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Hunts concerns about IMed increased after her dinner with Cunningham and Lance. She believes that Lance would have told them if IMeds earnings would meet analysts expectations. She is convinced that Lances failure to look her in the eye when he answered Cunninghams 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 can sell the IMed shares in the Primary Pensions portfolio but cannot encourage her mother to sell the investment clubs shares.

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

C) Hunt can tell her mother to sell the investment clubs shares of IMed but cannot sell the IMed shares in the Primary Pensions portfolio.

D) Hunt can both tell her mother to sell the investment clubs shares of IMed and sell the shares in the Primary Pensions portfolio.

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Answer and Explanation

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 Lances 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 clubs 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 employers interests. Hunts relationship to her mother could reasonably be assumed to constitute an indirect interest in the investment clubs securities.

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

A) Not trade in shares of IMed.

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

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

D) Not issue a research report based on the information communicated by Lance.

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Answer and Explanation

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.

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Dinners with Lance, Cunningham and Hunt at Cunninghams 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 III(B), Fair Dealing.

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

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

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

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Answer and Explanation

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 Lances employer, IMed, and the investing public. Even though Lance and Cunningham are long-time friends and former colleagues at Cunninghams employer, the potential for undue influence exists. Lance should be particularly concerned given Cunninghams inappropriate question regarding IMeds 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.

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Cunningham arrives in his office early on the day of the conference call. He has conducted an extensive analysis of IMeds financial statements and has reviewed his assessment of Lances conclusions in the report that Lance issued before his departure. He regrets having asked Lance about IMeds earnings at the previous nights dinner and decides to ask Lance some very pointed questions in public during the conference call, especially regarding Lances inclusion of some significant non-recurring gains in operating income. Based on his own knowledge and experience, Cunningham doesnt believe that Lances target price for IMed would be sustained. He decides that, if he doesnt get clear answers to his questions on the call, he will recommend to clients in his research report that IMeds rating drop to hold. Cunninghams research report and recommendation is sent to all of his firms 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) Exercise diligence and thoroughness in making investment recommendations.

B) Have a reasonable and adequate basis, supported by appropriate research and investigation, for such recommendations.

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

D) Clearly differentiate fact from opinion in making recommendations.

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Answer and Explanation

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, Cunninghams responsibility is to develop a forecast of IMeds 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. Cunninghams research report should contain sufficient information so that individual clients and their investment advisors can judge the appropriateness and suitability to the clients particular situation.

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Lance is very nervous before the conference call. Norton, IMeds 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 Lances actions when he stated that sales of Mediplex were strong?

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

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

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

D) Lance complied with Standard I, Professionalism.

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Answer and Explanation

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.

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During his first meeting with the Brazilian brokers and stock exchange members, did Hogue violate any CFA Institute Standards of Professional Conduct?

A) Yes, because he broke client confidentiality by revealing their plans to purchase BAI stock.

B) Yes, because he attempted to manipulate the market price of a Brazilian security.

C) Yes, because he failed to maintain independence and objectivity by meeting with influential Brazilian market participants.

D) No.

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Answer and Explanation

Hogue clearly exaggerated the American investors interest in BAI stock in an attempt to get local market participants to buy the stock in anticipation of increased American investment. By pumping the stock, the price rose and Hogue sold the Brazil Fund position and recommended investors do the same to take advantage of the artificially high prices. Hogue cites poor business prospects in his sell recommendation, a clear indication of his devious intent in claiming the high level of interest from American investors. By manipulating market prices in Brazil, Hogue has violated Standard II(B) Market Manipulation.

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Did the increased trading-volume contract that Hogue negotiated between the Brazilian market specialists for the BDB stock violate any CFA Institute Standards of Professional Conduct?

A) Yes, because the intent of the contract is to distort the trading volume of BDB in order to attract investors.

B) Yes, because the contract allows the traders to place their transactions ahead of client transactions.

C) Yes, because the contract discriminates against clients who will purchase the stock after the 1-year term is over.

D) No.

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Answer and Explanation

The contract is fully disclosed to potential investors in the marketing collateral. Thus investors can evaluate for themselves the true cost of the transactions. Therefore the intent of the increased liquidity is not to deceive investors, but rather to increase the market liquidity and ease of trading for foreign investors. The contract does not violate Standard II(B) Market Manipulation, since it is disclosed. If it were not disclosed, however, it would constitute a violation.

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When he distributed his buy and sell recommendations on BDB and BAI, respectively, did Hogue violate any CFA Institute Standards of Professional Conduct?

A) No.

B) Yes, because he did not establish a reasonable and adequate basis for either of the recommendations.

C) Yes, because he has issued two versions of the same report which disadvantages clients paying lower fees.

D) Yes, because he has released the two versions of the report at different times.

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Answer and Explanation

Standard III(B) Fair Dealing, requires members and candidates to deal fairly with their clients. Hogue can offer different levels of service so long as it is disclosed to his clients and all service levels are available to all clients. Since his tier one clients pay higher fees, the depth of research they receive may be greater than the tier two clients without violating the standard. By releasing the reports at different times, however, the tier two clients are put at a great disadvantage simply because they subscribe to a lesser level of service. This is a violation of Standard III(B), which says that members can offer different services to clients, but different levels of service must not disadvantage clients.

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Has Hogue violated any CFA Institute Standards of Professional Conduct with respect to the time period of returns and method of calculating returns used in his performance presentation?

Time period

Calculation method

A) No Yes

B) Yes Yes

C) No No

D) Yes No

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Answer and Explanation

According to Standard III(D) Performance Presentation, Hogue must disclose the fact that the 10-year performance history of the fund is comprised of five years of his performance and five years of his predecessors performance. By not disclosing this, the presentation is misleading and violates Standard III(D). It does not matter that the investment styles are similar or that he believes most investors are only interested in the last five years of data. Performance presentations need to be fair, accurate, and complete. His method of calculating returns before fees and taxes on a market-value-weighted basis is acceptable and fully disclosed. Therefore the calculation methodology does not constitute a violation of Standard III(D).

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By charging tier one and tier two clients different fees, has Hogue violated any CFA Institute Standards of Professional Conduct?

A) Yes, because having two classes of clients is a form of investment fraud.

B) Yes, because the two classes of clients creates an inherent conflict of interest.

C) Yes, because having two classes of clients inappropriately discriminates against the lower fee clients

D) No.

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Answer and Explanation

Hogue is allowed to offer different levels of service without violating Standard III(B) Fair Dealing, as long as the different levels of service are fully disclosed and offered to all clients and prospects. Hogue has his tier two clients sign a waiver indicating they are aware of the different levels of service offered by the firm. Thus he has complied with the Standard.

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In his first report on investments in the industrial sector, did Gonzaless description of the stock selection model or its historical results violate any CFA Institute Standards of Professional Conduct?

Model description

Historical results

A) Yes Yes

B) No Yes

C) No No

D) Yes No

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Answer and Explanation

The description provided by Gonzales is an accurate depiction of the process by which the model selects stocks to recommend for either a purchase or sell. Gonzales does not provide every detail regarding the individual factors used to screen the stocks or how the algorithm works since these are proprietary details. In describing the historical results of the model, however, Gonzales has violated Standard III(D) Performance Presentation and Standard I(C) Misrepresentation. In his report, Gonzales omitted the fact that the model selected several stocks with zero or negative returns. By not including this result in the report, Gonzales is not portraying a fair, accurate, and complete performance record (a violation of Standard III[D]) and thus intentionally misleads his clients with the recommendations (a violation of Standard I[C]). Clients are lead to believe that the model only picks top performers and thus the recommendations in the report imply that they will fall into this category.

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In his first report on investments in the industrial sector, did Gonzaless three investment recommendations violate any CFA Institute Standards of Professional Conduct?

A) Yes, because he provided an inherent guarantee of investment performance that cannot reasonably be expected.

B) No.

C) Yes, because he failed to distinguish between fact and opinion with regard to expected performance.

D) Yes, because he failed to investigate whether or not the investment recommendations were suitable for users of his report.

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Answer and Explanation

Gonzales has provided a guarantee that the investment returns are going to provide a return in excess of 15%. This is a misrepresentation of the risk inherent in the stocks and is thus a violation of Standard I(C) Misrepresentation, which prohibits such misrepresentations.

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With regard to his record retention actions and his reissuance of past investment recommendations, has Gonzales violated any CFA Institute Standards of Professional Conduct?

Record retention

Past recommendations

A) Yes No

B) No No

C) Yes Yes

D) No Yes

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Answer and Explanation

Standard V(C) Record Retention, requires members and candidates to maintain records supporting their research and investment recommendations. Gonzales has kept a copy of both his electronic and hard copy files used to generate his report and has thus complied with the Standard with regard to his record retention practices. The fact that the records are stored offsite is not relevant as long as they are being appropriately maintained. Gonzales has also not violated any Standards by compiling research to support an investment recommendation he made while at another firm. As long as he did not reissue the recommendation without supporting documentation or take (without permission) the supporting documentation from the previous employer, he has not violated the Standards.

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Does the referral arrangement between StatInvest and Ryers & Ovitz Inc. violate any CFA Institute Standards of Professional Conduct?

A) No.

B) Yes, because the referral arrangement is not properly disclosed to clients and prospects of Ryers & Ovitz Inc.

C) Yes, because StatInvest is not allowed to make a general disclosure in its research reports or recommendations.

D) Yes, because Ryers & Ovitz pays for the research out of a general overhead account, which disadvantages some clients.

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Answer and Explanation

Ovitz cannot rely on disclosures made by StatInvest but must disclose the referral arrangement to clients and prospects herself. It does not matter that a general overhead account is designated as the source of funds for the research purchased from StatInvest. Ryers & Ovitz Inc. and StatInvest have an agreement which provides a form of compensation to both parties and may pose a cost to the client either directly or indirectly. In order to assess the full cost of either firms services, the client must be aware of the referral arrangement. By not actively disclosing the agreement, Ovitz has violated Standard VI(C) Referral Fees.

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In her dealings with the local media, has Ovitz violated any CFA Institute Standards of Professional Conduct?

A) No.

B) Yes, because she has inappropriately used her volunteer position with her local society to further her own career.

C) Yes, because her comments regarding her disagreement with CFA Institute policies compromise the reputation of the organization.

D) Yes, because she has improperly exaggerated the meaning of the CFA designation.

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Answer and Explanation

Standard VII(A) prohibits members and candidates from taking any action that compromises the integrity or reputation of CFA Institute, the CFA designation, or the CFA exam. Members and candidates are allowed, however, to disagree with CFA Institute policies and express their lack of agreement. Therefore Ovitz did not violate Standard VII(A). Ovitz did violate Standard VII(B) which prohibits members and candidates from exaggerating the meaning of the CFA designation. Ovitz has implied that CFA charterholders are better investment managers and more ethical than other investment professionals, which overstates the implications of being a charterholder.

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Hunter Harrison, CFA, has recently been promoted to Chief Investment Officer (CIO) of Ironclad Investments, an investment adviser and pension consultant for medium and large corporate pension clients. Ironclad recently hired a compliance officer to update its compliance manual, which is consistent with the CFA Institute Code and Standards. Harrison serves as a director on several non-profit and corporate boards of directors, some of which have their pension assets managed by Ironclad. As part of his new job duties, Harrison will oversee Ironclads research analysts and portfolio managers, including Michelle Myers, who passed the Level 2 CFA examination last year and is registered for the next exam. Myers is a portfolio manager who regularly meets with clients and prospects. Myers is also a partner in a software company that sells retirement and benefit administration services to institutional clients, some of which are also clients of Ironclad to whom Myers has recommended the software company. Myers has disclosed her partnership interest in the software company to Ironclad, including the potential for additional compensation and the possible conflicts of interest, but not to her clients.

In her correspondence with prospects and clients, Myers normally refers to her status as a candidate in the CFA Program. Her latest brochure includes a reference to her status as a Level 3 CFA candidate in her biographical background to increase her prominence in the industry. Her targeted marketing efforts using these brochures have led to several new accounts in the last few years.

One of Myers software clients, Breakthrough Pharmaceuticals (Breakthrough), is a publicly traded corporation that is also held in many of Ironclads client portfolios. In the course of their business relationship, Breakthroughs CEO informs Myers that the company has been having difficulty making retirement benefit payments, and its pension plan has recently gone from overfunded to significantly underfunded as a result of market conditions. Breakthroughs CEO indicates to Myers that he is attempting to source additional short-term financing to make retiree benefit payments and will disclose the significant underfunded status of the pension plan in the upcoming financial statements. Myers, concerned that Breakthroughs current pension troubles and short-term liquidity issues will negatively affect its earnings and consequently the performance of the companys stock, informs Harrison of the impending disclosure. Harrison allows Myers to sell 1,800,000 shares of Breakthrough stock for clients, causing the price to drop by 5%. When the pension troubles are later disclosed in the companys financial statements, Breakthroughs stock price drops an additional 18%.

As part of Ironclads portfolio management activities on behalf of its clients, Harrison and Myers maintain relationships with third-party soft dollar providers and commission recapture brokers. Better Trading Brokerage (BTB), one of Ironclads top ten brokers and soft dollar providers, has offered Harrison two round-trip airline tickets anywhere in the U.S. in appreciation for its 2-year relationship with Ironclad. One of Harrisons pension clients, Worldwind Travel Inc. (WTI), participates in commission recapture and has offered Harrison two roundtrip airline tickets anywhere in the U.S. or Europe in appreciation for its 2-year relationship with Ironclad. Harrison has disclosed both offers to Ironclad in writing but has not yet responded to either offer because he has been busy with proxy voting duties.

Harrison, as CIO, is chairman of Ironclads proxy voting committee. Myers is also a member of the committee. Ironclad, as a discretionary investment manager, votes proxies through the proxy voting committee on behalf of clients. Ironclad is currently reviewing proxies for several companies covered in research, including technology companies Advanced DSL (Advanced), InterConnect Inc. (InterConnect), Speedy Chip Technology (Speedy Chip), and Wavelength Digital (Wavelength). Each companys current proxy contains voting proposals pertaining to employee stock option expensing methods. This issue is particularly important to Ironclad because several of its investment personnel recently participated in an industry forum that supported increased disclosure for company stock options. The panel concluded that such disclosure will provide investors with a more complete estimate of corporate earnings. Ironclad, through its clients, owns approximately 4% of the outstanding shares of Advanced and InterConnect and approximately 6% of the outstanding shares of Speedy Chip and Wavelength.

Harrison serves on the board of directors for InterConnect and Wavelength, while Myers provides consulting services for Speedy Chip. Harrison receives cash compensation and stock options for his services, while Myers receives restricted stock and stock options. The investment bank that led the public offering of InterConnect and Speedy Chip and seven of nine sell-side analysts covering the companies have sell ratings on the stocks. Ironclads analysts have also issued sell recommendations on the companies due to, among other issues, lack of earnings transparency and low earnings quality. Contrary to committee consensus, Harrison and Myers vote client proxies against the expensing of employee stock options for InterConnect, Wavelength, and Speedy Chip. Harrison increases his clients positions in both InterConnect and Wavelength, citing growth opportunities and consensus opinion. Neither Harrison nor Myers has disclosed these compensation arrangements to Ironclad.

Is it likely that Myers violated any CFA Institute Standards of Professional Conduct in her reference to her candidacy in the CFA program?

A) Yes, by inappropriately using her candidate status to recruit new clients.

B) Yes, by failing to indicate the number of times she took the Level 3 exam before passing.

C) No.

D) Yes, by stating her candidate status using language that is inconsistent with the Standards.

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Answer and Explanation

The actions of Myers are consistent with Standard VII(B), which requires that candidates appropriately reference their participation in the CFA Program, clearly stating their candidate status and not implying the achievement of any type of partial designation. Additionally, to be considered a candidate, an individual must be registered to take the next scheduled exam. Since Myers completed Level II last year and has registered for the next exam, she is in compliance with the Standard. There is also no indication that she has exaggerated the meaning of implications of her candidacy in the CFA program in the promotional brochure by, for example, over promising her competency or future investment results.

The actions of Myers are consistent with Standard VII(B), which requires that candidates appropriately reference their participation in the CFA Program, clearly stating their candidate status and not implying the achievement of any type of partial designation. Additionally, to be considered a candidate, an individual must be registered to take the next scheduled exam. Since Myers completed Level II last year and has registered for the next exam, she is in compliance with the Standard. There is also no indication that she has exaggerated the meaning of implications of her candidacy in the CFA program in the promotional brochure by, for example, over promising her competency or future investment results.

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Is it likely that Myers violated any CFA Institute Standards of Professional Conduct with respect to her disclosure of the partnership interest in the software company or did Harrison violate any standards with respect to the sale of Breakthrough stock?

Partnership interest

Breakthrough sale

A) Yes No

B) No Yes

C) Yes Yes

D) No No

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Answer and Explanation

Standard VI(A) Disclosure of Conflicts, is applicable since Myers is a portfolio manager with fiduciary responsibility for institutional clients of Ironclad who may also be clients of her software company, thereby potentially compromising her ability to make unbiased and objective investment recommendations. Myers should disclose the potential conflict to her clients and to Ironclad and abide by any restrictions imposed by the firm. Myers has not disclosed the conflict to clients and has therefore violated the Standard. Harrison has violated Standard IV(C) Responsibilities of Supervisors by failing to prevent Myers from trading on material nonpublic information. He has a responsibility as a supervisor to make reasonable efforts to detect and prevent violations of the Standards by his employees.

Standard VI(A) Disclosure of Conflicts, is applicable since Myers is a portfolio manager with fiduciary responsibility for institutional clients of Ironclad who may also be clients of her software company, thereby potentially compromising her ability to make unbiased and objective investment recommendations. Myers should disclose the potential conflict to her clients and to Ironclad and abide by any restrictions imposed by the firm. Myers has not disclosed the conflict to clients and has therefore violated the Standard. Harrison has violated Standard IV(C) Responsibilities of Supervisors by failing to prevent Myers from trading on material nonpublic information. He has a responsibility as a supervisor to make reasonable efforts to detect and prevent violations of the Standards by his employees.

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Is it likely that Myers violated any CFA Institute Standards of Professional Conduct by selling the Breakthrough stock for her clients accounts?

A) No, because she fulfilled her fiduciary duty to her clients by avoiding significant losses.

B) No, because she used information that, although nonpublic, was not material to Breakthroughs stock price.

C) Yes.

D) No, because she first made her supervisor aware of the information upon which the trade was based and received approval for the trade.

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Answer and Explanation

Although the information shared by Myers may have helped Ironclads clients avoid losses in shares of Breakthrough, the information was material nonpublic information. Information is material if its disclosure would have an impact on the stock or if a reasonable investor would want to know the information prior to making an investment decision. Information is nonpublic until it has been generally disseminated to the marketplace and investors have had an opportunity to react to the information. The information about Breakthroughs pension difficulties was both material and nonpublic, as the stock dropped significantly upon disclosure of the information in the market. Therefore, Myers had a duty to keep the information confidential and not to trade or cause others to trade on the information. By sharing the information with Harrison and trading on that information, Myers violated Standard II(A) Material Nonpublic Information.

Although the information shared by Myers may have helped Ironclads clients avoid losses in shares of Breakthrough, the information was material nonpublic information. Information is material if its disclosure would have an impact on the stock or if a reasonable investor would want to know the information prior to making an investment decision. Information is nonpublic until it has been generally disseminated to the marketplace and investors have had an opportunity to react to the information. The information about Breakthroughs pension difficulties was both material and nonpublic, as the stock dropped significantly upon disclosure of the information in the market. Therefore, Myers had a duty to keep the information confidential and not to trade or cause others to trade on the information. By sharing the information with Harrison and trading on that information, Myers violated Standard II(A) Material Nonpublic Information.

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In order to maintain compliance with CFA Institute Standards of Professional Conduct, is it appropriate for Harrison to accept, or is he required to reject, the offers of appreciation from BTB and WTI, assuming Ironclad consents to both?

BTB

WTI

A) Accept Reject

B) Accept Accept

C) Reject Accept

D) Reject Reject

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Answer and Explanation

Harrison can accept the offer from Worldwind but cannot accept the offer from Better Trading. Harrisons actions are covered by Standard I(B) Independence and Objectivity and Standard IV (B) Additional Compensation Arrangements. Under Standard I(B), members shall use reasonable care and judgment to achieve and maintain independence and objectivity in making investment recommendations or taking investment actions. Harrison, as a fiduciary to his investment clients, has an obligation to act in their best interest and must maintain his independence and objectivity when making investment decisions. Harrisons relationship with Better Trading is, among other things, to execute trades in return for soft dollar services for Ironclad. Soft dollars involve the use of client brokerage by an investment manager to obtain products and services that aid the manager in the research and investment decision-making process. As such, Harrisons acceptance of the offer from Better Trading could be perceived to compromise his independence and objectivity on behalf of his clients, as the broker may be trying to influence Harrison to increase the amount of trading that Ironclad executes on behalf of clients. The offer from Worldwind, who is one of Ironclads clients, if accepted, does not cause Harrison to violate Standard I(B). Gifts from clients are distinguishable from gifts from third parties seeking to influence the activities of an investment manager. Worldwinds offer to Harrison may be accepted, provided it is disclosed to Ironclad. Standard IV(B) Additional Compensation Arrangements, requires members to disclose in writing any additional compensation or other benefits received for their services in addition to those provided by their employer.

Harrison can accept the offer from Worldwind but cannot accept the offer from Better Trading. Harrisons actions are covered by Standard I(B) Independence and Objectivity and Standard IV (B) Additional Compensation Arrangements. Under Standard I(B), members shall use reasonable care and judgment to achieve and maintain independence and objectivity in making investment recommendations or taking investment actions. Harrison, as a fiduciary to his investment clients, has an obligation to act in their best interest and must maintain his independence and objectivity when making investment decisions. Harrisons relationship with Better Trading is, among other things, to execute trades in return for soft dollar services for Ironclad. Soft dollars involve the use of client brokerage by an investment manager to obtain products and services that aid the manager in the research and investment decision-making process. As such, Harrisons acceptance of the offer from Better Trading could be perceived to compromise his independence and objectivity on behalf of his clients, as the broker may be trying to influence Harrison to increase the amount of trading that Ironclad executes on behalf of clients. The offer from Worldwind, who is one of Ironclads clients, if accepted, does not cause Harrison to violate Standard I(B). Gifts from clients are distinguishable from gifts from third parties seeking to influence the activities of an investment manager. Worldwinds offer to Harrison may be accepted, provided it is disclosed to Ironclad. Standard IV(B) Additional Compensation Arrangements, requires members to disclose in writing any additional compensation or other benefits received for their services in addition to those provided by their employer.

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With respect to Harrisons directorships with InterConnect and Wavelength and Myers consulting arrangement with Speedy Chip, is it likely that any CFA Institute Standards of Professional Conduct have been violated?

Harrison's directorships

Myers' consulting arrangements

A) Yes No

B) Yes Yes

C) No Yes

D) No No

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Answer and Explanation

Standard IV(B) Additional Compensation Arrangements, applies to both Harrison and Myers, as they both receive compensation for their respective outside services in the form of cash, stock, and stock options. There is no indication that either of them have disclosed their compensation arrangements to Ironclad, which constitutes a violation of Standard IV(B). Standard I(B) Independence and Objectivity also applies to this situation, as both Harrison and Myers have outside activities that have the appearance of compromising their independence and objectivity regarding Ironclads clients. Harrisons role on the boards of directors for InterConnect and Wavelength and Myers role as a consultant for Speedy Chip appear to drive their proxy voting decisions, on behalf of Ironclads clients, regarding the expensing of stock options. Thus both Harrison and Myers have also violated Standard I(B). Harrison and Myers may have also violated Statement VI(A) Disclosure of Conflict by failing to disclose the conflicts of interest that exist as a result of Harrisons directorships with Interconnect and Wavelength and Myers consulting arrangement with Speedy Chip. Such conflicts (whether actual or potential) are required to be disclosed prominently and in clear language to clients, prospects, and employers according to Standard VI(A).

Standard IV(B) Additional Compensation Arrangements, applies to both Harrison and Myers, as they both receive compensation for their respective outside services in the form of cash, stock, and stock options. There is no indication that either of them have disclosed their compensation arrangements to Ironclad, which constitutes a violation of Standard IV(B). Standard I(B) Independence and Objectivity also applies to this situation, as both Harrison and Myers have outside activities that have the appearance of compromising their independence and objectivity regarding Ironclads clients. Harrisons role on the boards of directors for InterConnect and Wavelength and Myers role as a consultant for Speedy Chip appear to drive their proxy voting decisions, on behalf of Ironclads clients, regarding the expensing of stock options. Thus both Harrison and Myers have also violated Standard I(B). Harrison and Myers may have also violated Statement VI(A) Disclosure of Conflict by failing to disclose the conflicts of interest that exist as a result of Harrisons directorships with Interconnect and Wavelength and Myers consulting arrangement with Speedy Chip. Such conflicts (whether actual or potential) are required to be disclosed prominently and in clear language to clients, prospects, and employers according to Standard VI(A).

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Which of the following least accurately describes Harrisons actions necessary for compliance with the Code and Standards regarding proxy voting? Harrison should:

A) discard all proxies on behalf of Ironclads clients when there is a conflict of interest.

B) maintain the confidentiality of voting information on behalf of Ironclads clients.

C) abstain from voting on matters affecting Internet and Wavelength to avoid conflicts of interest.

D) disclose all proxy voting policies to Ironclads clients including the treatment of routine and nonroutine issues.

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Answer and Explanation

According to Standard III(A) Loyalty, Prudence, and Care, Ironclad, as a discretionary investment manager, is responsible (unless otherwise stipulated in the client guidelines or agreement) for making informed and reasonable decisions regarding proxy voting on behalf of clients. Among other things, Ironclad should have a proxy voting policy and a process for identifying and reviewing major proxy issues for appropriate clients. Ironclad and Harrison also have an obligation to avoid conflicts of interest when voting proxies. Although Harrison has a conflict of interest in voting issues on behalf of InterConnect and Wavelength due to his role on their board of directors, proxies on non-routine matters should not be discarded under any circumstances, as such action would constitute a breach of fiduciary duty. Harrison should abstain from voting on matters affecting InterConnect and Wavelength to avoid the appearance of a conflict of interest. Harrison should also ensure proper treatment of any confidential information received in his role on the respective boards of directors. Harrison should maintain confidentiality of voting information on behalf of clients and follow Ironclads proxy voting policy. Clients must be made aware of the firms policies on voting routine and non-routine proxy issues.

According to Standard III(A) Loyalty, Prudence, and Care, Ironclad, as a discretionary investment manager, is responsible (unless otherwise stipulated in the client guidelines or agreement) for making informed and reasonable decisions regarding proxy voting on behalf of clients. Among other things, Ironclad should have a proxy voting policy and a process for identifying and reviewing major proxy issues for appropriate clients. Ironclad and Harrison also have an obligation to avoid conflicts of interest when voting proxies. Although Harrison has a conflict of interest in voting issues on behalf of InterConnect and Wavelength due to his role on their board of directors, proxies on non-routine matters should not be discarded under any circumstances, as such action would constitute a breach of fiduciary duty. Harrison should abstain from voting on matters affecting InterConnect and Wavelength to avoid the appearance of a conflict of interest. Harrison should also ensure proper treatment of any confidential information received in his role on the respective boards of directors. Harrison should maintain confidentiality of voting information on behalf of clients and follow Ironclads proxy voting policy. Clients must be made aware of the firms policies on voting routine and non-routine proxy issues.

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