kasinkei

Wes Smith, CFA, refers many of his clients to Bill Towers, CPA, for accounting services. In return, Towers performs routine services for Smith, such as his tax returns, for no charge. With respect to this relationship, Smith:

A) must disclose to his clients that Towers provides services for Smith's personal benefit.

B) is in violation of both Standard V(B) and III(B).

C) is only in violation of Standard III(B), Fair Dealing, by not putting the client first.

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According to VI(C), Referral Fees, Smith must disclose to his clients that Towers provides services for Smith’s personal benefit. Neither of the Standards listed in the other answers apply.

kasinkei

An analyst who is a member of CFA Institute has composed an introductory information packet for her new clients, which includes information on fees she receives for referring clients to other professionals and those she pays for having clients referred to her. With respect to Standard VI(C), Referral Fees, this action:

A) is not addressed in the Standard.

B) exceeds the requirement of the Standard because she does not need to reveal the fees she pays to those that refer clients to her.

C) may not satisfy the Standard if such information is only provided after the receivers of the information have become clients.

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Standard VI(C) says that a member must reveal information both on fees she receives for referring clients to other professionals and those she pays for having clients referred to her before a prospect becomes a client. This allows the prospect to evaluate any partiality of a recommendation and the full cost of the services.

kasinkei

Toni Florence, CFA, CAIA, leases office space to her best friend, Tom Rigs. Florence is an independent investment advisor specializing in high net worth clients and Rigs is a licensed real estate broker. In lieu of paying rent, Rigs refers his real estate clients to Florence, but only with the clients’ permission.

For clients referred by Rigs, Florence:

A) need not disclose the referral fee if Rigs discloses the lease arrangement to the clients first.

B) must disclose the terms of the lease arrangement.

C) need not disclose the terms of the lease arrangement because Rigs obtained the clients’ permission for the referral.

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Standard VI(C), Referral Fees, requires members to disclose to clients and prospects any consideration or benefit received by the member or delivered to others for the recommendation of any services to the client or prospect. Florence has delivered a benefit (free rent) to Rigs, which must be disclosed to the clients referred by Rigs. Florence must not rely on Rigs to make the disclosure.

kasinkei

A firm produces regular proprietary research reports on various companies. According to Standard VI(B), Priority of Transactions, which of the following would be an “access person?”

A) An independent auditor with access to material, non-public information on a company being analyzed.

B) A supervisory analyst who reviews all research reports prior to dissemination.

C) A person working in the mail room.

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Persons with access to information during the normal preparation of research recommendations are subject to Standard VI(B). An independent auditor is not involved in the normal preparation of research recommendations.

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.

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, 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 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 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

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.