bmaggie

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

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

B) not violating the Standards.

C) violating the Standard on suitability.

---

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

bmaggie

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 company’s 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 company’s 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, and I(A), Knowledge of the Law.

C) Standard I(C), Misrepresentation, only.

---

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.

bmaggie

Lynne Jennings is a research analyst for a large brokerage company following the chemical industry. While flying through Chicago, Jennings visited her sister who works in the airport hospitality center for an airline. Many meetings take place at the center on any given day. At the center Jennings saw several senior officers who she knows are from the largest and fourth largest chemical companies walk into a conference room. She concluded that negotiations for an acquisition might be taking place. She told her sister this, and her sister asked her not to disclose how she got the information. Jennings should:

A) write a research report describing that she witnessed the senior officers together in the hospitality center, but need not mention in the report that her sister is an employee of the center.

B) not write a research report disclosing the meeting.

C) write a research report describing that she witnessed the senior officers together in the hospitality center, and must mention in the report that her sister is an employee of the center.

---

The information is material and nonpublic, therefore, Jennings cannot trade or cause others to trade.

bmaggie

Betsy Fox is an investment advisor who has a client, Don Gordon, who is an employment lawyer. At lunch, Fox noticed Gordon and the Chief Financial Officer of Blue Star Company at the next table. She overhears them talking and ascertains that Blue Star is about to announce higher than expected earnings. Before the earnings release, Gordon contacts Fox and asks her to purchase 3,000 shares for his portfolio. Fox:

A) can purchase shares for Gordon, but cannot ever purchase shares for her personal account.

B) must refuse to purchase shares for Gordon.

C) can only purchase shares for her personal account after informing all of her clients about the potential of the increase in earnings.

---

According to Standard II(A), Material Nonpublic Information, Fox cannot act or cause others to act on material nonpublic information until the information is made public. The information overheard at lunch was material and nonpublic; therefore, Fox must wait until the information is made public before accepting Gordon’s order.

bmaggie

June Carter passed Level III of the CFA examination in June but will not complete her work experience requirement until August of next year. Carter can state on her resume that she:

A) passed Levels I, II, and III of the CFA examination.

B) will be a CFA charterholder in August of next year as long as she is on track to complete her work experience.

C) is a CFA in waiting.

---

A candidate cannot use any form of the CFA designation until receiving her charter.

bmaggie

Paul Drake is employed by a company to provide investment advice to participants in the firm's 401(k) plan. Company stock is one of the investment options in the plan. Drake feels that the stock is too risky for employees to own in their 401(k) plan and starts advising them to pull out of the stock. The Treasurer of the company calls Drake and tells him that he will be fired if he continues making such advice because he is violating his fiduciary duty to the company. Drake should:

A) make sell recommendations but point out that the company Treasurer has a differing and valid point of view.

B) tell employees that he cannot provide advice on company stock because of a conflict of interest.

C) continue to advise employees to sell their stock.

---

Although Drake is paid by the company, his fiduciary duty is to the plan participants. His advice cannot be compromised by business considerations, otherwise he will be violating the Standard on loyalty, prudence, and care.

bmaggie

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 TRUE?

A) There is no violation of the Standards.

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

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.

bmaggie

Brenda Simone is a money manager and the Blue Streets Pension Fund is one of her clients. The director of the pension fund calls Simone and asks her to use a particular broker so that the fund can obtain some research services with the soft dollars from that broker. Simone believes that the desired broker will provide the same price and execution as the normal broker that Simone uses. Simone does as the client wishes. Simone has:

A) not violated the Standards as long as the research provided by the broker will benefit the plan beneficiaries.

B) not violated the Standards as long as the research provided by the broker will benefit Blue Streets.

C) violated the Standards.

---

Simone must ensure that the research benefits the parties to whom she owes fiduciary duty, which are the plan participants.

bmaggie

Dan Jeffries is a portfolio manager who is being sued by one of his clients for inappropriate investment advice. The Professional Conduct Program of CFA Institute is investigating Jeffries for the same offense. Jeffries settles the lawsuit with the client while the Professional Conduct Program investigation is ongoing. When the Professional Conduct Program staff questions Jeffries about the problematic investment advice, Jeffries claims he cannot talk about it because doing so would violate the confidentiality of his client. Jeffries has:

A) violated the Standards by refusing to talk about the case with the Professional Conduct Program, but not by executing the settlement agreement.

B) not violated the Standards by executing the settlement agreement or by refusing to talk about the case with the Professional Conduct Program.

C) violated the Standards by executing the settlement agreement, but not by refusing to talk about the case with the Professional Conduct Program.

---

Because the Professional Conduct Program will maintain client confidentiality, Standard III(E) Preservation of Confidentiality does not permit members to refuse to cooperate with a PCP investigation because of confidentiality concerns. The Standards do not require members to delay dealing with related legal matters while a PCP investigation is in progress.

bmaggie

Patricia Hoolihan is an individual investment advisor who uses mutual funds for her clients. She typically chooses funds from a list of 40 funds that she has thoroughly researched. The Burns, a married couple that are a client, asked her to consider the Hawkeye fund for their portfolio. Hoolihan had not previously considered the fund because when she first conducted her research three years ago, Hawkeye was too small to be considered. However, the fund has now grown in value, and cursory research uncovers no fundamental flaws with the fund. She puts the fund in the Burns' portfolio but not in any of her other clients' portfolios. The fund ends up being the best performing fund on her list. Hoolihan has:

A) violated the Standards by not dealing fairly with clients.

B) violated the Standards by not having a reasonable and adequate basis for making the recommendation.

C) not violated the Standards.

---

Despite the fact the addition of the fund was successful, Hoolihan acted improperly in not conducting the same degree of research as she did for the other funds on her list.