rgonzalez

An analyst has found an investment with what appears to be a great return-to-risk ratio. The analyst double-checks the data for accuracy, keeps careful records, and is careful to not make any misrepresentations as he simultaneously sends an e-mail to all his clients with a “buy” recommendation. According to Standard V(A), Diligence and Reasonable Basis, the analyst has:

A) fulfilled all obligations.

B) violated the Standard if he does not verify whether the investment is appropriate for all the clients.

C) violated the Standard by communicating the recommendation via e-mail.

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If the analyst had been an investment manager, it would have been inappropriate for him to make a blanket recommendation for all of his clients without considering the unique needs of each. However, the analyst is merely stating that given the qualities of the investment, it is an attractive buy. He has kept adequate records, and made fair disclosure of his rating decision.

rgonzalez

A client calls his money manager and asks the manager to liquidate a large portion of his assets under management for an emergency. The manager warns the client of the risk of selling many assets quickly but says that he will try to get the client the best possible price. This is a violation of:

A) Standard V(A), Diligence and Reasonable Basis.

B) none of the Standards listed here.

C) Standard III(C), Suitability.

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The money manager has done his duty. He has warned the client of the risk and made no explicit promises concerning what he can and cannot do.

rgonzalez

LMS Securities is a boutique broker-dealer specializing in private placements for technology companies. The firm also provides aftermarket support for the companies that go public after private rounds of financing. This support includes market making and research coverage.
Susan Jones, CFA, is an analyst at LMS Securities. She is responsible for a subset of the companies for which LMS offers research coverage. She recently received her annual CFA Institute Professional Conduct statement, but has not yet filled it out and turned it in. Steve Brown is an analyst who directs the due diligence process for LMS Securities’ private placements. Brown passed the Level II exam five years ago, and has registered for the Level III exam every year since then, but has never taken it. He is registered for the Level III CFA exam next June, but nobody at the office believes he will actually take the test.
Sunrise Technologies is a longtime client of LMS Securities. LMS arranged four levels of private financing, for Sunrise, providing in-depth business consulting as well as handling all of the private placements. Sunrise went public 90 days ago and is currently trading at $14 per share.
Kenneth Karloff, CEO of LMS Securities, instructed Jones to write a favorable research report on Sunrise Technologies right before the company went public, setting a price target of at least $30 per share. Jones has developed a number of alternative cash flow projections for Sunrise Technologies. She picks an optimistic scenario to justify a $30 price target and issues a positive report using those projections.
After Sunrise Technologies has gone public, Karloff decides to help Jones to write a more-detailed research report on the company. Karloff provides Jones with information about the product pipeline and sensitive patent litigation that was given to him in confidence by Sunrise executives while the company was private. Given the product pipeline and legal outlook, Jones revises her cash flow models to reflect greater growth, then writes a positive report and advises LMS’s clients to buy the stock.
LMS Securities has an arrangement with Clampett Securities, an investment adviser, under which the investment manager uses its client brokerage to obtain LMS’s research. Clampett manages accounts for wealthy individual investors. About half of Clampett’s clients have a growth objective, while the rest seek income.In order to remain an active member of CFA Institute, Jones must annually:

A) submit her completed Professional Conduct Statement, pay applicable membership dues, and complete forty hours of continuing education.

B) submit her completed Professional Conduct Statement and pay applicable membership dues.

C) pay applicable membership dues and complete forty hours of continuing education.

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To remain an active member, Jones must agree to abide by the Code and Standards and the Professional Conduct Program. This is accomplished by completing the Professional Conduct Statement on an annual basis. In addition, Jones must pay annual membership dues. Continuing education is encouraged but not required to remain an active member. (Study Session 1, LOS 2.a,b)

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Which of the following statements regarding the research report on Sunrise Technologies after the company went public is CORRECT?

A) Jones has violated the Standard on research reports because she failed to distinguish between fact and opinion; Karloff is in compliance with the supervisory-responsibilities Standard because he is keeping up with Jones’ actions and ensuring her report is accurate.

B) Jones has violated the misrepresentation Standard with her aggressive growth prediction for Sunrise Technologies; Karloff has violated the plagiarism Standard by disseminating information he received in confidence.

C) Jones is in compliance with the objectivity Standard because she made her recommendation based facts, not conjecture; Karloff has violated the Standard regarding the use of material nonpublic information.

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Jones’ second research report made reference to hard facts, and her analysis and revision of the cash flow projections seems thorough and reasonable. This time, Karloff did not press her to express a certain opinion, and she found the information about the company compelling. She projected higher growth in cash flow for Sunrise, but nowhere is it said that she guaranteed a hard target. Jones is in compliance with the misrepresentation, objectivity, reasonable-basis, and research-report Standards. Karloff violated the insider-trading Standard because the information was given to him in confidence. He may also have violated his fiduciary duty to Sunrise, which probably kept the information private for a reason. (Study Session 1, LOS 4.a)

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According to CFA Institute Standards concerning fair dealing, Jones is required to do which of the following?

A) Ensure that accounts belonging to her immediate family purchase securities only after other clients have had the chance to buy.

B) Disclose to all clients whether different levels of service are offered.

C) Disseminate new investment recommendations to all clients at the same time.

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Jones must disclose different levels of service to all clients. Jones must inform clients about new buy recommendations and advise them not to sell, but she cannot disregard the order if the client still wishes to sell. Family-owned accounts should be handled in the same way as other accounts, and cannot be made to wait until everyone else has acted. The Standard allows for the fact that it is impossible to notify everyone at the same time. (Study Session 1, LOS 2.a,b)

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Which of the following statements could Brown put on his resume without violating Standard VII(B): Reference to CFA Institute, the CFA Designation, and the CFA Program?

A) I am a Level III CFA and should become a chartered financial analyst next year.

B) I am a Level III CFA candidate eligible to receive my charter in November 2005.

C) If I pass the Level III test, I may be eligible for my CFA charter late next year.

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This statement is quite literally correct, and complies with the Standards. “Level III CFA” is not an acceptable use of the CFA mark. Candidates should not offer a prediction about the time they will earn their charter. While Brown is not likely to take the test, as long as he is registered, he may refer to himself as a candidate. (Study Session 1, LOS 2.a,b)

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In order for Clampett Securities to claim compliance with CFA Institute Soft Dollar Standards, the company must:

A) re-evaluate mixed-use research at least once a year.

B) comply with all recommended provisions of the Soft Dollar Standards.

C) send all purchased research to the client whose brokerage was used to pay for it.

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Mixed-use research must be evaluated at least annually. Companies that claim soft-dollar compliance must follow the mandatory provisions, but can forgo some of the recommended provisions. If research only benefits some clients, it is acceptable to use just their brokerage to pay for it. The Standards do not require sending research to clients. (Study Session 1, LOS 3.b)

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When Jones produced the research report on Sunrise Technologies before it went public, she violated:

A) Standard V(A): Diligence and Reasonable Basis because her research was not thorough, and Standard I(B): Independence and Objectivity because of her obedience to her CEO.

B) Standard V(B): Communication with Clients and Prospective Clients by leaving relevant facts out of the report, but not Standard III(A): Loyalty, Prudence, and Care because the CEO cannot pass his fiduciary duty on to her.

C) Standard I(B): Independence and Objectivity because of her obedience to her CEO, and Standard II(A): Material Nonpublic Information because of Karloff’s involvement.

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Jones’ research was not thorough, and her report did leave out salient facts. Thus, she violated Standards V(A) and V(B). Her objectivity was certainly in question, so she violated Standard I(B). She also has a fiduciary duty to the clients regardless of what the boss says, so she violated Standard III(A). No nonpublic information was used in this report, so Standard II(A) was not violated. (Study Session 1, LOS 2.a,b)

pacmandefense

May Frost, CFA, is concerned about the comments and activities of several of her coworkers and feels both ethical and legal violations are routinely overlooked. According to the Code and Standards, a recommended first step would least likely be to:

A) provide her supervisor with a copy of the Code and Standards.

B) contact industry regulators.

C) review the company’s policies and procedures for reporting ethical violations.

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See Standard IV(A) "Loyalty." Frost should begin by reviewing the company’s policies and procedures for reporting ethical violations and provide her supervisor with a copy of the Code and Standards to highlight the high level of ethical conduct she is required to follow.

pacmandefense

Nancy Korthauer, CFA, has launched a new hedge fund called the Korthauer Tautology Fund but has had trouble hiring analysts who are CFA charterholders as well as with finding clients. She offers a $15,000 incentive bonus to any charterholder who joins the firm with over $1 million in committed client investments. Which of the following interpretations of the Code and Standards is most accurate?

A) A member or candidate may arrange for current clients to switch to the Korthauer Tautology Fund provided the member or candidate refuses to accept the incentive bonus.

B) A member or candidate may arrange for current clients to switch to the Korthauer Tautology Fund provided clients are informed of the incentive bonus.

C) A member or candidate may not solicit current clients away from their current employer.

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A member or candidate may not solicit current clients away from their current employer under Standard IV(A) "Loyalty."

pacmandefense

Nicholas Brynne, CFA, develops a trading model while working for CE Jones, an investment management firm. By working on the model at home from his personal computer, Brynne is able to devote additional work hours. Although the trading model is successful, Brynne losses his job in a company restructuring, and decides to start his own practice using the trading model. Nicholas is most likely:

A) in violation of the Standards because he did not receive permission from his employer to keep or use the files after employment ended.

B) not in violation of the Standards because the trading model was created using his home computer.

C) in violation of the Standards because he did not have permission to build the trading model using his home computer.

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Brynne is in violation of Standard IV(A) "Loyalty." Employer records include items stored in any medium including home computers.

pacmandefense

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.

pacmandefense

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.

pacmandefense

Which of the following statements about Standard IV(C), Responsibilities of Supervisors, is NOT correct? CFA Institute members with supervisory authority:

A) are expected to bring an inadequate compliance system to the attention of the firm's senior managers and recommend corrective action.

B) may delegate supervisory duties, which relieves them of their supervisory authority.

C) are expected to have in-depth knowledge of the Code and Standards and to apply this knowledge in discharging their supervisory responsibilities.

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Standard IV(C) permits members to delegate supervisory duties but such delegation does not relieve members of their supervisory responsibility.

pacmandefense

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

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

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

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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.