning performance presentation.

B) Standard I(C) regarding misrepresentation and Standard III(D) concerning performance presentation, but violates at least one other standard.

C) all Standards.

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The material fails to conform to Standard VII(B), Reference to CFA Institute, the CFA Designation, and the CFA Program. The Chartered Financial Analyst designation should always be used as an adjective, never as a noun. It would be proper, for instance, to print, “Greg Hartsburg is a CFA charterholder.” The statements about industry experience and the all-star analyst list are statements of fact. Reynolds has not misrepresented the services the company or Hartsburg is capable of performing, its qualifications, or Hartsburg’s professional credentials. Hence they conform to Standard I(C). The statement also does not contradict Standard III(D) concerning performance presentation in any way. (Study Session 1, LOS 2.a,b)

anshultongia

Lon Smith is an analyst in the Research Department of Lincoln & Co., a large investment firm. He has just completed a temporary assignment in Lincoln's Corporate Finance Department related to FinSoft, a computer software company whose recent operating record has reflected lagging sales volume and heavy product development expenses. Smith has marked his FinSoft notes and work sheets "CONFIDENTIAL / CORPORATE FINANCE DEPARTMENT" and sent them to the company file in the Research Department. This material reveals that FinSoft is about to receive a major contract for an innovative software program that will have a very significant positive impact on earnings as well as on the company's visibility and stature in the industry.
Jay Jones, a CFA candidate and a portfolio manager for Lincoln, has come upon these notes and work sheets while reviewing the FinSoft research file. Jones had been considering sale of the stock from the accounts under his management, but realizes after reading the file material that the recent weakness in operating results is about to be reversed and that the company's prospects are actually quite favorable. Perhaps, he thinks, he should add to his clients' FinSoft positions instead of considering their sale.
Jones briefly reflects on the matter of "inside information" in relation to perhaps buying more of the stock instead of selling it, but his recollection is hazy and Lincoln has no formal guidelines on the subject to which he can refer. Based on the circumstances, Jones believes he is free to use this new knowledge for the benefit of Lincoln's clients.
Based on CFA Institute Standards of Professional Conduct, which of the following is NOT correct?

A) There is misappropriation of information by Jones because the file is marked "Confidential / Corporate Finance Department."

B) There is no breach of duty if traded on because Jones did not conduct the research that produced the information.

C) The information is material because the new software is likely to significantly increase FinSoft's future earnings.

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Jones has a derivative duty not to trade or cause others to trade on material nonpublic information. It does not matter that he did not conduct the research.

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Based on the information presented in this situation, Jones has an obligation to do all of the following EXCEPT:

A) wait to trade on the information until after a reasonable period has passed.

B) encourage public dissemination of the information.

C) encourage his employer to review the compliance procedures as they relate to material nonpublic information issues.

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Jones has an obligation to not trade on the information until after he is sure the information has been made public.

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Based on the information presented, Lincoln should adopt a set of guidelines on inside information that include each of the following EXCEPT:

A) develop criteria for identifying inside information.

B) have in place a supervisor or compliance officer who has the authority and responsibility to decide whether information is material and nonpublic.

C) prohibit exchange of personnel, even temporary, between investment banking and institutional money management departments.

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There is no need to avoid transfer of personnel as long as proper safeguards and procedures are observed.

anshultongia

June Bird is a pension consultant asked to advise on the Backwater County Pension Plan. Bird notices that 20 percent of the plan's assets are invested in privately held local businesses. Bird is concerned about the lack of liquidity and diversification caused by such an investment. She learns that state law allows investing in local businesses and county law requires at least one-fifth of the plan's assets to be dedicated to investing in local businesses. Bird:

A) should file a written complaint to the Department of Labor pointing out that the law is in conflict with the Employee Retirement Income Security Act (ERISA).

B) should recommend that the trustees resign or risk being sued for violating the Prudent Expert Rule.

C) can continue to advise the pension plan as best she can with the restrictions.

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According to Standard III(A), Loyalty, Prudence, and Care, Bird can continue to serve as a consultant to the plan, but must follow the applicable law.

anshultongia

The following information pertains to the Galaxy Trust, a trust established by Stephen P. House and managed by Gamma Investment LLC:

• At the time the trust was established House provided $5 million in cash to fund the trust, but Gamma was aware that 93% of his personal assets were in the form of Oracle stock.
• Gamma has been asked to view his funds and the trust as a single entity for planning purposes, since House’s will stipulates that all of his estate will pass to the trust upon his death.
• The investment policy statement, developed in September 1996, stipulates that the trust should maintain a short position in Oracle stock and use the proceeds to diversify the trust more adequately.
• House was able to sell all of his Oracle shares back to the corporation in January 1999 for cash.
• The policy statement redrawn in September 1999 continues to stipulate that the trust hold a short position in Oracle stock.
• House has given the portfolio manager in charge of the trust an all expenses paid vacation package anywhere in the world each year at Christmas. The portfolio manager has reported this fact in writing to his immediate supervisor at Gamma.

Which of the following is most correct? The investment manager is:

A) in violation of the Code and Standards by not properly updating the investment policy statement in light of the change in the circumstances but is not in violation with regard to the acceptance of the gift from House.

B) in violation of the Code and Standards by not properly updating the investment policy statement in light of the change in the circumstances and is in violation with regard to the acceptance of the gift from House.

C) not in violation of the Code and Standards for not properly updating the investment policy statement in light of the change in the circumstances and is not in violation with regard to the acceptance of the gift from House.

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The investment manager is in violation of the Standard requiring him to make a reasonable inquiry into the client’s financial situation and update the investment policy statement since such a dramatic change in the client’s circumstances would undoubtedly alter the investment policy statement and would probably eliminate the need to hold a short position in Oracle. The investment manager is not in violation of the Standard concerning additional compensation, since the gift has been reported to his supervisor and has come from a client. If there was a failure to report such a gift, if the firm had a rule in place against the acceptance of gifts from clients, or if the gift had come from a non-client, there would be a violation of the standard.

anshultongia

Jordan Conomos is the new trustee for the Grant Trust, which has both current beneficiaries and remaindermen. Up until now, the trust has been entirely invested in long-term tax-free municipal bonds. Conomos decides to put 30 percent of the assets in common stocks, with the justification that taxes should be the concern of the trust beneficiaries and not the trust, and the trust needs some diversification and growth. Conomos is:

A) not violating his fiduciary duty.

B) violating his fiduciary duty by not investing solely for the purposes of the current beneficiaries.

C) violating his fiduciary duty by not considering taxes.

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The trustee must consider tax liabilities of beneficiaries. However, he should also provide diversification and be concerned with the desires of the remaindermen. (Remaindermen refers to the group that is to receive the remainder of the trust once its term is complete. Of course, some trusts never expire so not every trust has remaindermen.)

anshultongia

Steve Wynn, CFA, is an investment advisor and Jennifer Carey has been a client of his for three years. Carey has shown an interest in international stocks, so they agree to consider putting a portion of Carey's portfolio in foreign stocks. Wynn makes sure that Carey is aware of the currency and political risks inherent in foreign investing before proceeding. They jointly agree to purchase a small portfolio of stocks in the country of Bellagio because one of the brokerage houses that Wynn uses has a great deal of fundamental research on companies domiciled there. Six months later it is revealed in the news media that Bellagio has had severe insider trading problems which have contributed to the loss on the portfolio. Wynn has:

A) violated the Standards by not informing Carey about the insider trading risks and contributing to the problem of insider trading.

B) not violated the Standards.

C) violated the Standards by not informing Carey about the insider trading risks, but not by contributing to the problem of insider trading.

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Wynn should have known about the risks and should have informed Carey of the risks. However, merely investing in a market in which insider trading is prevalent is not a violation of the Standards.

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