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) is allowable but only if quoted verbatim from her conversations with management.

C) lacks a reasonable and adequate basis in fact.

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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

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

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

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

Rickard Advisors recently had a trading error in a customer account that was subsequently covered by Rickard. The firm felt embarrassed by the disclosure of this error, and, in order to induce the client to continue its relationship, Rickard offers the client preferential access to a new issue that is expected to be “hot.” Which Standard is violated, if any?

A) The Standard concerning Fair Dealing.

B) The Standard concerning Fiduciary Duty.

C) The Standard concerning Independence and Objectivity.

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Rickard is in violation of the Standard concerning Fair Dealing by offering the client preferential access to a “hot” new issue. There is no obvious violation of Fiduciary Duty, since there is no evidence that Rickard is placing its own financial interest ahead of the client.

bmaggie

Scott Andrews, CFA, is a stockbroker selling an oversubscribed stock issue. Which of the following best describes Andrews' actions regarding this sale? Andrews:

A) cannot offer an oversubscribed issue of stock to any clients.

B) can only offer this security to clients for which it is appropriate on a first come first serve basis.

C) can offer this security on a prorated basis to all clients for which the security is appropriate.

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Standard III(B), Fair Dealing, applies. When new issues or secondary offerings are available or are being offered by the firm or if the firm is part of a selling syndicate, all clients for whom the security is appropriate are to be offered a chance to take part in the issue. If the issue is oversubscribed, then the issue is to be prorated to all subscribers.

bmaggie

The use of client brokerage by an investment manager to obtain certain products and services to aid the manager in the investment decision-making process is called:

A) quid pro quo practices.

B) trading practices.

C) soft dollar practices.

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Directing client brokerage for research and/or services is called soft dollar practices.

bmaggie

The Konkol Company implements a new methodology for portfolio valuation that is licensed to them by ABC Statistics. Konkol complies with the CFA Institute Code and Standards by:

A) not discussing the new methodology with clients because there is no need to, as it will not change their risk and yield preferences.

B) discussing the new methodology with clients only when a change in the security selection process is involved.

C) discussing the new methodology with the clients, in its entirety.

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Standard V(B), Communication with Clients and Prospects, requires any change in the scope, valuation methodology, or focus of the portfolio to be discussed with clients.

bmaggie

John McNeal, CFA, has a friend named Stan Green, a journalist at Investment News, a weekly magazine. In one of their conversations, Green tells McNeal about material nonpublic problems at Brightstar.com, a heavily traded firm. Green has written a special article about Brightstar.com’s problems that will appear in the next issue of Investment News. According to the Standards, can McNeal act on the information Green has shared with him?

A) Yes, McNeal can trade on the information but should ask Green to disseminate the information immediately.

B) Yes, McNeal can trade on the information, because it is already public.

C) No, McNeal cannot trade on the information.

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McNeal cannot trade on the information before the article is published. Trading on the information received from the journalist before the magazine is published is trading on material nonpublic information, a breach of Standard II(A).

bmaggie

Member compliance on issues relating to corporate governance or to soft dollars is primarily addressed by the Standard concerning:

A) Loyalty, Prudence, and Care.

B) Disclosure of Referral Fees.

C) Disclosure of Conflicts to Clients and Prospects.

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Fiduciary duty on issues relating to corporate governance or to soft dollars is primarily addressed by Standard III(A), Loyalty, Prudence, and Care.