kasinkei

Ray Stone, CFA, follows the Amity Paving Company for his employer. Which of the following scenarios is Stone least likely to have to disclose to his employer.

A) The fact that Stone's son worked at Amity as a laborer during the summer while in school.

B) Stone's ownership of Amity securities.

C) Stone's personal relationship with the CEO of Amity.

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Members are required to disclose to their employer all matters that reasonably could interfere with their objectivity. Personal friendships with corporate executives and personal ownership of securities could reasonably interfere with objectivity, but it is unlikely that a child’s employment in a labor function would reasonably interfere with a parent’s objectivity.

kasinkei

Bill Valley has been working for Advisors, Inc., for several years, and he just joined CFA Institute. Valley routinely writes research reports on Pharmaceutical firms. Valley has recently been asked to serve on the board of directors of an organization that promotes the search for a cure of a certain cancer. Serving on the board is an unpaid position without any direct benefits other than meeting new people and potential clients. To comply with Standard VI, Disclosure of Conflicts, Valley needs to:

A) do nothing.

B) both disclose the position on the board to his supervisor and describe his responsibilities on the board.

C) only disclose the position on the board to his supervisor.

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Valley could be affected by his position on the board because he may tend to favor investments in firms that do cancer research. To comply with Standard VI(A), Disclosure of Conflicts, Valley must inform his supervisor of this relationship and describe his responsibilities on the board. Even if his supervisor does not find the relationship troublesome, any subsequent action that could lead to a conflict of interest should be discussed with the firm’s compliance officer.

kasinkei

Arthur Harrow, CFA, is a pharmaceuticals analyst at Dominion Asset Management. His supervisor directs him to prepare separate research reports on Miracle Drug Company and Wonder Drug Company. Harrow's former college roommate and close friend is the president of Miracle. Harrow owns 2000 shares of Wonder, which currently sells for $25 a share. Harrow's supervisor is unaware of these facts. According to CFA Institute Standards of Professional Conduct, which of the following action, if any, is Harrow required to take if he writes the research reports?

A) Harrow must disclose to Dominion his ownership of shares in Wonder but not his relationship with the president of Miracle.

B) Harrow must disclose to Dominion his relationship with the president of Miracle but not his ownership of shares in Wonder.

C) Harrow must disclose to Dominion both his relationship with the president of Miracle and his ownership of shares in Wonder.

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Standard VI(A) requires that Harrow disclose to Dominion conflicts that reasonably could be expected to interfere with his independence and objectivity. Both Harrow's relationship with the president of Miracle and his ownership of a substantial dollar amount of Wonder's shares represent a potential conflict requiring prompt disclosure to Dominion.

kasinkei

Lee Hurst, CFA, is an equity research analyst for a long-term investment fund. His annual bonus is linked to quarterly trading profits. Under a new policy, the quarterly assessment period is switched to a monthly assessment period. According to the Code and Standards, best practices dictate:

A) requiring Hurst to obtain permission from each client prior to implementation of the new policy.

B) updating disclosures when the policy change is implemented.

C) keeping the policy change private as a trade secret.

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Standard VI(A) "Disclosures of Conflicts" recognizes this policy as a potential conflict of interest as members and candidates could be incentivized to favor short-term trading gains over long-term value creation. Best practices dictate updating disclosures when the policy change is implemented. The long-term investors should know how members and candidates are compensated, especially when there is the potential for conflicts of interest.

kasinkei

Lance Tuipulotu, CFA, is a portfolio manager for an investment advisory firm. He plans to sell 10,000 shares of Park N’Wreck, Inc. to finance his daughter’s new restaurant venture, but his firm recently upgraded the stock to "strong buy." In order to remain in compliance with Standard VI(B) "Priority of Transactions," Tuipulotu must:

A) notify his firm of his intention to sell the shares before selling the shares.

B) not sell the shares of Park N’Wreck.

C) delay selling the shares until a firm client makes an offsetting purchase to avoid having a market impact.

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Standard VI(B) "Priority of Transactions" does not prohibit Tuipulotu from trading opposite the firm’s recommendation, but he should notify his firm first. Note that if Tuipulotu were a research analyst covering Park N’Wreck, he may be prevented from selling the security if his firm claims compliance with the CFA Institute’s Research Objectivity Standards.

kasinkei

An analyst routinely has the opportunity to offer his clients the opportunity to purchase “hot new issues.” He tells his clients that he will distribute each issue equally among those interested, with himself included in the distribution. The clients do not object to this. With respect to Standard VI(B), Priority of Transactions, this:

A) may be a violation despite the clients' approval.

B) cannot be a violation because the clients know of the practice and agree.

C) may be a violation because it is impossible to distribute hot new issues equally.

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Just because the clients know of a practice does not make it right. The analyst must put the clients first. It is a violation for the analyst to participate in a “hot new issue” which can lower the allocation to any given client below what that client would prefer. This is tantamount to putting the analyst’s interests ahead of the clients’ interests.

kasinkei

An analyst has the opportunity to offer his clients shares in a “hot new issue.” One of the analyst’s clients is his brother. When the new issue comes out, for those clients he deems it would be appropriate, he offers them an equal share. He includes his brother in that group. With respect to Standard VI(B), Priority of Transactions, this is:

A) congruent with the Standard as long as he does not have a direct personal interest in his brother's account.

B) congruent with the Standard if his brother is not a 'covered person'.

C) congruent with the Standard even if he has a direct personal interest in his brother's account.





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Client accounts that belong to family members should be treated like any other account so long as there is no direct interest on the part of the analyst. In other words, these types of accounts should not be at a disadvantage relative to other client accounts when there is no direct interest on the part of the analyst overseeing the account.

kasinkei

An analyst, who is a CFA Institute member, manages a high-grade bond mutual fund. This is his only professional responsibility. When the analyst comes across a speculative stock investment that he feels is a good investment for his personal portfolio, the analyst:

A) is in violation of Standard IV(A), Loyalty to Employer, by spending time analyzing stocks when he should only analyze bonds.

B) must notify his supervisor about the stock according to Standard VI(B), Priority of Transactions, to see if it is appropriate for the portfolio that he manages.

C) may invest in the stock because the analyst would not purchase the stock for the bond portfolio he manages.

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The problem says the analyst “came across” the speculative stock investment. We do not know if the analyst neglected his duties. Since such an investment is clearly not appropriate for a high-grade bond fund, the analyst may invest in the stock without any restrictions relating to the fund

kasinkei

An analyst likes to trade options in her own account. She does not deem any of her client accounts suitable for option trading. When she finds a favorable options position, in accordance to Standard VI(B), Priority of Transactions, she should:

A) act on it on her own behalf as she sees fit.

B) first tell her clients about it before acting herself.

C) refrain from acting until she notifies her supervisor.

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This is not a violation of Standard VI(B), Priority of Transactions, because the investment is not suitable for her clients. If the analyst believes that none of her clients should trade options, she is not obligated to advise them in this instance.

kasinkei

An analyst has a large personal holding of a security, and he has just determined that market conditions warrant selling this security. The analyst contacts clients who have a position in the security and advises them to sell some or all of the security. After waiting 24 hours, he sells the security from his personal accounts. This is:

A) a violation of Standard VI(B), Priority of Transactions.

B) congruent with Standard VI(B), Priority of Transactions.

C) a violation of Standard III(B), Fair Dealing.

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According to Standard VI(B), an analyst must give clients the first opportunity to buy or sell a security before the analyst acts on his own behalf. A 24-hour waiting period seems reasonable under the circumstances presented. The analyst seems to have a reasonable basis, and there is no reason to believe that he is violating Standard III(B) since he contacted all of the clients who have a position in the security.