Travis Brown is a partner in a money management firm. He recently attended a seminar and learned about a quantitative model presented by Dixon. Upon returning to his office, Brown began testing the model and making a few minor alterations. He showed the model to his partners who were impressed and decided to promote the model as proof of the firm's value added. In the firm's next newsletter, Brown included a discussion of the model, the results, and financial data on several stocks selected by the model. These factual data were taken from Standard and Poor's publication. According to the CFA Institute Standards of Professional Conduct, which of the following actions is Brown required to take?

A) Brown must credit both Dixon and S & P.

B) Brown must credit Dixon, no need to credit S & P.

C) Brown must credit S & P, no need to credit Dixon.

D) Brown need not credit either Dixon or S & P.

Which of the following statements about a member's use of client brokerage commissions is FALSE? Client brokerage commissions:

A) should be used by the member to ensure that fairness to the client is maintained.

B) may be used by the member to pay for securities research used in managing the client's portfolio.

C) should be commensurate with the value of the brokerage and research services received.

D) may be directed to pay for the investment manager's operating expenses.

Demonstrate a thorough knowledge of the Code of Ethics and Standards of Professional Conduct by interpreting the Code and Standards in various situations involving issues of professional integrity.

Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.

Steve Jones is a portfolio manager for Gregg Advisors. Gregg has developed a proprietary model that has been thoroughly researched and is known throughout the industry as the Gregg 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 researchan 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. Jones thoroughly understands the model and uses it with all of his clients. Jones is:

A) violating the Standards in purchasing stocks without a thorough research basis and in not disclosing all alterations of the model to clients.

B) violating the Standards in purchasing stocks without a thorough research basis, but not in failing to disclose all alterations of the model to clients.

C) violating the Standards in not disclosing all alterations of the model to clients, but not in purchasing stocks without a thorough research basis.

D) not violating the Standards either in purchasing stocks without a thorough research basis or in not disclosing all alterations of the model to clients.

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 researchan 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 managers investment decisions is TRUE?

A) Melfi is violating the Standards by using two investment processes that are in conflict with each other.

B) Melfi is violating the Standards by using a research process that she did not participate in developing.

C) There is no violation of the Standards.

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

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 researchan 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) violating the Standards by not being objective.

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

D) not violating the Standards.

Nancy Westfall 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 Craigs, a married couple that is a client, asked her to consider the Eligis fund for their portfolio. Westfall had not previously considered the fund because when she first conducted her research three years ago, Eligis was too small to be considered. However, the fund has now grown in value, and after doing thorough research on the fund, she finds the fund has suitable characteristics to be included in her acceptable list of funds. She puts the fund in the Craigs' portfolio but not in any of her other clients' portfolios. The fund ends up being the poorest performing fund in the Craigs' portfolio. Has Westfall violated any Standards? Westfall has:

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

B) violated the Standards by not maintaining independence and objectivity.

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

D) not violated the Standards.

David Lynch is an individual investment advisor who uses mutual funds for his clients. He typically chooses funds from a list of 40 funds that he has thoroughly researched. The Palmers, a married couple that are a client, asked him to consider the Twin Peaks fund for their portfolio. Lynch had not previously considered the fund because when he first conducted his research three years ago, Twin Peaks was too small to be considered. However, the fund has now grown in value, and after doing thorough research on the fund, he finds the fund has suitable characteristics to be included in his acceptable list of funds. He puts the fund in the Palmers' portfolio but not in any of his other clients' portfolios. The fund ends up being the best performing fund of any of the funds on his list. Has Lynch violated any Standards? Lynch has:

A) violated the Standards by not disclosing conflicts to clients.

B) violated the Standards by not maintaining independence and objectivity.

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

D) not violated the Standards.

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) not violated the Standards.

B) violated the Standards by not maintaining independence and objectivity.

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

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

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) not violated the Standards.

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

C) violated the Standards by not maintaining independence and objectivity.

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

One year ago, Karen Jason left the employment as a portfolio manager of Howe Advisors. The departure was contentious and both parties threatened legal action. As a result, both parties signed a settlement in which Jason was paid a pro rated bonus, but agreed not to work on the portfolios of any existing Howe client for two years. The terms of the agreement were that both parties agreed to keep all aspects of the agreement confidential, including the fact that there was hostility surrounding the departure. Jason now works for Torre Advisors, who has the Stein Company as a new client. At the time Jason left Howe, Stein was a client of Howe, although Jason did not personally work on the Stein portfolio. Jason's supervisor at Torre wants Howe to work on the Stein portfolio. Jason should:

A) inform her supervisor that she cannot work on the portfolio because of a legal agreement, but cannot tell him why.

B) work on the portfolio because she did not personally work on the portfolio when she was at Howe.

C) inform her supervisor that she cannot work on the portfolio because of a non-compete agreement.

D) leave the employment of Torre because of a conflict of interest.

Judy Gonzales is a portfolio manager with Brenly Capital and works on Johnson Company's account. Brenly has a policy against accepting gifts over $25 from clients. The Johnson portfolio has a fantastic year, and in appreciation, the pension fund manager sent Gonzales a rare bottle of wine. Gonzales should:

A) return the bottle to the client explaining Brenly's policy.

B) present the bottle of wine to her supervisor.

C) inform her supervisor in writing that she received additional compensation in the form of the wine.

D) share the wine at a company function.

Ken James has been an independent financial advisor for 15 years. He received his CFA Charter in 1993, but did not feel it helped his business, so he let his dues lapse this year. He still has several hundred business cards with the CFA designation printed on them. His promotional materials state that he received his CFA designation in 1993. James:

A) must cease distributing the cards with the CFA designation and the existing promotional materials.

B) can continue to use the existing promotional materials, and can use the cards until his supply runs outhis new cards cannot have the designation.

C) must cease using the existing promotional materials, but can use the cards until his supply runs outhis new cards cannot have the designation.

D) must cease distributing the cards with the CFA designation, but can continue to use the existing promotional materials.

Brian Williams is a portfolio manager with Santo Capital and works on the Banks Company's account. Santo has a policy against accepting gifts over $500 from clients. The Banks' portfolio has a fantastic year, and in appreciation, the pension fund manager sent Williams a rare bottle of wine that he estimates is worth $300. Williams must:

A) report the pension fund manager to the CFA Institute Professional Conduct Program.

B) return the bottle to the client.

C) donate the wine to charity.

D) inform his supervisor in writing that he received additional compensation in the form of the wine.

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) is a CFA in waiting.

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

C) has earned the CFA charter as long as she is on track to complete her work experience.

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

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 percent, 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 PPS.

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

D) he cannot discuss performance orally without first putting his numbers in writing.

Brenda Clark is an investment advisor. Two years ago Clark decided to stop calculating a return composite because of the time required to make those calculations. A prospective client asks Clark what she thinks her performance would have been over the past two years. Clark:

A) can answer the question orally but cannot state the numbers in writing.

B) cannot answer the question because it would be misleading.

C) cannot answer the question, nor can she discuss potential future market returns with the prospective client.

D) must surrender her Charter immediately.

Jack Stevens is employed by a company to provide investment advice to participants in the firm's 401(k) plan. One of the investment options is a stable value fund run by the company. Stevens' research indicates that the fund is far riskier and less liquid than the typical stable value fund and has a fundamental asset value lower than book value of the assets. He tells Jessica Cox, the head of employee benefits, about his research, and indicates that he will advise new employees to not invest in the fund and will advise employees who already own the fund to reduce their holdings in the fund. Cox points out that the fund is not in any current danger because there are very few redemptions requested of the fund. Cox also states that a sell recommendation may become a self fulfilling prophecy, causing investors to redeem their shares and forcing the fund to liquidate, which in turn will cause the remaining investors to receive less than their promised value. Stevens agrees with this assessment and feels his fiduciary duty is to all employees. Stevens should:

A) continue to recommend that new investors do not invest in the fund, but not advise existing investors to reduce their holdings.

B) continue to recommend that new investors do not invest in the fund and existing investors reduce their holdings.

C) recommend that new investors invest in the fund and existing investors maintain their holdings.

D) tell investors he cannot give advice on the fund because of a conflict of interest.

Randal Brooks is the chief economist for a large brokerage firm. In the aftermath of a national tragedy, Brooks feels that it is very possible that the stock market will drop significantly and not recover for several years. However, he does not believe that this is the most likely scenario but merely that the risk of investing in equities has increased. He decides to write a market commentary to the brokerage clients that discusses the reasons why the market will remain stable and talks about why he, as a private citizen, feels patriotic. He does not mention the increase risk in equities. Brooks has:

A) violated the Standards by not including all of the relevant factors in the research report and making patriotic statements.

B) violated the Standards by making patriotic statements, but not by failing to include all of the relevant factors in the research report.

C) not violated the Standards.

D) violated the Standards by not including all of the relevant factors in the research report, but not by making patriotic statements.

Jim Taylor works as a portfolio manager for Rose Capital and also serves as president of the Little League board of directors in his town. He receives no money from Little League, however the local golf club provides him with a free membership for volunteering his time on the Little League board. Taylor's involvement with Little League is in his company biography, but the club membership has not been disclosed to Rose or his clients. Taylor has:

A) violated the Standards by not disclosing the club membership to Rose, but not by failing to disclose it to clients.

B) violated the Standards by not disclosing the club membership to Rose and failing to disclose it to clients.

C) violated the Standards by not disclosing the club membership to clients, but not by failing to disclose it to Rose.

D) not violated the Standards.

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 sending the report to the CFO before sending it to her clients.

B) not violated the Standards of Professional Conduct.

C) violated the Standards of Professional Conduct by not including all of the data the CFO provided to her.

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

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) not violated the Standards as long as the research provided by the broker will benefit Simone's money management practice.

D) violated the Standards.

Dan Jeffries is a portfolio manager who is being sued by one of his clients for inappropriate investment advice. The Professional Conduct staff of CFA Institute is also investigating Jeffries for the same offense. Jeffries settled the lawsuit with the client with the settlement agreement requiring that the client not divulge any aspects of the case or the settlement to any non-governmental authority. When the CFA Institute 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 executing the settlement agreement, but not by refusing to talk about the case with CFA Institute.

B) violated the Standards by executing the settlement agreement and refusing to talk about the case with CFA Institute.

C) violated the Standards by refusing to talk about the case with CFA Institute, but not by executing the settlement agreement.

D) not violated the Standards.

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 stating she has a CFA designation over the Internet.

C) violated the Standards by misrepresenting her experience.

D) not violated the Standards.

Greg Allen is a security analyst and visits David Dawson, the Chief Financial Officer of Edmonds Company. Dawson reveals a great deal of nonmaterial financial data to Allen, data that Dawson routinely reveals to all security analysts who visit him. From this data and other industry information, Allen conjectures that Edmonds is likely to make a tender offer for another company in the industry, a fact that if true would be considered material to the value of the company. Allen:

A) should send a copy of the report to Dawson for verification before disseminating the report to clients.

B) must not disseminate the information or use it for trading purposes until the tender offer is announced.

C) can trade in the stock, but must not publish the information until the tender offer is announced.

D) can publish his conclusion in a research report.

Patricia Cuff is the chief financial officer and compliance officer at Super Selection Investment Advisors that has incorporated the CFA Institute Code of Standards into the firm's compliance manual. Karen Trader is a portfolio manager for Super Selection. Trader is friendly with Josey James, president of AMD, a rapidly growing biotech company. Trader has served on AMD's board of directors for the last three years. James has asked Trader to commit to a large purchase of AMD stock for her portfolios. Trader had previously determined that AMD was a questionable investment but agreed to reconsider. Her reevaluation deemed the stock to be overpriced, but she nevertheless decides to purchase for her portfolios. Which standard was NOT broken?

A) IV(C)--Responsibilities of Supervisors.

B) IV(A)--Loyalty.

C) VI(A)--Disclose of Conflicts.

D) I(C)--Misrepresentation.

The following information pertains to the Galaxy Trust, a trust established by Stephen P. House and managed by Gamma Investment LLC:

• At the time the trust was established House provided $5 million in cash to fund the trust, but Gamma was aware that 93 percent of his personal assets were in the form of Oracle stock.
• Gamma has been asked to view his funds and the trust as a single entity for planning purposes, since Houses will stipulates that all of his estate will pass to the trust upon his death.
• The investment policy statement, developed in September 1996, stipulates that the trust should maintain a short position in Oracle stock and use the proceeds to diversify the trust more adequately.
• House was able to sell all of his Oracle shares back to the corporation in January 1999 for cash.
• The policy statement redrawn in September 1999 continues to stipulate that the trust hold a short position in Oracle stock.
• House has given the portfolio manager in charge of the trust an all expenses paid vacation package anywhere in the world each year at Christmas. The portfolio manager has reported this fact in writing to his immediate supervisor at Gamma.

Which of the following is most correct? The investment manager is:

A) in violation of the Code and Standards by not properly updating the investment policy statement in light of the change in the circumstances and is in violation with regard to the acceptance of the gift from House.

B) in violation of the Code and Standards by not properly updating the investment policy statement in light of the change in the circumstances but is not in violation with regard to the acceptance of the gift from House.

C) not in violation of the Code and Standards for not properly updating the investment policy statement in light of the change in the circumstances and is not in violation with regard to the acceptance of the gift from House.

D) not in violation of the Code and Standards for not properly updating the investment policy statement in light of the change in the circumstances but is in violation with regard to the acceptance of the gift from House.

Joan Platt, CFA, operates an investment firm in New York, but maintains an office in Xania. Platts firm invests on its clients behalf in both domestic and international stocks and bonds. Platts employees include two analysts, Paula Linstrom, CFA, and Hershel Wadel, a member of the CFA Institute. Both analysts report to Platt directly. Thorvald Knudsen, CFA, manages the international bond portfolio.

Xania recently established a stock market, which is not very efficient. None of the Xanian stocks trade in the U.S. market. Xania legally permits the use of material inside information. Platt believes that using inside information would help her compete against other Xanian investment advisers, and also help some of her Xanian clients reach their investment objectives.

Platt instructs Wadel to write a research report on Gamma Company. Wadel's wife inherited 500 shares of Gamma Company from her father when he died five years ago. Gamma stock currently sells for $35 a share. Wadel does not believe that informing Platt about his wife's inheritance is necessary.

Doris Black, one of Wadel's long-time clients, verbally promised Wadel that he could use her vacation home in Aspen, Colo., for a week during skiing season if the return on her portfolio exceeded its benchmark by two percentage points during the next year. Black also promised to reimburse Wadel for his travel expenses. Because Wadel is the sole manager of Blacks portfolio, he says nothing to Platt about his arrangement with Black.

Platt instructs Linstrom to write a research report on Delta Enterprises. Delta's stock is widely held by institutional and individual investors. Linstrom does not own any Delta shares, though one of her friends owns 100 shares of Delta. Linstrom does not believe that informing Platt about her friend's ownership of Delta shares is necessary.

Linstrom has a client, Mandy Miller, with a large account. Miller has set a return goal for her portfolio, promising Linstrom that if the portfolio exceeded the target return, she would let Linstrom use her time-share in St. Maarten in December. Linstrom sent an e-mail to Platt describing Millers promise to her. Platt promptly replied to her email granting her permission to enter the agreement.

In February, Linstrom was able to arrange for the purchase of Brady Company bonds at a significant discount to market value. The purchase was made in three blocks at 13 percent, 15 percent, and 12 percent discounts to market value. Linstrom allocated the 15 percent discount block to Millers account and the balance to her remaining clients.

Knudsens uncle, Gustaf Jensen, owns a construction firm that has extra cash. When Jensen saw Knudsen at a family event last November, he asked Knudsen to give him advice about purchasing domestic bonds for the construction firm. In exchange for the advice, the construction firm would pay Knudsen $5,000 per year. At the same event, Knudsens aunt, Hanna Jorgensen, approached Knudsen and asked if he would manage Jorgensens apartment building for a fee of 10 percent of the gross rents. Knudsen agreed to both Jensens and Jorgensens proposals. Knudsen informed Platt of Jensens request, but not about the Jorgensen arrangement.

Platt suspects that one of the firms unpaid interns has violated a federal securities regulation.

Which of the following statements about Linstrom and Wadel's conduct regarding their research reports is TRUE?

A) Wadel did not violate Standard VI(A): Disclosure of Conflicts, and Linstrom did violate Standard VI(A).

B) Neither Linstrom nor Wadel violated Standard VI(A): Disclosure of Conflicts.

C) Wadel violated Standard VI(A): Disclosure of Conflicts, and Linstrom did not violate Standard VI(A).

D) Both Linstrom and Wadel violated Standard VI(A): Disclosure of Conflicts.

A) Wadel must disclose the arrangement to Platt but is not required to disclose the arrangement to his other clients.

B) Wadel need not disclose anything to his clients or to Platt because he is violating no fiduciary duty.

C) Wadel must disclose the arrangements to his clients and to Platt only if he believes it will create a conflict with his responsibilities to other clients.

D) Wadel need not disclose the vacation-home deal to Platt because no money is changing hands, but must disclose the expense reimbursement to both Platt and his clients.

A) no Standards with regards to both the Jensen and Jorgensen deals.

B) Standard IV(B): Additional Compensation with relation to the Jensen deal, but did not violate the Standard with relation to the Jorgensen deal.

C) Standard IV(B): Additional Compensation with relation to the Jorgensen deal.

D) Standard IV(B): Additional Compensation with relation to both the Jensen deal and the Jorgensen deal.

A) violated Standard IV(B): Additional Compensation Arrangements, Standard III(B): Fair Dealing, and Standard IV(C): Responsibilities of Supervisors.

B) violated Standard III(B): Fair Dealing, but not Standard IV(B): Additional Compensation Arrangements.

C) did not violate the Code and Standards because the appropriate disclosures were made.

D) violated Standard IV(B): Additional Compensation Arrangements and Standard III(B): Fair Dealing.

A) Tell the intern to stop the conduct.

B) Report the interns behavior to the appropriate regulatory authority.

C) Initiate an investigation and place limits on the interns activities pending the outcome.

D) Do nothing, as the intern is not receiving compensation, and as such is not an employee of the company.

A) not use material inside information unless trading Xanian stocks.

B) not use material inside information when trading in Xania.

C) use material inside information only when trading for Xanian nationals.

D) use material inside information when trading in Xania only if the information does not relate to a tender offer.

Sheila Stevens, CFA, has accepted a one-year gift membership (valued at approximately $225) to the Womens World Health Club from a firm to which she directs trades. She has done so without notifying her employer. Which of the following statements are FALSE?

A) This is a violation of the Code and Standards, because the gift is not a token amount.

B) This is a violation of the Code and Standards but is less serious than an identical case in which the gift was given by a client of Stevens.

C) This is a violation of the Code and Standards, because it has not been disclosed to her employer.

D) This is a violation of the Code and Standards, because the intent appears to be to gain influence over Stevens.

Which of the following statements about soft dollars is least accurate?

A) Soft dollars are assets of the client.

B) Soft dollars are third party research arrangements.

C) Soft dollars are not to be used for overhead.

D) Directed brokerage are soft dollars to be used for research that benefits the investment firm.

In August 2005, the following events occurred related to Aggregate Opportunities, Inc.:

• Aug. 8: The Wall Street Journal reported that Aggregate Opportunities had inflated its 2004 earnings due to questionable accounting practices. The story was based on interviews with unnamed sources within Aggregate and its auditor, Millennium Partners. On that day the stock fell 42 percent to $12.50 from $21.55.
• Aug. 10: At 9 a.m., Aggregate revealed in a conference call to analysts a restatement of earnings for the previous three fiscal years that almost completely erased the reported net income for fiscal years 2002, 2003, and 2004. Aggregates chief financial officer personally selected the small group of analysts participating in this call. Company officers said the restatement resulted from questionable accounting practices for off-balance sheet limited partnerships. At 1 p.m., the company issued a news release containing the information provided in the conference call. By the end of the trading day the stock had fallen 74 percent to $3.25.
• Aug. 11: At 10 a.m., Aggregates Chief Financial Officer Buster Lockhart, CFA, publicly announced his resignation, and the Securities and Exchange Commission said it was pursuing an investigation.

During July and August of 2005, the following actions were taken:

• July 20: Michael Cho, CFA, a highly respected analyst with 25 years of experience covering Aggregates industry, had spent several days reading Aggregates 10-K and 10-Q documents and other analysis published by some of his competitors at major brokerage houses. Based on his reading and conversations with Aggregate management concerning nonmaterial, nonpublic information, Cho concluded that Aggregate had inflated its earnings. On July 20, Cho issued a detailed research report to his clients and concluded that Aggregate should be sold. He subsequently participated in the Aug. 10 conference call, although it only confirmed what he had already detailed in his July research report.
• Aug. 2: Equity analyst Harold Black, a CFA charterholder, received from his brother information that Aggregate might restate its earnings. Blacks brother is a senior partner at Millennium Partners. Based on this information, Black immediately prepared a new research report that advised his clients to sell Aggregate, but did not liquidate his personal holdings in the company.
• Aug. 4: Bob Watkins, a CFA Level II candidate and portfolio manager, was golfing at his club. Approaching the third tee, he heard the chief executive officer and chief financial officer of Aggregate discussing company finances. Concealing himself behind a tree, Watkins overheard them discussing the upcoming Wall Street Journal article and the earnings restatement. Based on this conversation, he immediately sold all Aggregate holdings in his clients portfolios. Later that day, Watkins told his friend Juan Martinez, CFA, what he learned about Aggregate and how he learned it. Martinez, a subscriber to Chos research, then read Chos report on Aggregate. Immediately after finishing Chos report, Martinez sold the funds entire stake in Aggregate. Watkins and Martinez were not participants in the Aug. 10 conference call.
• Aug. 8: Barb Henderson, a CFA charterholder, read the Wall Street Journal article in the morning and immediately issued a sell recommendation for Aggregate. On Aug. 10, she participated in the conference call and heard the details of the earnings restatement.
• Aug. 10: Lisa Sanders, CFA, participated in the Aggregate conference call. At 10 a.m., she changed her recommendation on Aggregate from hold to sell and informed all of her clients. At 1 p.m., Sanders sold Aggregate from her personal account.

In issuing a sell recommendation for Aggregate, Henderson:

A) violated none of the Standards.

B) violated Standard V(B): Communication with Clients and Prospective Clients because she failed to distinguish between fact and opinion.

C) violated Standard V(A): Diligence and Reasonable Basis because she lacked sufficient reason to justify the downgrade.

D) violated Standard II(A): Material Nonpublic Information because she took investment action prior to the analyst conference call.

A) did not violate Standard II(A): Material Nonpublic Information because the information did not involve a tender offer.

B) did not violate Standard II(A): Material Nonpublic Information because he had not yet earned his CFA designation and is not bound by the Standards.

C) did not violate Standard II(A): Material Nonpublic Information because there was no breach of duty.

D) violated Standard II(A): Material Nonpublic Information by taking investment action.

A) violated Standard III(B): Fair Dealing because he did not take his own advice and sell the stock.

B) violated Standard V(A): Diligence and Reasonable Basis because he did not have sufficient information to spur investment action.

C) did not violate Standard I(B): Independence and Objectivity, but his supervisor violated Standard IV(C): Responsibilities of Supervisors.

D) violated Standard VI(A): Disclosure of Conflicts because he did not tell his clients the tip came from his brother, and his brother violated Standard III(A): Loyalty, Prudence, and Care.

A) did not violate Standard II(A): Material Nonpublic Information because the information was disclosed to a select group of analysts.

B) violated Standard VI(B): Priority of Transactions by trading Aggregate from her own account.

C) violated Standard II(A): Material Nonpublic Information by taking investment action based on information not accessible to the public.

D) violated Standard III(B): Fair Dealing by not disseminating the information to all clients and prospective clients equally.

A) violated Standard III(A): Loyalty, Prudence, and Care by using information obtained from Watkins.

B) violated Standard V(A): Diligence and Reasonable Basis because he failed to use sufficient diligence in his research.

C) violated Standard II(A): Material Nonpublic Information by using information obtained from Watkins.

D) violated no standards.

A) Aggregates CFO violated the fair-dealing Standard, but Black did not violate the fiduciary-duties Standard.

B) Martinez did not violate the Standard regarding use of material nonpublic information and did not violate the fiduciary-duties standard.

C) Cho did not violate the Standard regarding use of material nonpublic information, and neither did Watkins.

D) Henderson violated the reasonable-basis standard, but Sanders did not violate the Standard regarding use of material nonpublic information.

David Loy, an analyst, in the course of reviewing the Corn Co., has received comments from management that, while not meaningful by themselves, when pieced together with data he has accumulated from outside sources, lead him to recommend placing Corn Co. on his firm's sell list. What should David do?

A) Contact the managers and have them publicly announce their comments.

B) Show his report to his own manager and counsel for their review since this information has become material once it was combined with his analysis.

C) Not issue the report until the comments are publicly announced.

D) The comments are non material and the report can be issued as long as he maintains a file of the facts as supplied by management.

Your manager, Nathan Green, is asking you about "fiduciary duty." Green asks you to give examples of this fundamental concept. You show him a series of statements that might be made by a CFA Institute member who is an investment manager for a pension plan operating under the provisions of ERISA, the Employee Retirement Income Security Act of 1974. This U.S. legislation established guidelines and requirements for fiduciary conduct and sets standards for many aspects of all private and some public pension plans in the United States. Together with the CFA Institute Code of Ethics and Standards of Practice, the ERISA prescriptions may serve as a model for appropriate fiduciary conduct worldwide.

Concerning an investment manager's responsibility to vote proxies, which of the following statements is TRUE?

A) The investment manager must vote all proxies.

B) The investment manager must vote all proxies in agreement with management or the investment should be sold.

C) The investment manager is only required to vote proxies in support of anti-management votes. When in agreement with management, no vote is required.

D) The investment manager must vote all proxies unless there are bona fide reasons, consistent with the interests of the plan participants and beneficiaries, for not doing so.

A) Fiduciaries are required to conduct a thorough and diligent analysis.

B) Fiduciaries must consider the circumstances prevailing.

C) Fiduciaries must invest so as to ensure they do not experience negative returns.

D) Fiduciaries must consider the risk return tradeoff.

A) the plan documents should be followed.

B) ERISA requirements should be followed.

C) the firm's compliance officer should determine which will govern plan administration.

D) the differences may be ignored.

Lon Smith is an analyst in the Research Department of Lincoln & Co., a large investment firm. He has just completed a temporary assignment in Lincoln's Corporate Finance Department related to FinSoft, a computer software company whose recent operating record has reflected lagging sales volume and heavy product development expenses. Smith has marked his FinSoft notes and work sheets "CONFIDENTIAL / CORPORATE FINANCE DEPARTMENT" and sent them to the company file in the Research Department. This material reveals that FinSoft is about to receive a major contract for an innovative software program that will have a very significant positive impact on earnings as well as on the company's visibility and stature in the industry.

Jay Jones, a CFA candidate and a portfolio manager for Lincoln, has come upon these notes and work sheets while reviewing the FinSoft research file. Jones had been considering sale of the stock from the accounts under his management, but realizes after reading the file material that the recent weakness in operating results is about to be reversed and that the company's prospects are actually quite favorable. Perhaps, he thinks, he should add to his clients' FinSoft positions instead of considering their sale.

Jones briefly reflects on the matter of "inside information" in relation to perhaps buying more of the stock instead of selling it, but his recollection is hazy and Lincoln has no formal guidelines on the subject to which he can refer. Based on the circumstances, Jones believes he is free to use this new knowledge for the benefit of Lincoln's clients.

Based on CFA Institute Standards of Professional Conduct, which of the following is NOT correct?

A) There is no breach of duty if traded on because Jones did not conduct the research that produced the information.

B) The information is material because the new software is likely to significantly increase FinSoft's future earnings.

C) The information is nonpublic because there is no indication it has been disclosed in the marketplace.

D) There is misappropriation of information by Jones because the file is marked "Confidential / Corporate Finance Department."

A) encourage public dissemination of the information.

B) wait to trade on the information until after a reasonable period has passed.

C) report the situation to his supervisor or the firm's compliance officer.

D) encourage his employer to review the compliance procedures as they relate to material nonpublic information issues.

A) have in place a supervisor or compliance officer who has the authority and responsibility to decide whether information is material and nonpublic.

B) develop criteria for identifying inside information.

C) prohibit exchange of personnel, even temporary, between investment banking and institutional money management departments.

D) establish an information barrier between personnel who invest client funds and personnel who work in corporate finance.

Member compliance on issues relating to corporate governance or to soft dollars is primarily addressed by the Standard concerning:

A) Loyalty, Prudence, and Care.

B) Fair Dealing.

C) Disclosure of Conflicts to Clients and Prospects.

D) Disclosure of Referral Fees.

Denise Weaver is a portfolio manager who manages a mutual fund and has pension clients. When Weaver receives a proxy for stock in the mutual fund, she gives it to Susan Griffith, her administrative assistant, to complete. When the proxy is for a stock owned in a pension plan, she asks Griffith to send the proxy on to the director of the pension fund. Weaver has:

A) violated the Standards by her policy on pension fund proxies, but not her policy on mutual fund proxies.

B) violated the Standards by her policy on mutual fund and pension fund proxies.

C) violated the Standards by her policy on mutual fund proxies, but not her policy on pension fund proxies.

D) not violated the Standards.

Sharon Pope has been asked by the Chief Investment Officer to develop a firm-wide policy for proxy voting. Which of the following would NOT be acceptable to include in the policy statement?

A) Voting proxies may not be necessary in all instances.

B) Portfolio managers of active funds must vote in all proxies; portfolio managers of index funds should vote only when they have a definitive opinion.

C) The value of proxy voting must me maximized.

D) Proxy voting procedures should always be disclosed to clients.

Jordan Conomos is the new trustee for the Grant Trust, which has both current beneficiaries and remaindermen. Up until now, the trust has been entirely invested in long-term tax-free municipal bonds. Conomos decides to put 30 percent of the assets in common stocks, with the justification that taxes should be the concern of the trust beneficiaries and not the trust, and the trust needs some diversification and growth. Conomos is:

A) violating his fiduciary duty by not investing solely for the purposes of the current beneficiaries.

B) violating his fiduciary duty by not following the Prudent Man Rule.

C) not violating his fiduciary duty.

D) violating his fiduciary duty by not considering taxes.

June Bird is a pension consultant asked to advise on the Backwater County Pension Plan. Bird notices that 20 percent of the plan's assets are invested in privately held local businesses. Bird is concerned about the lack of liquidity and diversification caused by such an investment. She learns that state law allows investing in local businesses and county law requires at least one-fifth of the plan's assets to be dedicated to investing in local businesses. Bird:

A) should file a written complaint to the Department of Labor pointing out that the law is in conflict with the Employee Retirement Income Security Act (ERISA).

B) must immediately resign as a consultant to the plan or risk forfeiting her CFA Charter.

C) should recommend that the trustees resign or risk being sued for violating the Prudent Expert Rule.

D) can continue to advise the pension plan as best she can with the restrictions.

Mason Dixon is an investment advisor with Vicki Lynn as a client. Lynn has expressed an interest in socially responsible investing and has expressed a desire to replace her international and small company funds with socially responsible funds. Dixon has research that indicates the Alpha International Fund and the Beta Small Company Fund are the best socially responsible funds in their class. He believes the Alpha fund will likely have slightly lower performance than the current international fund, but the Beta fund will have significantly worse performance than the current small company fund. Moreover, Dixon has research that supports the contention that socially responsible funds as a group will underperform regular funds. Dixon:

A) must explain the research to Lynn and tell her that he cannot as her advisor purchase either fund without violating his fiduciary duty.

B) must explain the research to Lynn, who can purchase the funds if she still feels comfortable with these investments.

C) can purchase the funds without explaining the research to Lynn.

D) must explain the research to Lynn and tell her that he cannot as her advisor purchase the Beta fund without violating his fiduciary duty, but he can purchase the Alpha fund.

A company has a defined benefit plan that is currently under-funded. The plan sponsor has instructed the portfolio manager of the plan to invest more aggressively to bring the funding level up to an adequate amount. Which of the following statements best describes the course of action the portfolio manager should take? The portfolio manager should:

A) not invest more aggressively because this is not the method used to increase the funding level of a plan.

B) not invest more aggressively since this may expose the plan to too much risk and may not be in the best interest of the plan's beneficiaries.

C) invest more aggressively because this will increase the plan's assets faster as the stock market increases allowing the plan to become fully funded.

D) invest more aggressively because his fiduciary duties lie with the plan sponsor.

Scott Andrews, CFA, is a stockbroker selling an oversubscribed stock issue. Which of the following best describes Andrews' actions regarding this sale? Andrews:

A) can offer this security on a prorated basis to all clients for which the security is appropriate.

B) can offer this security to all clients on a first come first serve basis.

C) can only offer this security to clients for which it is appropriate on a first come first serve basis.

D) cannot offer an oversubscribed issue of stock to any clients.

Which of the following actions is least likely to prevent the misuse of insider information?

A) Controlling relevant interdepartmental information.

B) Placing securities on a restricted list when the firm is in possession of material nonpublic information.

C) Monitoring the trading of the firm and personal trading of the employees.

D) Monitoring all the phone calls made by the brokers.

Rajiv Singh, a CFA charterholder, works as an equity analyst with Horizon Investments, a large broker/dealer. After ski-resort developer HighLife misses a quarterly earnings target, Singh changes his recommendation on HighLife from buy to hold. Singh has been following HighLife for years. In several previous research reports on HighLife, Singh told clients that, based on his detailed analysis of the financial statements and market position, he believed HighLife had stopped picking up market share. He had mentioned concerns about HighLife several times in his reports and said in the most recent report that he would downgrade the stock if it missed quarterly earnings.

Singh had produced his monthly report on HighLife just a week before the earnings announcement, and because he had just written about his intention to downgrade the stock, he felt he did not need to inform clients of his recommendation change until the next monthly report.

On the same day that the HighLife report was released, Singh initiated coverage on another company, the convenience-store operator QuickStop, with a Buy rating. His research report is distributed that afternoon. A client sends Singh a sell order for QuickStop via e-mail the same day the new recommendation is being disseminated to all Singhs clients and prospects.

John Womack, a Level II CFA candidate, is a trader at Horizon. Womack, walking past the conference room during an investment meeting, learns of the initiation of the buy rating on QuickStop. Prior to the dissemination of the buy rating to Horizons clients, he buys up a large block of QuickStop shares for Horizons account in anticipation of clients interest in the stock. When the rating is released to the firms customers, he fills the incoming customer orders out of Horizons inventory, generating a modest profit for the company.

Horizon is drafting trade-allocation guidelines for companywide use. Five regulations the company is considering are listed below:

• Regular orders are processed and executed on a pro-rata basis.
• Shares in initial public offerings will be allocated on a pro-rata basis to the firms portfolio managers according to advance indications of interest from the managers.
• When the full amount of a block order is not executed, partially executed orders are allocated on a first-in, first-out basis.
• Orders must be recorded in writing and stamped with the time of the order and the execution.
• All clients participating in block trades are give the same execution price, and all clients are charged the same commission.

When Singh receives the sell order for QuickStop, he should:

A) tell the client about the buy rating and advise him not to sell the stock.

B) ask the client to delay the order until he sees the new research report.

C) process the sell order immediately to fulfill his fiduciary duty to the client.

D) delay answering the e-mail until the client has received the new research report.

A) Standard III(E): Preservation of Confidentiality and Standard VI(B): Priority of Transactions.

B) Standard IV(A): Loyalty to Employer and Standard III(B): Fair Dealing.

C) Standard III(A): Loyalty, Prudence, and Care and Standard VI(B): Priority of Transactions.

D) Standard III(A): Loyalty, Prudence, and Care and Standard IV(A): Loyalty to Employer.

A) violated the research reports Standard because he failed to differentiate between facts and opinions.

B) violated the insider-trading Standard by using nonmaterial, nonpublic information in forming his opinion of HighLife.

C) did not violate the Standards for reasonable basis or research reports.

D) violated the reasonable-basis Standard by downgrading a stock just because it missed one quarterly earnings estimate.

A) Standard III(B): Fair Dealing by not telling clients about the downgrade of HighLife in the wake of his promise to downgrade the stock if it missed estimates.

B) Standard V(A): Loyalty, Prudence, and Care by not exercising reasonable care and prudent judgment in his research.

C) Standard I(C): Misrepresentation by not exercising diligence and thoroughness in his research.

D) Standard III(C): Suitability because he did not consider the needs of individual clients.

A) a violation of Standard: Loyalty, Prudence, and Care and Standard VI(B): Priority of Transactions.

B) not a violation of Standard I(B): Independence and Objectivity.

C) not a violation of Standard III(B): Fair Dealing if they are disclosed to all clients and prospects.

D) a violation of Standard III(C): Suitability, but not of Standard ) III(A): Loyalty, Prudence, and Care.

A) When the full amount of a block order is not executed, partially executed orders are allocated on a first-in, first-out basis.

B) All clients participating in block trades are give the same execution price, and all clients are charged the same commission.

C) Regular orders are processed and executed on a pro-rata basis.

D) Orders must be recorded in writing and stamped with the time of the order and the execution.

Mary Montpier, CFA, is an equity analyst located in the Malaysia office of World Class Advisers. The firm provides investment advice and financial-planning services globally to institutional and retail clients. The Malaysia office was opened last year to provide additional international investment opportunities for U.S. clients. Montpier covers small-cap stocks in the region. Montpiers supervisor, Rick Reynolds, CFA, works in New York.

Jim Taylor is an analyst in New York who works at World Class Broker-Dealer, a sister company of World Class Advisers. Taylor covers health-care and biotech stocks for the firm. Taylor recently completed Level I of the CFA examination and is registered for the Level II examination next year. Taylor works for John James, CFA.

Through her interaction with other analysts in Malaysia, Montpier learns that the use of material, nonpublic information is common practice in analyst research reports and recommendations, and is not prohibited by law in Malaysia. Montpier has acquired material, nonpublic information on the research pipeline of Circuit Secrets, a Malaysian semiconductor company. The nonpublic information makes the company seem like a fine investment. After extensive research through traditional means, Circuit Secrets appeared to be fully valued relative to its growth potential until Montpier found the nonpublic information.

In preparation for a client meeting, James asks Taylor to prepare a research report on attractive companies in the health-care industry. Since Taylor is busy preparing for company conference calls, James tells him to throw something together. To meet James request, Taylor obtains reports on Immune Health Care and Remedy Corp., two companies that he likes, but has not researched in depth. Taylor takes the original reports, which were prepared by a small brokerage firm in the Netherlands, adds some general industry information, incorporates World Classs proprietary earnings-growth model, and submits strong buy recommendations to James for the stocks. Although written procedures require James to review all analyst reports prior to release, time constraints consistently prevent him from reviewing the reports prior to distribution.

Montpier is proud of her CFA charter. In fact, she often boasts that she is one of the elite members of the CFA Institute that passed all three exams consecutively without failing. Taylor is also proud of the CFA program. He told his friends and family the CFA designation is globally recognized in the field of investment management and research. Furthermore, Taylor states that he believes the program will enhance his portfolio management skills and further his career development.

In her free time, Montpier has begun consultation for members of a local investment cluB.The club is in the process of developing an appropriate compensation package for her services, which to date have included financial-planning activities and investment research. Montpier informs the investment club that she has a full-time job at World Class Advisers, which offers similar services. The investment club gave Montpier written permission to consult for them despite her full-time work.

To gain insight on biotech stocks, Taylor registers for an upcoming asthma study conducted by Breakthrough Corp., through which he and others will be the subject of testing for the efficacy of several new drugs. On his application, longtime asthma sufferer Taylor indicates that he has the appropriate medical condition for the study and signs a confidentiality agreement. During the study, a researcher shows Taylor a spreadsheet detailing the progress of Breakthroughs research pipeline. Two of the new drugs on which Breakthrough is awaiting regulatory approval have serious negative side effects in patient testing. This information confirms suspicions Taylor had developed after extensive research and conversations with company executives regarding nonmaterial, nonpublic information, though he was not certain about the names of the drugs until he saw the spreadsheet. At the conclusion of the study, Taylor releases a report detailing the drugs side effects and recommends that clients sell Breakthrough Corp.

Over the next two weeks, Breakthrough releases information that the drugs in question have been held up by a regulatory agency pending additional investigation. The stock plunges more than 30 percent on the news.

Which of the following is a violation of the Code and Standards?

A) Reynolds approves Montpiers report on Circuit Secrets immediately, but tells his traders to wait a week before buying the stock themselves.

B) James has dinner with Taylor and promises to provide Taylor with three weeks off in May to study for the CFA exam and offer some test-taking tips.

C) Taylor sends out a resume referring to himself as a Level II CFA candidate and indicating his intention to take the Level II test in June.

D) An intern at World Class takes a side job as a bartender on weekends to supplement her income.

A) Montpier could satisfy the requirements of Standard II(A): Material Nonpublic Information by producing a research report on Circuit Secrets for Malaysian clients, but not making it available to U.S. clients.

B) If Montpier fails to use the nonpublic information, and as such is unable to recommend the company, she has violated Standard III(A): Loyalty, Prudence, and Care by failing to act in the best interest of her clients.

C) If Montpier prepares a research report for all World Class clients recommending Circuit Secrets as a Buy, but does not reveal the nonpublic information, she has still violated Standard II(A): Material Nonpublic Information.

D) Montpiers best course of action is to initiate coverage of Circuit Secrets as a hold, and attempt to get the company to disclose the nonpublic information.

A) neither Montpier nor Taylor is in compliance.

B) Montpier is in compliance, and Taylor is in compliance.

C) Montpier is not in compliance, and Taylor is in compliance.

D) Montpier is in compliance, and Taylor is not in compliance.

A) Initiate coverage of Immune Health Care and Remedy Corp. as holds, not strong buys, until he has time to do further research.

B) Base his report on information from Value Line and Standard & Poors reports rather than research from rival analysts.

C) Nothing, as the reports he used came from an international source, and are not protected under U.S. law.

D) Just use excerpts from the original reports, rather than copying the whole reports.

A) By accepting compensation for his role in the medical study, Taylor is violating the Standard.

B) Despite getting written permission from her client to consult, Montpier is not in compliance with the Standard.

C) Taylors use of rival analysts reports in his own research violates the Standard.

D) Neither Taylor nor Montpier is in violation of the Standard.

A) violate Standard II(A): Material Nonpublic Information because the information was not in the public domain.

B) do not violate Standard II(A): Material Nonpublic Information because he was only confirming what he already suspected.

C) did not violate Standard I(D): Misconduct because he did not misappropriate the information.

D) violate Standard IV(A): Loyalty to Employer because he is being compensated for the work.

Jim Crockett is a portfolio manager for Miami Advisors and reports to Vicki Tubbs, the Chief Investment Officer. Miami has developed a proprietary model that has been thoroughly researched and is known throughout the industry as the Miami model. The model is purely quantitative and takes a given set of client characteristics and universe of potential securities and forms a portfolio for the investor. Individual portfolio managers are responsible for selecting securities to fit into the model based on recommendations from the firm's research department and the managers' own judgment. Because of the specific nature of the inputs to the model, each manager is responsible for applying the model on his or her own computer. The basic philosophy of the process is thoroughly explained to clients. Crockett does not understand the basics of the model, but feels that since it provides pure quantitative output, he does not need to understand it. However, he misapplies the model for several of his clients. In reviewing some of Crockett's portfolios, Tubbs finds the errors and points them out to Crockett. Which of the following statements regarding Tubbs and Crockett are TRUE?

A) Crockett has violated the Standards by not distinguishing between facts and opinion in presenting an investment recommendation.

B) Crockett has violated the Standards by not considering the appropriateness and suitability of the investment for his clients.

C) Tubbs has violated the Standards by failing to supervise adequately.

D) Crockett has violated the Standards by not exercising diligence and thoroughness in making investment recommendations.

Janine Walker is an individual investment advisor with 200 individual clients. When she first obtains a client, Walker solicits personal data that helps her formulate an investment recommendation, including tax status, income, expenditure needs, and risk tolerance. The Standards:

A) require Walker to update the data regularly.

B) only require to update a client's data when a material change is being made to the clients' portfolio.

C) require Walker to update the data at least once every three years.

D) require updating a client's data only when a material change occurs to the personal data.

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

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

C) must refuse to purchase shares for Gordon.

D) must wait until after she purchases the 3,000 shares for Gordon to purchase shares for her personal account, and then must keep the information quiet.

Ned Brenan manages two dozen pension accounts, one of which earned over 25 percent during the past two years. Brenan tells prospective clients that based on past experience they can expect a 25 percent 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.

D) Brenan has not violated either Standard of Professional Conduct III(D), Performance Presentation, or Standard I(C), Misrepresentation.

Kim Lee is a research analyst at Superior Investments and is researching a biotech firm specializing in the analysis of "mad cow" disease. While touring company facilities and meeting with management, she learns that they believe they may have found a way to reverse the disease. Moreover, one manager conjectured, "Suppose that we reversed the disease in someone who didn't even have it? We might then be able to boost that individual's IQ into the stratosphere!" After returning to her office, Lee issues a research report describing the compound as an "IQ booster with huge potential." This statement:

A) is reasonable given the information she was provided by the company.

B) lacks a reasonable and adequate basis in fact.

C) is allowable but only if quoted verbatim from her conversations with management.

D) violates the Standard concerning plagiarism.

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

B) the corporate finance department for Genco.

C) the equity research department for a brokerage firm.

D) an investment advisor that competes with Roth.

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) cease making sell recommendations because of the harm that can come to himself.

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

C) continue to advise employees to sell their stock.

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

Chuck Thomas is the trustee of a trust of which Jill Wyatt is the main beneficiary. Wyatt's husband is the president of a company. In emptying the recycling bin at home, Wyatt finds some papers that lead her to believe that her husbands company will make a tender offer to acquire another firm. Wyatt takes the information to Thomas, who uses it to purchase shares of the company for the trust, but does not further disclose the information. Thomas has:

A) violated the Standards concerning material nonpublic information.

B) violated the Standards concerning loyalty, prudence, and care.

C) violated the Standards concerning preservation of confidentiality.

D) not violated any Standards.

Victor Logan is a portfolio manager for McCoy Advisors, and Jack Brisco is the Director of Research for McCoy. Brisco has developed a proprietary model that has been thoroughly researched and is known throughout the industry as the McCoy 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. Brisco frequently alters the model based on rigorous researchan 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. Logan has conducted very thorough research on his own, using the same process that Brisco uses to validate his findings. Logan feels the model is missing some key elements that would further reduce the list of acceptable securities to purchase, however, Brisco has refused to look at Logan's research. Frustrated by this, Logan applies his own version of the model, with the justification that he is still only purchasing securities on the buy list. Because of the conflict with Brisco, he does not disclose the use of the model to anyone at McCoy or to clients. Which of the following statements regarding Logan and Brisco is TRUE? Logan is:

A) violating the Standards by applying his version of the model and by not disclosing it to clients. Brisco is not violating the Standards.

B) violating the Standards by applying his version of the model, but not by failing to disclose it to clients. Brisco is not violating the Standards.

C) violating the Standards by applying his version of the model and by not disclosing it to clients. Brisco is violating the Standards by failing to consider Logan's research.

D) not violating the Standards by applying his version of the model, but is violating the Standards by not disclosing it to clients. Brisco is not violating the Standards.

Jim Kent is an individual investment advisor in San Francisco with 300 clients. Kent uses open-ended mutual funds to implement his investment policy. For most of his clients, Kent has used the Baker fund, a small company growth fund based in Boston, for a portion of their portfolio. As a result he has become very friendly with Keith Dunston, the manager of the fund, whom Kent feels is mainly responsible for Baker's performance. One day Dunston calls Kent and tells him that he will be leaving the fund in four weeks and moving to San Francisco to work for a different money management company. Dunston is seeking suggestions on housing in the area. Baker has not yet announced Dunston's departure. Kent immediately finds a fund that is a suitable replacement for the Baker fund, and over the next two days he calls his 30 clients with the largest dollar investments in the funds and tells them he feels they should switch their holdings. Baker feels the remaining clients' positions are small enough to wait for their annual review to switch funds. Kent has:

A) violated the Standards by not dealing fairly with clients but has not violated the Standards regarding material nonpublic information.

B) violated the Standards by not dealing fairly with clients and regarding material nonpublic information.

C) violated the Standards regarding nonpublic information but has not violated the Standards in failing to deal fairly with clients.

D) not violated the Standards.

Randy Wesson is a research analyst for a large brokerage company following the chemical industry. Wesson receives a phone call from his nephew who works part-time in an airport hospitality center for an airline while going to business school. Many meetings take place at the center on any given day. The nephew tells Wesson that while bringing some faxes into a conference room, he overheard executives of Hunt Chemical talking about the likely divestiture of one of their subsidiaries. His nephew wants to know whether that will be good for Hunt. Wesson should:

A) write a research report describing the possibility of a divestiture, but not mention how he learned about it.

B) not use the information.

C) manufacture a reason to upgrade the stock to a "buy" recommendation to protect his nephew's confidentiality.

D) write a research report describing that he learned about the likely divestiture from his nephew who works at the hospitality center.

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) 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.

C) wait until the public announcement is made, then release a report stating that he is sure that the company will make his release date, but not disclose the relationship with Perry.

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

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) not write a research report disclosing the meeting.

B) 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.

C) write a research report mentioning the meeting but not disclose how she knew that the meeting occurred.

D) 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.

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 suitability.

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

C) violating the Standard on reasonable basis and representations.

D) not violating the Standards.

Christopher Lance, CFA, Chuck Cunningham, and Lucy Hunt, CFA, went to graduate school together and have remained close friends ever since. Lance and Hunt earned their CFA charters this past June and Cunningham is a Level III candidate. Lance, Cunningham, and Hunt have dinner every month at Cunninghams country club, one of the most prestigious in the metropolitan area where they live.

In his new position at IMed, Lance is the principal spokesperson on the companys financial performance and is responsible for developing and maintaining good relationships with the companys shareholders, especially large institutional investors, and with approximately 30 research analysts who issue research reports and make recommendations about publicly-traded equity and debt securities. It is April 12th and Lance is preparing to conduct the next conference call following the release on April 15th of IMeds quarterly earnings. Participating in the call will be Lances former colleague and good friend, Cunningham, and the other analysts who cover IMed. In addition, Hunt, a portfolio manager at Primary Pensions, a major institutional investor, has told Lance she will also be on the call. Primary Pensions has accumulated the largest single holding in IMed equity.

Cunningham is a research analyst at Lances former employer and has taken over coverage of IMed following Lances resignation. Until his promotion to Lances former position, Cunningham was a junior analyst covering the oil and gas industry. Although knowledgeable about fundamental financial analysis and equity valuation, he is unfamiliar with IMed and the pharmaceutical industry. Cunningham has been reviewing the past 5 years of IMeds financial statements and Lances research reports in preparation for participating in IMeds quarterly conference call to discuss its quarterly earnings release. Cunningham is under considerable pressure from his employer to meet or exceed Lances reputation and be rated top analyst by Investment Professional. His firms currently rates IMed as a strong buy based on Lances last research report. Based on his own preliminary analysis, Cunningham has a hard time justifying a hold recommendation. He is puzzled by several of the earnings adjustments that Lance made to achieve his target share price for IMed. He plans to ask Lance about these adjustments at their dinner on April 14^th.

Lance, Cunningham, and Hunt met for their regular monthly dinner on April 14th. Cunningham opens the after dinner discussion by questioning Lance about his new job and asks him if he and Hunt should anticipate any surprises at tomorrows conference call. Cunningham specifically asks Lance if IMed will meet or beat analyst expectations and the consensus earnings forecast. Lance responds that, under current securities laws, he is unable to discuss details of IMeds performance with Cunningham and Hunt and that theyll both be briefed with the other analysts and shareholders on tomorrows call. Shortly thereafter, the three friends say their good-byes. Hunt and Cunningham wish Lance well on the next days conference call.

What Standard governs Lances response to Cunninghams question and is he in compliance?

Standard

Compliance

A) VII: Responsibilities as a CFA Institute Member or CFA Candidate Yes

B) III: Duties to Clients No

C) V: Investment Analysis, Recommendations, and Action No

D) I: Professionalism Yes

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.

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.

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.

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.

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.

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.

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.

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.

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?

A) No Yes

B) Yes Yes

C) No No

D) Yes No

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.

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?

A) Yes Yes

B) No Yes

C) No No

D) Yes No

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.

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

A) Yes No

B) No No

C) Yes Yes

D) No Yes

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.

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.

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.

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

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.

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

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

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.