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Which of the following statements regarding employee/employer relationships is NOT correct?

A)	An employee is someone in the service of another.

B)	There must be monetary compensation for an employer/employee relationship to exist.

C)	A written contract may or may not exist between employer and employee.

Monetary compensation is not a requirement of the employee/employer relationship.

Theresa Hatcher, CFA, is making arrangements to establish her own investment advisory business before terminating her relationship with her current employer, Elite Brokers, Inc. Elite is a small company consisting of only six investment professionals and a small support staff. According to CFA Institute Standards of Professional Conduct, which of the following activities is least likely a violation of Hatcher's duty to Elite?

A)	Hatcher solicits Elite's clients before her termination of employment at Elite.

B)	Hatcher engages in secret negotiations with two other investment professionals and her administrative assistant to leave Elite in order to join her new business.

C)	Hatcher leases office space, furniture, and other equipment for her new business.

Standard IV(A) permits Hatcher to make preparations to begin a new practice, such as leasing office space, furniture, and other equipment, but not to engage in the other activities that may violate her duty to employer.

Which of the following statements is most correct concerning a member’s obligation to his or her employer under the Code and Standards?

A)	Consent from the employer is necessary to permit independent practice that could result in compensation or other benefits in competition with the member's employer.

B)	Members are prohibited from making arrangements or preparations to go into competitive business before terminating their relationship with their employer.

C)	Members are prohibited from undertaking independent practice in competition with their employer.

There is no blanket prohibition against independent practice in competition with a member’s employer. The member must obtain permission from the employer. Members may make preparations to go into a competitive business, but may not solicit clients of the employer as long as members are still employed by the employer.

Which of the following activities will least likely constitute a violation of Standard IV(A), Loyalty?

A)	Contacting your current clients and asking them to "come with you" when you resign from your current employer.

B)	Conspiracy to bring about a mass resignation of other employees.

C)	Consulting on your own time and obtaining written permission from your employer.

Consulting on your own time and obtaining written permission from your employer does not constitute a violation of Standard IV(A).

Bob Douglas, CFA, is considering leaving his current employer to compete in the same field. He did not sign a non-compete clause when he was hired. He may:

A)	begin competing with his current employer as long as the employer has been informed of Douglas' future intentions.

B)	plan and prepare to compete with his current employer, but not begin competing until his resignation is effective.

C)	may not prepare to compete, begin competing, or anything related to competing with his current employer.

Douglas may plan and prepare to compete with his current employer, but may not begin competing until his resignation is effective or he gets permission from his employer. Members must provide notification to their employer describing the types of services to be rendered, the expected duration, and compensation for the services.

All of the following activities might constitute a violation of Standard IV(A), Loyalty to Employer, EXCEPT:

A)	solicitation of the employer's clients following termination of employment.

B)	misuse of confidential information.

C)	solicitation of the employer's clients prior to termination of employment.

Solicitation of the employer’s clients prior to termination of employment would constitute a violation of Loyalty to Employer, but solicitation of clients following termination would not.

When providing outside services, a member should provide all of the following information to her current employer EXCEPT:

A)	a promise to remit an agreed-upon percentage of the proceeds to the current employer.

B)	the compensation she will receive.

C)	the types of services to be provided.

She should provide information about the type of services, the compensation arrangement and the expected duration of the project.

Analysts who undertake an independent consulting practice while employed must get permission from their employer and should disclose all of the following EXCEPT:

A)	the clients contact information.

B)	the anticipated duration of the service to be rendered.

C)	the compensation or benefit to be received.

The Member or Candidate is not required to disclose confidential information about his independent clients.

Isabella Travelli, CFA, is a research analyst for Worldwide Investments in Rome, Italy. Travelli was contacted by Seaside Partners of Milan, Italy, a regional brokerage firm, about doing research on companies in the beverage industry on a contract basis.

A)	after receiving consent from both Worldwide and Seaside.

B)	if Worldwide does not follow the beverage industry.

C)	if Worldwide has no clients in the same geographic area as Seaside.

Standards IV(A) and IV(B) require members to obtain written consent from both their employer and the contracting party before undertaking independent practice in competition with their employer. Travelli needs to seek such consent from both entities because it does not appear that she can argue successfully that there is no competition between Worldwide and Seaside. They apparently are both research firms, industry specialization may not prevent competition, and Travelli should be devoting her time and energy to her employment, unless her employer consents to the contract work.

A CFA Institute member, undertaking independent practice that could result in compensation or other benefit:

A)	must notify his employer of the types of service to be rendered, the expected duration, and the expected compensation.

B)	must notify the entities for whom he plans to undertake independent practice of the compensation he receives from his employer.

C)	must notify his employer and clients of the types of service to be rendered and the expected compensation.

According to Standard IV(A), Loyalty to Employer, a CFA Institute member, undertaking independent practice that could result in compensation or other benefit, must notify his employer of the types of service to be rendered, the expected duration, and the expected compensation.

Jacob Allen, CFA, decides he could make more money if he started his own company. Which of the following steps would NOT violate Standard IV(A), Loyalty to Employer?

A)	Taking home the employer's buy lists.

B)	Getting written permission from his employer to call the clients and solicit their business for his new firm.

C)	Taking home his current employer's client lists, investment statements and marketing presentations.

If Jacob gets written permission from his employer to solicit their clients (not likely, obviously) he would not be violating the Loyalty to Employer Standard.

When a CFA Institute member who is presently employed by a firm undertakes any independent practice, he must do all of the following EXCEPT:

A)	remand a percentage (to be determined by the employee and employer) of the income earned back to the employer.

B)	disclose the expected duration of the services to be rendered.

C)	secure permission from the employer.

The member is obligated to get permission from his employer if he will be in any way competing with his current employer. They must provide notification to their employer describing the types of services to be rendered, the expected duration, and compensation for the services.

Jack Salyers, CFA, is considering starting his own firm to compete with his current employer. He takes several actions before turning in his resignation. Which of the following actions is NOT in violation of Standard IV(A), Loyalty to Employer?

A)	Jack copied the employer's computer models and other property.

B)	Before leaving, Jack solicits his employer's current clients.

C)	Jack told his employer that he was considering leaving and requested that the employer write him a letter of recommendation.

Asking for a letter of recommendation is perfectly acceptable. Soliciting clients and taking the employer’s property like client lists, computer programs, etc. are not permissible.

Pamela Gee is a portfolio manager. She is planning to establish her own money management firm. She has already informed her employer, Branford, Inc., about her plans. In her remaining time at Branford, she can:

A)	solicit Branford colleagues but not Branford clients.

B)	start the registration of her new company.

C)	inform her current clients about her resignation and let them know how to reach her, in case any problems arise in the future.

The only action that will not breach Standard IV(A) Loyalty to Employer, is to start the registration of her new company.

Which of the following statements is most correct under the Code and Standards?

A)	Consent from the employer is necessary to permit independent practice that could result in compensation or other benefits in competition with the member's employer.

B)	CFA Institute members are prohibited from undertaking independent practice in competition with their employer.

C)	Members are prohibited from making arrangements or preparations to go into competitive business before terminating their relationship with their employer.

Members are not prohibited from making arrangements or preparations to go into competitive business before terminating their relationship with their employer. CFA Institute members are not prohibited from undertaking independent practice in competition with their employer provided they have consent from their employer. Members must provide notification to their employer describing the types of services to be rendered, the expected duration, and compensation for the services.

An analyst belongs to a nationally recognized charitable organization, which requires dues for membership. The analyst has worked out a deal where he provides money management advice in lieu of paying dues. Which of the following must the analyst do?

A)	Resign from the position because the relationship is a conflict with the Standards.

B)	Nothing since he is not an employee of the charitable organization.

C)	Must treat the charitable organization as his employer.

An employee/employer relationship does not necessarily mean monetary compensation for services. If the analyst is performing services for the organization, then the analyst must treat the position as if he were an employee.

Nick O'Donnell, CFA, unsuspectingly joins the research team at Wickett & Co., an investment banking firm controlled by organized crime. None of the managers at Wickett are CFA Institute members. Because of his tenuous situation at Wickett, O'Donnell begins making preparations for independent practice. He knows he will be terminated if he informs management at Wickett that he is preparing to leave. Consequently, he determines that "if he can just hang on for one year, he will likely have a client base sufficient for him to strike out on his own." This action is:

A)	a violation of his fiduciary duties.

B)	not a violation of his duty to employer.

C)	a violation of his duty to disclose conflicts to his employer.

O’Donnell is required to obtain consent from his employer if he is attempting to practice in competition with his employer. Merely undertaking preparations to leave, which do not violate a duty, is not a violation of the Code and Standards.

Janet Thompson, CFA, is employed as an analyst by Nationwide Securities. According to CFA Institute Standards of Professional Conduct, which of the following statements about Thompson's duty to Nationwide is NOT correct? Thompson must refrain from:

A)	making arrangements to go into a competitive business before terminating her relationship with Nationwide.

B)	engaging in any conduct that would injure Nationwide.

C)	engaging in independent competitive activity that could conflict with the business of Nationwide unless she receives written consent.

Standard IV(A) permits Thompson to make preparations to go into a competitive business before terminating her relationship with Nationwide provided that such preparations do not breach her duty of loyalty.

John Hill, CFA, has been working for Advisors, Inc., for eight years. Hill is about to start his own money management business and has given his two-week notice of his resignation from Advisors. A few days before his resignation takes effect, a former client of Advisors calls Hill at his home about his new firm. The former client says that he is very happy that Hill is leaving Advisors because now he and Hill can resume a professional relationship. The client says that he would never become a client of Advisors again. Hill promises to call the client back after he has left Advisors. Hill does not tell his employer about the call. Hill has most likely:

A)	violated the Standard concerning disclosure of conflicts.

B)	violated the Standard concerning loyalty to employer.

C)	not violated the Standards.

Based on the information here, Hill has done nothing wrong. He took a call at his home, presumably on his own time, and the client made it clear that he would never be a client of Advisors. Therefore, there was no breach of loyalty to Advisors by Hill, nor is there a conflict of interest.

Grant Starks, CFA, has been working for Advisors, Inc., for eight years. Starks is about to start his own money management business and has given his two-week notice of his resignation. A few days before his resignation takes effect, a current client of Advisors calls him at his office to inquire about some services for her account at Advisors. During the conversation, Starks tells the client that his new business will have lower commissions than Advisors. Starks has most likely violated:

A)	Standard IV(A), Loyalty to Employer, by competing with his current employer.

B)	Standard VI(B), Priority of Transactions, by violating the priority of transactions.

C)	none of these Standards.

This is a breach of loyalty to his current employer. By telling a current client of his employer about the lower commissions he will charge in his new business, Starks is placing himself in direct competition with Advisors, and this is a violation of Standard IV(A).

John Hill, CFA, has been working for Advisors, Inc., for eight years. Hill is about to start his own money management business and has given his two-week notice of his resignation from Advisors. A few days before his resignation takes effect, on his lunch hour, he takes out a loan from a bank on behalf of his new business and uses the money to buy some office equipment for his new business. Since he engaged in these transactions while still an employee of Advisors, Hill violated Standard IV(A), Loyalty to Employer, by:

A)	engaging in a financial transaction, like taking out a loan, only.

B)	both taking out the loan and purchasing the office equipment.

C)	neither of these actions.

The Standards of Practice under IV(A) expressly says that a departing employee is “generally free to make arrangements or preparations to go into a competitive business before terminating the relationship with the employee’s employer provided that such preparations do not breach the employee’s duty of loyalty.” Neither of these actions are in conflict with the interests of Advisors, and Hill performed them on his own time.

Sue Parsons, CFA, works full-time as an investment advisor for the Malloy Group, an asset management firm. To help pay for her children’s college expenses, Parsons wants to engage in independent practice in which she would advise individual clients on their portfolios. She would conduct these investment activities only on weekends. She is currently only in the preparation stage and has not started independent practice yet. Which of the following statements about Standard IV(A), Loyalty to Employer, is most accurate? Standard IV(A):

A)	requires Parsons to obtain written consent from both Malloy and the persons from whom she undertakes independent practice.

B)	requires Parsons to notify Malloy in writing about her intention to undertake an independent practice.

C)	does not require Parsons to notify Malloy of preparing to undertake independent practice under the current conditions.

Standard IV(A), Loyalty to Employer, requires that Parsons obtain written consent only from her employer before she undertakes independent practice that could result in compensation or other benefit in competition with Malloy. It is not required to get permission from your employer when only preparing to go into independent practice.

Brian Bellow, a CFA Institute member, is a portfolio manager for Progressive Trust Company. Several friends asked Bellow to review their investment portfolios. On his own time, Bellow examined their portfolios and made several recommendations. He received no monetary compensation from his friends for his investment advice and provided no future investment counsel to them. According to CFA Institute Standards of Professional Conduct, did Bellow violate his duty to Progressive Trust?

A)	No, because Bellow received no monetary compensation for his services.

B)	No, because Bellow provided no ongoing investment advice.

C)	Yes, because he undertook an independent practice that could result in compensation or other benefit to him.

Standard IV(A) does not preclude providing independent services for compensation while still employed; however, notification to the employer is required describing the type of service, the expected duration, and the compensation. Compensation includes more than just monetary benefits.

Fernando Abrea, CFA was an analyst for Pacific Investments. In October he left Pacific and joined Global Securities as manager of a local office. Abrea’s change of employment came about in the following manner:

A)	violated the Standard by contracting for office space on behalf of Global.

B)	violated the Standard by contacting his former clients at Pacific.

C)	did not violate the Standard.

According to Standard IV(A) Loyalty, preparations to leave employment are not prohibited. Even though Abrea engaged in significant preparatory activities prior to beginning his new venture, none of these actions suggest Abrea did not continue to act in Pacific's interests while he was employed by Pacific. Abrea may contact his former clients on behalf of Global after his employment by Pacific has officially ended, as long as he did not misappropriate their contact information from Pacific.

Nicholas Brynne, CFA, develops a trading model while working for CE Jones, an investment management firm. By working on the model at home from his personal computer, Brynne is able to devote additional work hours. Although the trading model is successful, Brynne losses his job in a company restructuring, and decides to start his own practice using the trading model. Nicholas is most likely:

A)	in violation of the Standards because he did not receive permission from his employer to keep or use the files after employment ended.

B)	not in violation of the Standards because the trading model was created using his home computer.

C)	in violation of the Standards because he did not have permission to build the trading model using his home computer.

Brynne is in violation of Standard IV(A) "Loyalty." Employer records include items stored in any medium including home computers.

Dave Kline, CFA, is a personal investment advisor with 200 individual, family, and corporate accounts. After a dispute with a coworker on margin policy, he formally resigns his position by giving suitable notice. However, he does not follow his firm’s established "Transition and Exit Policies" regarding his accounts. The firm’s stated policies require him to notify each client of his planned departure and personally introduce them to their new account representative, Greg Potter. Kline sees Potter as a rival and states "...let Potter do his own work and find his own clients." Kline is most likely:

A)	in violation of Standard I(D) "Misconduct" for leaving clients subject to an account representative he does not find suitable.

B)	in violation of Standard IV(A) "Loyalty" for failing to follow the employer’s policies and procedures related to notifying clients of his departure.

C)	not in violation of the Code and Standards.

Kline is in violation of Standard IV(A) "Loyalty" for failing to follow the employer’s policies and procedures related to notifying clients of his departure.

Dave Kline, CFA, is a personal investment advisor. After a dispute with a coworker on margin policy, he formally resigns his position by giving suitable notice. However, he does not follow his firm’s established "Transition and Exit Policies" regarding discussion of the reason for his departure. During his final two weeks of employment, Kline routinely discusses the margin policy dispute, stating "...anyone who would lend that much money on securities of such low quality does not belong in this business..." Kline’s statements are in direct violation of the firm’s "Transition and Exit Policies," but he considers it a free-speech issue. Kline is most likely:

A)	in violation of Standard IV(A) "Loyalty" recommended procedures for failing to follow the employer’s policies and procedures related to termination policy.

B)	in violation of Standard IV(A) "Loyalty" recommended procedures for failing to notify regulators of the dangerous margin policy.

C)	not in violation of the Code and Standards.

Kline is in violation of Standard IV(A) "Loyalty" recommended procedures for failing to follow the employer’s policies and procedures related to termination policy. Members and candidates should understand and follow their employer’s policies and operating procedures. Also, members and candidates planning to leave their current employer must continue to act in the employer’s best interest.

May Frost, CFA, is an equity research analyst for a "precious metals mining" exchange traded fund which has recently started significantly outperforming its benchmark after several years of stagnation. Upon investigating the source of the outperformance, Frost learns that the fund has experienced severe style drift, and now has a significant proportion of its resources invested in technology and Internet stocks. Frost reviews the fund’s prospectus and learns the current sector weighting violates multiple prospectus covenants. Frost contacts her supervisor and the fund’s compliance department and is told the portfolio weighting is not her responsibility and that she should not pursue the matter further. Frost reviews the firm’s whistleblower policy, contacts personal legal counsel, and then contacts regulatory authorities regarding the style drift and prospectus violations. Frost is most likely:

A)	in violation of Standard IV(A) "Loyalty."

B)	not in violation of the Code and Standards.

C)	in violation of Standard III(E) "Preservation of Confidentiality."

Standard IV(A) "Loyalty" does not necessarily prohibit Frost from whistleblowing actions. Frost has properly contacted her supervisor and the compliance department, and has reviewed her firm’s whistleblower policy.

May Frost, CFA, is concerned about the comments and activities of several of her coworkers and feels both ethical and legal violations are routinely overlooked. According to the Code and Standards, a recommended first step would least likely be to:

A)	contact industry regulators.

B)	provide her supervisor with a copy of the Code and Standards.

C)	review the company’s policies and procedures for reporting ethical violations.

See Standard IV(A) "Loyalty." Frost should begin by reviewing the company’s policies and procedures for reporting ethical violations and provide her supervisor with a copy of the Code and Standards to highlight the high level of ethical conduct she is required to follow.

Francisco Perez, CFA, is an equity research analyst for a long-term investment fund. The fund is seeking new clients, so Perez contacts old clients he knew through his former employer. Which of the following is most accurate?

A)	Perez cannot solicit clients from a former employer.

B)	Perez can only solicit clients after notifying his former employer.

C)	Perez is not prevented from soliciting clients as long as he is working from memory and publically available information rather than a list generated while he was still with the former employer.

According to Standard IV(A), Perez is not prevented from soliciting clients as long as he is working from memory and publically available information rather than a list generated while he was still with the former employer.