Reading 2-I: Standards of Professional Conduct & Guidance 2011, center, should, write, style

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Session 1: Ethical and Professional Standards
Reading 2-I: Standards of Professional Conduct & Guidance: Professionalism

LOS B.: Independence and Objectivity.

 

 

An analyst is told by his supervisor that when he feels he should write a buy recommendation he is free to do so, and when he feels he should write a sell recommendation he should check with the supervisor first. This practice is:

A) congruent with Standard V(A), Diligence and Reasonable Basis.

B) in violation of Standard I(B), Independence and Objectivity.

C) in violation of Standard V(A), Diligence and Reasonable Basis.

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The policy dictated by the supervisor would infringe upon the analyst’s independence and objectivity . It would probably discourage the analyst from making sell recommendations and, furthermore, present the opportunity for the supervisor to try and change the analyst’s mind.

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Joshua Rosenberg, CFA, is an equity analyst who covers Northwest Implements, a farm implement manufacturer. Northwest's main factory is located in a sparsely inhabited region six hours by automobile from the nearest airport. Northwest has its own corporate jet and a landing strip is located near the facility. When Rosenberg contacts Northwest’s management to gather information for a report he is preparing on the company, Northwest’s chief financial officer, Thomas Blake, invites Rosenberg to visit Northwest’s headquarters and meet with management. Blake offers to send Northwest’s corporate jet to pick up Rosenberg from an airport near Rosenberg’s home and to return him home the same evening. Rosenberg estimates that it would require three days for him to make the visit using commercial travel. If Rosenberg accepts Blake’s offer and makes the trip to Northwest’s headquarters on the corporate jet, Rosenberg:

A) has violated the Code and Standards unless he discloses the trip and the payment of his travel expenses in his report on Northwest.

B) has violated the Code and Standards unless he reimburses Northwest for the cost of the trip.

C) has not violated the Code and Standards.

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Standard I(B) requires members to maintain independence and objectivity. A visit by an analyst to an out-of-the-way site may be paid for by a client company host as long as the analyst can maintain objectivity. Members should encourage clients to limit the use of corporate aircraft, but exceptions can be made if transportation would not otherwise be available or would be inefficient.

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Luis Rodriguez, CFA, is an analyst at XYZ Investments. He covers a company that is located in a region that is not easily accessible. The company invites analysts for their annual analyst meeting and pays for the transportation to the remote location. Rodriguez is:

A) allowed to accept the payment for transportation as long as it does not exceed $100.

B) not allowed to accept the payment for transportation because this is a considered a “perk” and may influence his independent judgment.

C) allowed to accept the payment for transportation because the trip was all business and was out of the way.

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Standard I(B) Independence and Objectivity. Analysts should pay for their own travel accommodations if the location is accessible by normal means. In this situation payment is acceptable because the location is out of the way and the purpose of the trip is all business.

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In order to comply with the CFA Institute Standards, an analyst should:

A) use only his own research in making investment recommendations, because anything else would violate Standard I(B), Independence and Objectivity.

B) use outside research only after verifying its accuracy.

C) use only his company's research when making investment recommendations and use outside research for reports and analysis on stocks.

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Standard I(B), Independence and Objectivity: the analyst is allowed to use outside research only after an insightful review. There are no restrictions regarding the exclusive use of outside information or in-house information.

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All of the following would be permitted according to the CFA Institute Standards of Professional Conduct EXCEPT:

A) token gifts received from clients.

B) air transportation paid by a corporate issuer for travel to a major metropolitan airport.

C) use of an issuer’s corporate aircraft when commercial transportation is not available.

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In order to maintain independence and objectivity, members and candidates should restrict special reimbursement arrangements concerning commercial transportation and hotel charges. Use of corporate aircraft is permitted when commercial transportation is not available.

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Which of the following gifts to employees from clients does NOT need to be reported to the employee’s employer?

A) An expensive case of wine.

B) An inexpensive golf shirt.

C) A ski-vacation.

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According to Standard I(B), Independence and Objectivity, token gifts are allowed.

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Tony Calaveccio, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto. He places trades for the fund with Worldwide Brokerage. Worldwide is holding a conference in Amsterdam and has offered to pay for Calaveccio's airfare, meals, and accommodations associated with his attendance of the conference. The conference concerns European small cap securities and the EASDAQ. He decides that he will accept their offer and attend the conference. In order to comply with the Code and Standards, he:

A) may attend, but he must disclose the arrangement to TrustCo's clients and prospects as required under Standard IV.B.

B) may attend, but he must disclose the arrangement to his employer as a gift.

C) should not attend unless he pays for the trip himself.

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Under Standard I(B) gifts, benefits, compensation, or consideration cannot be accepted if the purpose was to influence or reward. Token items are OK. Worldwide Brokerage is not a client of Calaveccio but an entity that he does business with. As such Worldwide could influence Calaveccio to always do business with them which could be to the detriment of his fund if the execution of their trades starts to deteriorate compared to their competitors.

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An analyst who is a CFA Institute member receives an invitation from a business associate’s firm to spend the weekend in a high-quality resort. In order to abide by the Standards, the analyst should (may):

A) do both of the actions listed here.

B) refuse the invitation if the associate is from a firm he analyzes for his employer.

C) obtain written consent from his supervisor if the offer is contingent on achieving a target investment return.

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According to Standard I(B) Independence and Objectivity, the analyst should refuse the invitation if it is from a firm the analyst covers for his employer. The analyst can accept the invitation if it is from a client but the analyst must get written consent from his employer if the offer is contingent on future performance, to comply with Standard IV(B) Additional Compensation Arrangements.

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Francisco Perez, CFA, CPA, is a portfolio manager for an investment advisory firm. Due to the prominence of his position, he is often invited to attend free marketing and educational events hosted by firms which seek to inform the investment community about their investment processes. One such firm, Unlimited Horizons, has invited Perez to attend free educational events which qualify for Continuing Education credits which could help Perez maintain his CPA designation. Perez should most likely:

A) accept the invitation as no cash compensation is involved and the primary intent is to educate and inform the investment community.

B) decline to attend the event as it could result in a violation of Standard I(B) "Independence and Objectivity."

C) decline to attend the event as it could result in a violation of Standard I(A) "Knowledge of the Law."

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Perez should decline the invitation as it creates the impression of lack of independence. If he does not accept the free continuing education courses, he would have to pay for them some other way so the free courses are a form of compensation. Nothing in the vignette suggests the free classes are illegal.

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Susan Nielsen, CFA, is an equity research analyst on a fact-finding property tour with 6 other analysts to learn about Just Kittens, Inc. Just Kittens sells tungsten ball-bearings and has 16 warehouses, and 20 manufacturing, research, and wholesale sales outlets scattered over 8 countries – mostly emerging markets. Because of the remote location of some of the facilities, commercial travel is effectively unavailable. Just Kittens charters a jet and various busses to take the research analysts to the properties. If Nielsen accepts these accommodations, she is most likely:

A) in violation of Standard I(B) "Independence and Objectivity."

B) not in violation of Standard I(B) "Independence and Objectivity" because commercial travel is effectively unavailable.

C) not in violation of Standard I(B) "Independence and Objectivity" because best practices dictate that better access to company executives is likely to lead to more accurate and timely information.

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Nielsen is not in violation of Standard I(B) "Independence and Objectivity" because commercial travel is effectively unavailable.