Bad5shah

Amanda Brad, CFA, is a security analyst at UpTrend, Inc. During a routine visit to a beauty salon, she learns that a major cosmetic company, Lorean, is expected to present a revolutionary formula for facial cream. Brad buys Lorean stock for her portfolio and prepares a special report on the company. Brad also makes a call to Hillary Lang, another security analyst at UpTrend, to inform her about the news. Lang starts trading on her clients’ portfolios. Brad’s report states that given the on-going research activity at Lorean within the last months, investors can expect some successful new products and a sharp increase in the price of the stock. Lang’s actions:

A) violate the Standard of Objectivity and Independence.

B) violate the Standard of Fair Dealing.

C) violate the Standards because she trades on inside information.

---

Lang violates Standard III(B), Fair Dealing, which imposes the requirement to start trading on the clients’ portfolios only after the information is disseminated to all clients.

Bad5shah

Williams and Fudd is a major London-based brokerage and investment banking firm. Heritage Group, a money management firm, is the first, second, or third largest holder of each of the securities listed on Williams & Fudd's "PrimeShare #10" equity security list.On Tuesday morning, August 22, Williams & Fudd released a research report recommending the purchase of Skelmerdale Industries to the public and to its clients. On Wednesday afternoon, August 23, Heritage Group bought 1.5 million shares of Skelmerdale. This action is:

A) a violation of the Standard concerning fair dealing.

B) a violation of the Standard concerning disclosure of conflicts.

C) in accordance with the CFA Institute Code and Standards.

---

These actions are in accordance with both Standards III(B), Fair Dealing, and VI(B), Priority of Transactions. There is no violation.

Bad5shah

Todd Gregory has been recently hired as the head of compliance for Speed Capital. He decides the firm should precisely follow the recommendations of the CFA Institute Standards of Professional Conduct to ensure integrity within the firm. Which of the following is NOT a compliance procedure that Speed should put in place?

A) A requirement that investment personnel should clear all personal investments to identify possible conflicts.

B) A requirement of disclosure of all investment holdings of friends and family members of employees on an annual basis.

C) A requirement that employees provide duplicate confirmations of personal investing transactions.

---

Members and Candidates are not required to disclose investment holdings of friends unless those holdings create a conflict of interest.

Bad5shah

Patricia Young is an individual investment advisor who uses a computer model to place her clients into an appropriate portfolio. The model uses a range of simulated portfolio returns and presents the probability of achieving clients' return goals. Investors then choose a portfolio that provides a satisfactory probability of achieving their minimum required returns. By using this process, Young is:

A) violating the Standard on suitability.

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

C) not violating the Standards.

---

The Standard on suitability calls for Young to assess risk tolerance, which is ignored by her process.

Bad5shah

Milton Baker, CFA, prepares a research report on the dynamics of a stock price. In his study, he uses a considerable number of information sources, both outside sources and his company’s own research papers, prepared for both internal and public use. The report will first be distributed at the monthly department meeting and then later will be published on the company’s Internet site. He thinks that he may have neglected to mention some of his sources in his reference list but decides that he needs to be concerned about full disclosure of his sources only for the public version of the report, so he will wait to revise his work until after the monthly meeting but before it is published on the internet site. Which Standards does Baker NOT comply with?

A) Standard I(C), Misrepresentation, and I(A), Knowledge of the Law.

B) Standard I(C), Misrepresentation, I(B), Independence and Objectivity, and I(A), Knowledge of the Law.

C) Standard I(C), Misrepresentation, only.

---

Baker has some doubts but does not initiate any action presuming they only apply to the publicly disclosed report. The lack of action is a violation of Standard I(A), Knowledge of the Law. He also violates Standard I(C), Misrepresentation, by failing to properly disclose the sources of his information, where necessary.

Bad5shah

Lynne Jennings is a chemical industry research analyst for a large brokerage company. That industry is currently seeing an increase in mergers and acquisitions. While flying through Chicago, Jennings sees several senior officers who she knows are from the largest and fourth largest chemical companies walk into a conference room. She concludes that negotiations for an acquisition might be taking place. Jennings:

A) may not act or cause others to act on this information.

B) may use this information to support an investment recommendation.

C) should inform her compliance officer that she has material nonpublic information on firms she covers.

---

The fact that the company officers met is not material nonpublic information. As long as she bases her investment recommendation on her own independent research, Jennings will not violate any Standards if she uses this additional information to support it.

Bad5shah

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) must refuse to purchase shares for Gordon.

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

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

---

According to Standard II(A), Material Nonpublic Information, Fox cannot act or cause others to act on material nonpublic information until the information is made public. The information overheard at lunch was material and nonpublic; therefore, Fox must wait until the information is made public before accepting Gordon’s order.

Bad5shah

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

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

C) is a CFA in waiting.

---

A candidate cannot use any form of the CFA designation until receiving her charter.

Bad5shah

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

B) continue to advise employees to sell their stock.

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

---

Although Drake is paid by the company, his fiduciary duty is to the plan participants. His advice cannot be compromised by business considerations, otherwise he will be violating the Standard on loyalty, prudence, and care.

Bad5shah

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 research—an 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 manager’s investment decisions is CORRECT?

A) There is no violation of the Standards.

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

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

---

Soprano is violating the Standard on portfolio investment recommendations and actions by excluding relevant factors of the investment process. The fundamental research aspect is highly relevant to the process and should be disclosed to clients. It is acceptable for Melfi to use two investment processes that may be in conflict with each other and to use a process that was not developed by her.