bmaggie

Albert Long, CFA, manages portfolios of high net worth individuals for HKB Corp. Alice Thurmont, one of his close friends, heads a local charity for homeless children that depends on donations to operate. Because donations have declined during the past year, the charity is experiencing financial difficulty. Thurmont asks Long to give her a partial list of his clients so that she can contact them to make tax-deductible donations. Because Long knows that the charity provides much benefit to the community, he provides Thurmont with the requested list.

Betty Short, CFA, also works for HKB Corp. She receives a letter from CFA Institute's Professional Conduct Program (PCP) requesting that she provide information about one of HKB’s clients who is being investigated. Short complies with the request despite the confidential nature of the information requested by the PCP.

Based on Standard III(E), Preservation of Confidentiality, which of the following statements about Long and Short’s actions is TRUE?

A) Short violated Standard III(E) but Long did not violate Standard III(E).

B) Long violated Standard III(E) but Short did not violate Standard III(E).

C) Both Long and Short violated Standard III(E).

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Long violated Standard III(E) because he did not preserve the confidentiality of information communicated by clients. Short did not violate Standard III(E) because this standard does not prevent members from cooperating with an investigation by CFA Institute’s Professional Conduct Program. Thus, Short can forward confidential information to the PCP.

bmaggie

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

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

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

C) Controlling relevant interdepartmental information.

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Standard II(A), Material Nonpublic Information, applies in this situation. Standard II(A) suggests the use of "fire walls" to protect the firm and to conform to the Standards. A fire wall is an information barrier designed to prevent the communication of material nonpublic information between departments of a firm. Although the fire wall system should provide a means to review transactions, it is not feasible to monitor all communications into/out of departments. Placing sensitive securities/firms on "watch, "restricted," or "rumor" lists helps management target monitoring of transactions.

bmaggie

While visiting the CSI Company, Mark Ramsey, CFA, overheard management make comments that were not public information, but were not really meaningful by themselves. However, when this information is combined with his own analysis and other outside sources, Ramsey decides to change his recommendation on CSI from buy to sell. According to CFA Institute Standards of Professional Conduct, Ramsey should:

A) report these events to his immediate supervisor and legal counsel, since they have become material in combination with his analysis.

B) issue his sell report because the facts are nonmaterial, but maintain a file of the facts and documents leading to this conclusion.

C) not issue his report until these comments are made public.

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The use of security analysis combined with nonmaterial nonpublic information to arrive at significant conclusions is legal and is called the mosaic theory.

bmaggie

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 S&, no need to credit Dixon.

B) Brown must credit both Dixon and S&.

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

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The Standards require members to acknowledge the author of a model, but members are not required to acknowledge information from a recognized statistical and reporting service.

bmaggie

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.

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Standard V(A) requires that a member have a "reasonable and adequate basis" before making an investment recommendation. Extrapolating on the basis of the conjecture of one member of the management team, without independent corroboration, is clearly in violation of this Standard. She is also in violation of Standard V(B) concerning the use of reasonable judgment regarding what is included or excluded in a communication with a client or prospective client.

bmaggie

Brendan Duval works as a research analyst for Toby Securities. Duval recommends changing a recommendation from “sell” to “buy” on Dalton Company. His firm, which manages several mutual funds, may be interested in buying Dalton’s stock. He also manages the retirement account that his parents established with Toby. Duval wants to buy shares of Dalton’s stock because it is an appropriate investment for his parent’s retirement account and obtains approval from his employer to do so. Duval is also thinking about personally investing in Dalton stock. According to CFA Institute Standards of Professional Conduct, which of the following best describes the priority of transactions? Duval should give:

A) priority to Toby's clients and his employer concurrently, followed by his parent's retirement account, and finally his personal account.

B) priority of transactions to Toby's clients, followed by his employer, then his parent's retirement account, and finally his personal account.

C) Toby's clients and his parent's account equal priority, followed by his employer, and then his personal account.

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According Standard VI(B) Priority of Transactions, Duval should give transactions for clients and employers priority over his personal transactions. Because his parent’s retirement account represents a client account at Toby, Duval should treat this account just like any other firm account. His parent’s retirement account should neither be given special treatment nor disadvantaged because of an existing family relationship with Duval. If Duval treats his parent’s retirement account differently from other accounts at Toby, he would breach his fiduciary duty to his parents.

bmaggie

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

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

C) The value of proxy voting must be maximized.

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Proxies for stocks in passively managed funds must also be voted. A cost-benefit analysis may show that voting all proxies may not benefit all clients.

bmaggie

In the course of reviewing the Corn Co., an analyst 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 the analyst do?

A) 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.

B) 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.

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

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This is an example of the mosaic theory where separate pieces of nonmaterial information are pieced together to make an investment recommendation.

bmaggie

Sallie Reid, CFA, is asked by her boss, also a CFA charterholder, to use a research report of a competing firm, change a few details, sign it and send it to a large client. He says their firm’s researchers will draw the same conclusions but haven’t gotten to them yet. If she complies, she is doing all of the following EXCEPT:

A) obeying her boss, a CFA charterholder, but violating several of the CFA Institute Code and Standards.

B) complying with CFA Institute standards because she cannot disobey her boss.

C) violating CFA Institute standards dealing with plagiarism.

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If Sallie complies, she is violating Standard I(C) Misrepresentation, because copying the report is plagiarism. Sallie should attempt to disassociate from any activity that she knows is in violation of the standards.

bmaggie

Sheila Stevens has accepted a one-year gift membership (valued at approximately $225) to the Women’s World Health Club from a firm to which she directs trades. She has done so without notifying her employer. Which of the following statements is least accurate?

A) 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.

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

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

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This action is clearly a violation of Standard I(B), Independence and Objectivity. Accepting a gift from a non-client is a more serious violation than accepting a gift from a client (for which a compensation arrangement would already exist), since the intent is almost certainly to gain influence over future actions of the member (e.g., increased allocation of trades).