luckygiftvn

Fred Stroh is an international equity analyst for EmerWorld Capital Management (ECM). Stroh has been studying the opportunities associated with the rumors of proposed joint ventures involving U.S. firms and firms partially owned by the government in a recently democratized country. Clients of Stroh have called him to ask about the investment possibilities. This concerns Stroh somewhat as he has had great difficulty in finding and acquiring reliable information about the quality and accessibility of the inputs and labor in local markets. Furthermore, there is still considerable uncertainty about which U.S. firms will be offered partnerships, what the conditions of those partnerships will entail, and the accounting rules that will govern the new ventures. However, Stroh is confident that there will be demand for the output in local and international markets.
Stroh begins his investigation and e-mails an old friend who was an entrepreneur in the U.S. and moved to the recently democratized country when he went into partial retirement. Although Stroh had not been in contact with the friend for several years, the friend writes back and says that this is a great time to invest in the country. He says that there will be national elections soon, and it seems that a pro-business chief executive for the country will be elected. The friend includes website URL addresses which link to reports from reputable news sources concerning the election. Stroh goes to those sites and sees that recent opinion polls in the country show that the pro-business candidate has a majority in the polls taken and is believed to be able to easily win the election.
Stroh calls his friend, and asks if the labor costs and input availability in the country gave the country a comparative advantage in some areas. The friend says yes, and that APX Corp. is planning to partner with the country’s government to expand a plant for making car parts. APX is also in talks to make a tender offer for a French glass manufacturing firm, which was one of the few non-nationalized and foreign owned firms in the country. None of APX’s intentions were known to outsiders of the firm. Stroh asks his friend how sure he is of the information, and the friend says that he has been hired as a consultant for APX and has been a negotiator in the tender offer dealings, which are going well. Stroh warns his friend that he may be saying too much, and his friend says that there are no rules in the country associated with trading on this type of information. The friend says he has some other useful information, but first asks if Stroh thought investing in APX was a good idea. Stroh responds by saying that based on the information just provided, and his training as an analyst and a CFA charterholder, the analysis would indicate that his friend should buy APX. The friend then says that IMI Corp. has decided not to enter into any partnerships in the country. Stroh then asks about how sure his friend was of IMI withdrawing from partnering in the country, and the friend says that although he has no contacts in IMI, it was his own research that lead to that conclusion. Stroh corroberated his friend's research findings.
Stroh continues his investigation. In his research he finds through public documents that APX has purchased the land next to the car parts plant. Some of APX’s managers are already working in the parts plant itself. He also finds that APX representatives have been visiting the headquarters of the French glass manufacturer. In public documents, APX is projecting a big increase in its production of engine parts and windshields.
Stroh calls the CFO of IMI and during the conversation learns that IMI has decided to withdraw its bid to be a joint venture partner, but that the formal announcement of the withdrawal will not occur for another week. The CFO declines to give a reason. Stroh also finds that official statistics verify the friend’s assertion that the country’s labor and raw material supplies do give it a comparative advantage in the types of activities APX is seeking to engage in.
Not wanting to miss an opportunity, Stroh completes his industry analysis and concludes that EmerWorld will issue a buy recommendation on APX. In the recommendation he says that APX is planning on expanding its production of car parts and windshields by acquiring new manufacturing plants in a country that offers great cost advantages, but does not mention his gathering the information concerning the land acquisition and the APX managers working in the existing plant because he wants to conceal his research methods. Stroh also says the advantages to APX are exceptionally good because a new pro-business chief executive will soon be elected. Upon the announcement of IMI to not partner in the country, Stroh issues a sell recommendation on IMI. Stroh says in the sell recommendation that IMI’s management does not seem competent because it will not be capitalizing on the opportunities in the country and apparently cannot recognize a good opportunity when it sees one. Which of the following pieces of information would Stroh have been able to use to trade upon?

A) The plan by APX to partner in the car parts production in the country.

B) The labor and materials comparative advantage of the country.

C) IMI withdrawing from partnering in the country.

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All of the pieces of information related to APX purchasing the other company, APX partnering in the car parts industry, and IMI withdrawing from partnering in the country are all insider information and therefore cannot be used to trade upon.  The only information that can be used is the information pertaining to the labor and materials comparative advantage since this was public information that Stroh could verify based on publicly available statistics. (Study Session 1, LOS 2.a,b)

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The statement Stroh made in his recommendation of APX concerning the election of a pro-business chief executive was:

A) appropriate because it did not relate directly to the firms themselves.

B) not appropriate because of the way it was mentioned in the recommendation.

C) appropriate because it was based on information from the public websites of reliable news agencies.

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According to Standard V(B), Communication with Clients and Prospective Clients, investment analysis and recommendations should clearly differentiate facts from opinions. Although it is a widely held opinion that the pro-business candidate would win, no one can predict the future. None of the other reasons are valid. (Study Session 1, LOS 2.a,b)

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With respect to the given information and the sell recommendation of IMI, which of the following statements would NOT be allowable in the sell recommendation under the Standards?

A) IMI is now abandoning its plan to partner in the country.

B) Research indicated IMI was likely to withdraw from any partnership agreements within the country.

C) IMI’s executives cannot recognize a good opportunity when they see it.

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Stroh has no reasonable basis for saying that IMI’s executives cannot recognize a good opportunity when they see it. The CFO of IMI did not give a reason for their not partnering in the country. IMI may have better opportunities elsewhere. Had the CFO said that the statistics concerning comparative advantages were not valid, for example, Stroh might have more of a basis to be critical of the management. The other statements are facts that Stroh can provide adequate support for. (Study Session 1, LOS 2.a,b)

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When Stroh answered his friend’s question concerning whether the friend should invest in APX, Stroh was in violation of all of the following Standards EXCEPT:

A) Standards VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program.

B) Standard III(C) Suitability.

C) Standard III(B) Fair Dealing.

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The Standard III(B) indicates that members shall deal fairly and objectively with all clients when disseminating recommendations and material changes. Fair dealing requires that members make every effort to treat all clients, whether they are individuals or institutions, in a fair and impartial manner. By essentially making a recommendation to his friend first, Stroh breached the standard because he disadvantaged his clients in favor of his friend. Also, Stroh still had to verify what the friend said about the comparative advantage was true. Standard V(A), Diligence and Reasonable Basis, and that the investment would be appropriate for his friend Standard III(C), Suitability. Mentioning his training, which included the CFA designation, was not inappropriate. (Study Session 1, LOS 2.a,b)

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Stroh attempted to maintain the confidence of his research methods by not revealing them in his report. By doing so, Stroh:

A) may have violated the standards related to known limitations of his analysis and material misrepresentation by omitting the source of his information and other facts that led to his conclusions.

B) is neither helping nor harming the consumers of his report, as long as he reaches logical conclusions from the information the sources provide.

C) is exercising discretion in order to maintain a competitive edge.

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Standard V(A), Diligence and Reasonable Basis, and Standard V(B), Communication with Clients and Prospective Clients. Known limitations of the analysis and conclusions should be documented in research reports. Material misrepresentations should also be avoided by including all pertinent information and by distinguishing between opinion and fact in the analysis and conclusions of a report. Stroh may have violated the standards related to known limitations in his analysis by rushing to provide a recommendation. Stroh felt somewhat unable to perform an analysis given the lack of essential data, but completed a report where the conclusions are largely driven by information derived from conversations that were not included or referenced in the report. These missing facts may also be construed as material misrepresentation. However, at no time should material nonpublic information be used for, or reported in, recommendations that are produced by Stroh or ECM. (Study Session 1, LOS 2.a,b)

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With respect to Stroh’s recommendations, the mosaic principle could play a role with respect to the use of which piece of information?

A) The purchase of the glass manufacturing company in the country.

B) The partnering of APX with the government’s car parts operations.

C) The comparative advantage of the country in manufacturing.

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Stroh could not use the information concerning the car parts partnering, the purchase of the glass manufacturing company, or IMI's withdrawal from partnering because some or all of this information was passed on to him via insiders with the information being material nonpublic information and therefore cannot be traded upon. The Mosaic principle could only play a role in the material public information regarding the comparative advantage of the country. (Study Session 1, LOS 2.a,b)

luckygiftvn

Susan Tigra, CFA, is a portfolio co-manager for the Sandia Energy pension fund. She has been contacted by Ted Garnet, a former classmate. Garnet has started his own investment management firm and would like Sandia Energy to move a portion of its assets to be managed by his firm. Tigra moves 5% of the pension fund to Garnet’s firm to help him build his assets under management. Kurt Show, CFA, is Tigra’s supervisor. Show notes the move, but does not investigate. Show is most likely:

A) not in violation of the Code and Standards.

B) in violation of Standard IV(C) "Responsibilities of Supervisors."

C) in violation of Standard V(A) "Diligence and Reasonable Basis."

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Show should review important changes to the portfolio for compliance with firm policies and procedures. The decision to work with Garnet seems arbitrary, and may not be necessary or prudent.

luckygiftvn

The proper system for compliance with CFA Institute Standards and requirements:

A) should incorporate professional conduct evaluation of the employees into their performance review only for those employees who are CFA charterholders.

B) should incorporate the professional conduct evaluation of the employees into their performance review.

C) cannot incorporate the professional conduct evaluation of the employees into their performance review, because not all of the employees are CFA charterholders.

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Once a compliance system is established, it should prohibit all employees, including those who are not CFA charterholders, from violating CFA Institute Standards. The incorporation of the professional conduct evaluation into the employee’s performance review is one of the recommended features of the compliance system.

luckygiftvn

Dixie Miller, CAIA, and Level II CFA candidate, heads the research department of a large brokerage firm. The firm has many analysts, some of whom are subjected to the CFA Institute Code of Ethics and Standards of Professional Conduct. If Miller delegates some of her supervisory duties, which statement best describes her responsibilities under the CFA Institute Code and Standards?

A) CFA Institute Standards prevent Miller from delegating supervisory duties to subordinates.

B) Miller retains supervisory responsibilities for those duties delegated to her subordinates.

C) Miller's supervisory responsibilities do not apply to those subordinates who are not subjected to the CFA Institute Code and Standards.

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Even though members may delegate supervisory duties, such delegation does not relieve members of the supervisory responsibility.

luckygiftvn

For years, John Berger, a CFA charterholder and CEO of a company, relied upon a set of reasonable procedures for preventing violations of the Standards of Practice in the firm. The company has recently arranged to have members of CFA Institute as mid-level supervisors throughout the firm. With this arrangement Berger has delegated the supervision of employees with respect to the Code and Standards to the mid-level managers. With this action Berger:

A) is still responsible for seeing that procedures are in place to prevent violations of the Code and Standards.

B) is relieved of his obligation to supervise the employees under the mid-level supervisors.

C) has violated Standard IV(C), Responsibilities of Supervisors.

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Berger has not violated any of the Standards. He has the right to delegate supervisory duties. This delegation does not relieve him of the responsibility of making sure that procedures are in place to prevent violations of the Code and Standards.

luckygiftvn

Wanda Kirby, CFA, recently joined Allegheny Investments as a senior analyst. Because of her extensive experience in the investments business and knowledge of the Code and Standards, Allegheny's management asked her to assume supervisory responsibility. Kirby reviewed Allegheny's existing compliance system and determined that it was inadequate to allow her to clearly discharge her supervisory responsibility. According to CFA Institute Standards, Kirby should:

A) agree to accept supervisory responsibility provided that Allegheny adopts reasonable procedures to allow her to adequately exercise such responsibility.

B) decline in writing to accept supervisory responsibility until Allegheny adopts reasonable procedures to allow her to adequately exercise such responsibility.

C) agree to accept supervisory responsibility and to develop reasonable procedures to allow her to adequately exercise such responsibility.

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If Kirby clearly cannot discharge supervisory responsibilities because of an inadequate compliance system, she should decline in writing to accept supervisory responsibility until Allegheny adopts reasonable procedures to allow her to adequately exercise such responsibility.

luckygiftvn

For many years, John Berger, CFA, has been a mentor of Bob Chennings, a family friend, who just earned the CFA designation. Berger is the CEO of a firm that just hired Chennings, but the hiring was done at a lower level so Berger and Chennings have no direct contact in the daily operation of the firm. With respect to Standard IV(C), Responsibilities of Supervisors, Berger:

A) must both develop written procedures concerning Chennings and routinely evaluate his performance.

B) assumes no extra responsibility with the hiring of Chennings.

C) must develop a set of written procedures to prevent violations derived from his mentoring Chennings.

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As a CEO, Berger is responsible for reasonable procedures being in place for the entire firm. Since Berger is not the supervisor of Chennings, however, Berger assumes no extra responsibility upon his hiring.

luckygiftvn

Jess Green, CFA is the research director for Castle Investment, Inc., and has supervisory responsibility over eight analysts, including three CFA charterholders. Castle has a compliance program in place. According to CFA Institute Standards of Professional Conduct, which of the following is NOT an action that Green should take to adhere to the compliance procedures involving responsibilities of supervisors? Green should:

A) incorporate a professional conduct evaluation as part of the performance review only for the three CFA charterholders.

B) issue periodic reminders of the procedures to all analysts under his supervision.

C) disseminate the contents of the compliance program to the eight analysts.

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Green should incorporate a professional conduct evaluation as part of his review of all eight analysts under his supervision, not just the three CFA charterholders.

luckygiftvn

The following scenarios describe two members of CFA Institute who have supervisory responsibility.

• The president of Hawthorne Investments, a newly founded money management firm with five investment professionals, asked Rebecca Long, CFA, to be the company's compliance officer and to develop the company's compliance procedures. Long has an in-depth knowledge of the Code and Standards, but she was too busy to develop a compliance manual herself. Therefore, she copied, with written permission, the compliance manual of a large money management firm. This manual was comprehensive and covered many areas not part of Hawthorne's operations. Long gave the manual to Hawthorne's president, but did not distribute the contents of the program to other appropriate personnel.
• A co-worker at Barksdale Capital mentions to Stephen Luck, CFA, that George Trout, a candidate in the CFA Program, may have violated the CFA Institute standard involving priority of transactions. As Trout's supervisor, Luck decided to investigate this allegation but did not begin the investigation until a month after the alleged incident. Luck continued to maintain the same amount of supervision on Trout during the month before he began his investigation of Trout.

According to the CFA Institute Standards of Professional Conduct, which of the following statements about whether Long and Luck followed appropriate compliance procedures involving their responsibilities as supervisors is CORRECT?

A) Luck violated the procedures for compliance, but Long did not.

B) Both Luck and Long violated the procedures for compliance.

C) Neither Luck nor Long violated the procedures for compliance.

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Long violated the procedures for compliance involving her supervisory responsibility by not tailoring the compliance manual to Hawthorne's operations and by not distributing the contents of the program to appropriate personnel. Luck also violated the procedures for compliance by not responding promptly to the allegation that Trout violated the CFA Institute standard involving priority of transactions and by not increasing supervision on Trout pending the outcome of the investigation.

luckygiftvn

A firm recently hired Hal Crane, CFA, to be a supervisor in the firm. Crane has reviewed the procedures for complying with the Code and Standards in the company. It is Crane’s belief that the procedures need revision in order to be effective. Crane must:

A) only send out a petition to fellow workers asking for a change in the procedures.

B) both submit a petition to fellow workers and inform the SEC.

C) refuse supervisory responsibilities in writing until the company adopts an adequate system.

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If Crane believes the current procedures are not adequate, Crane must refuse the supervisory responsibilities in writing until an adequate system is adopted. There is nothing in the Standards about circulating a petition.