karoliukas

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

A) not in violation of the Code and Standards.

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

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

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

karoliukas

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

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

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

C) not in violation of the Code and Standards.

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

karoliukas

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

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

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

C) not in violation of the Code and Standards.

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

karoliukas

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

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

B) Perez cannot solicit clients from a former employer.

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

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

karoliukas

Jan Hirsh, CFA, is employed as manager of a college endowment fund. The college’s endowment is held by the brokerage firm Advisors, Inc. Over the years, Hirsh has developed a solid relationship with Advisors. Because of this relationship, Advisors has given her their Platinum level service for her personal account. Advisors ordinarily gives the Platinum level only to clients who do a minimum of $2,500 of commission business in a year. Hirsh has never reached the $2,500 commission level and probably will never do so. According to Standard IV(B), Additional Compensation Arrangements, Hirsh needs to:

A) inform her supervisor in writing about the Platinum account.

B) inform her supervisor verbally about the Platinum account.

C) do none of the actions listed here.

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Having the Platinum account is a benefit from her managing the endowment, which led to the relationship with Advisors. Members should report to their employers any additional compensation or benefits they receive for their services. This must be in writing. Doing $2,500 in business alone will not negate her obligation unless she explicitly tells Advisors that she is willing to accept whatever penalties accompany a Platinum account when a client does less business.

karoliukas

An analyst working at an investment firm has a client that rents limousines. The client tells the analyst that as long as he is the client’s analyst, he can have free use of a limousine several times a year. The analyst needs to:

A) do nothing since the offer is not linked to the performance of the client's portfolio.

B) explicitly refuse such an offer.

C) inform his supervisor in writing of the offer if the analyst intends to accept the offer.

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Standard IV(B) requires that members disclose to their employer in writing all benefits that they receive in addition to their regular compensation for services they perform on behalf of their employer. They also need to get consent from their employer in writing. The written report to the employer should include the details of any written or oral agreement for extra compensation. The analyst does not have to refuse the offer.

karoliukas

Jill Marsh, CFA, works for Advisors where she manages a portfolio for a wealthy family. Marsh earns 1% of the portfolio’s value each year in the form of a commission from Advisors. The family just told her that any year the portfolio she manages earns more than a 10% return, the family will give her the use of the family’s vacation home for one week. Hirsh will comply with Standard IV(B), Additional Compensation Arrangements, if she:

A) sends an e-mail to her supervisor about the vacation home.

B) does nothing with respect to this.

C) delivers a typed memo to her supervisor about the vacation home the first time she uses it.

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Standard IV(B) requires that members disclose to their employer in writing all benefits that they receive in addition to their regular compensation for services they perform on behalf of their employer. E-mail messages qualify. As long as the agreement is in effect, she must inform her employer even if she has yet to use the potential benefit.

karoliukas

To comply with Standard IV(B), Additional Compensation Arrangements, members should do all of the following EXCEPT:

A) state the terms of oral or written agreements regarding the compensation and the duration of the agreement.

B) immediately make a written report to their employer specifying any compensation benefits they receive.

C) reject any outside compensation immediately because it is not appropriate to accept outside compensation in a business setting.

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There is no reason to reject any outside compensation immediately because it is inappropriate to accept it. However, all outside arrangements must be reported to the member’s employer.

karoliukas

Dick Bowden, a CFA charterholder, receives a free country club membership in exchange for financial advice he can offer the firm. He should:

A) do nothing; it is his business where he spends his free time.

B) reject the country club membership since it is illegal under CFA Institute rules and regulations to accept outside compensation.

C) disclose the arrangement to his employer.

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Dick should disclose the arrangement to his employer under Standard IV(B), Additional Compensation Arrangements.

karoliukas

Chris Babcock, CFA, a portfolio manager for a large Texas investment firm, has been offered compensation in addition to what her firm pays her. The offer is from one of her clients and the additional compensation will be based on her yearly performance in excess of the market index. Babcock should:

A) turn down the offer because it represents a clear conflict between this client and Babcock's other clients.

B) make written disclosure to all parties involved before she accepts this offer.

C) make written disclosure to her other clients before she accepts this offer.

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Standard IV(B), Additional Compensation Arrangements, applies in this situation. Standard IV(B) states, “No gifts, benefits, compensation, or consideration are to be accepted with may create a conflict of interest with the employer’s interest unless written consent is received from all parties.”

The key words here are "written consent" - members must obtain written consent because such arrangements may affect loyalties and objectivity and create potential conflicts of interest.