bmaggie

Lee Roth, who is an investment advisor, is riding in a taxi and finds a file of information labeled "Genco Valuation." The folder contains a great deal of financial data, projections and nonpublic information concerning the food products industry that lead Roth to believe that Genco will be worth 50% more than its current stock value. Roth also finds some correspondence that leads him to believe that the file belonged to Tom Hagan. Roth tries to find out where Hagan works so he can return the file. Roth can recommend Genco to his clients unless Hagan works for:

A) the corporate finance department for Genco.

B) the equity research department for a brokerage firm.

C) Roth cannot recommend Genco to his clients at this time.

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The information is material and nonpublic; therefore, Roth cannot act or cause others to act at this time.

bmaggie

Scott Marsh is a research analyst for a brokerage firm following the computer industry. Joe Perry is Marsh's former college roommate and is the head of technology for Mercury, a large software company. Perry informs Marsh on Tuesday that in two days the company will be making an official announcement that its release of its newest version of its software will be moved up one month, from October 1 to September 1. The announcement will be surprising to the industry and will likely be met with skepticism because the company has had trouble meeting release dates in the past. Perry assures Marsh that he is certain that they will meet the September 1 date. Marsh considers Perry to be very honest and highly competent. Marsh should:

A) immediately put out a report recommending the stock, but waiting until the official announcement to state his reasons.

B) produce his research report in two days based solely on the official announcement, not taking into consideration the information from Perry.

C) wait until the public announcement is made, then release a report explaining that he believes the company will make the release date, disclosing that one of the reasons for his opinion is Perry is a friend of his.

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The research report cannot be released until the official announcement is made, otherwise he will be violating the Standard on prohibition against the use of material nonpublic information. Once it is made public, Marsh can disclose the nature of the conversation without violating that Standard because the information will now be public. However, he should disclose the relationship with Perry or he will be violating the Standard on communications with clients and prospective clients.

bmaggie

While having a conversation with a prospective client, John Henry states that his performance across all of his past clients over the past five years was over 20%, which was 200 basis points higher than his benchmark. He tells the client that while the benchmark may rise or fall over time, his excess performance will remain consistent. Henry violated the Standards of Professional Conduct because:

A) he cannot discuss prospective future performance in any manner.

B) he cannot discuss performance without clearly stating that the composite does not conform to GIPS.

C) the statement of excess performance is misleading with respect to its certainty.

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Guaranteeing performance on investments that are inherently volatile is misleading to clients.

bmaggie

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.

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One cannot misrepresent their experience, even over the Internet.

bmaggie

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 TRUE?

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.

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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”).

bmaggie

While attending his wife’s office party, Donald North, CFA, overhears two top executives from Parker Industries discussing that the company’s Board of Directors just approved to omit its cash dividend due to unexpected losses during the quarter. Parker has paid a quarterly dividend for the past ten years. The next day, North calls his broker and instructs her to sell short Parker’s common stock.

While in a coffee shop, Diane South, CFA, overhears two top executives from Ryland Products say that their company is about to be acquired by another company for a substantial premium over the market price. The next day, South calls her broker and instructs him to buy 500 shares of Ryland’s common stock.

Which of the following statements about whether North and South violated Standard II(A), Material Nonpublic Information, is TRUE?

A) North violated Standard II(A) but South did not violate Standard II(A).

B) Both North and South violated Standard II(A).

C) Neither North nor South violated Standards II(A).

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According to Standard II(A), a member or candidate must not act or cause others to act on material nonpublic information until that same information is made public. In both cases, the information was material nonpublic information; therefore, both North and South are in violation.

bmaggie

Maggie McCarthy is an individual investment advisor who uses mutual funds for her clients. She typically chooses from a list of 40 funds that she has thoroughly researched. The Figgs, a married couple that are a client, asked her to consider the Boilermaker fund for their portfolio. McCarthy had not previously considered the fund because when she first conducted her research three years ago, Boilermaker was too small to be considered. However, the fund has now grown in value, and after doing thorough research on Boilermaker, she found the fund was by far the most outstanding large company value fund in her list of funds. She puts the fund in the Figgs' portfolio, and in all new clients portfolios, but not in any of her other clients' portfolios. Her reasoning is that her existing clients were comfortable with their current holdings, and she did not want to risk disturbing their comfort. Has McCarthy violated any Standards? McCarthy has:

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

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

C) not violated the Standards.

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The fund should have been considered for the existing clients' portfolios. There may have been reasons not to add the fund to their portfolios, such as tax consequences or a lack of suitability, but disturbing their comfort is not sufficient.

bmaggie

Anna Nichols is a research analyst preparing a report on Enterprise Company. In order to ensure accuracy in her report, she sends the report to the Chief Financial Officer (CFO) of Enterprise to allow him to point out some factual errors. The CFO makes some corrections, which Nichols checks and agrees with. The CFO also sends Nichols several pages of market analyses that appear favorable for Enterprise. Nichols checks the analyses for accuracy and includes a summary of them in her report, pointing out that the data came from Enterprise. Nichols has:

A) violated the Standards of Professional Conduct by including the data from the CFO in the report.

B) not violated the Standards of Professional Conduct.

C) violated the Standards of Professional Conduct by sending the report to the CFO before sending it to her clients.

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It is perfectly acceptable to send the report to management to check for factual errors and to use judgment in editing the data provided in the report.

bmaggie

Scott LaRue is a portfolio manager for Washington Advisors. Washington has developed a proprietary model that has been thoroughly researched and is known throughout the industry as the Washington 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. La Rue feels the model would be improved by adding some factors but he has not fully tested this new version of the model. LaRue discloses his model to his own clients but not to his supervisor. LaRue is:

A) violating the Standards by not considering the appropriateness of the recommendations to clients.

B) not violating the Standards.

C) violating the Standards by not having a reasonable and adequate basis for his investment recommendation.

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The ad hoc model is not part of the formal research process and does not formulate an adequate basis for a recommendation.

bmaggie

If the Chief Investment Officer of an investment advisory firm also is a CFA charterholder, which of the following statements is TRUE?

A) The firm must comply with the CFA Institute Global Investment Performance Standards only if it states that it follows the Standards.

B) The firm must present an historical composite.

C) All performance results that are presented must comply with the CFA Institute Global Investment Performance Standards.

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Global Investment Performance Standards (GIPS) are the best way to comply with the Standard on performance presentation; however, adoption of GIPS is voluntary.