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Jack Stevens is employed by a company to provide investment advice to participants in the firm's 401(k) plan. One of the investment options is a stable value fund run by the company. Stevens' research indicates that the fund is far riskier and less liquid than the typical stable value fund and has a fundamental asset value lower than book value of the assets. He tells Jessica Cox, the head of employee benefits, about his research, and indicates that he will advise new employees to not invest in the fund and will advise employees who already own the fund to reduce their holdings in the fund. Cox points out that the fund is not in any current danger because there are very few redemptions requested of the fund. Cox also states that a sell recommendation may become a self fulfilling prophecy, causing investors to redeem their shares and forcing the fund to liquidate, which in turn will cause the remaining investors to receive less than their promised value. Stevens agrees with this assessment and feels his fiduciary duty is to all employees. Stevens should:

A) continue to recommend that new investors do not invest in the fund, but not advise existing investors to reduce their holdings.

B) continue to recommend that new investors do not invest in the fund and existing investors reduce their holdings.

C) recommend that new investors invest in the fund and existing investors maintain their holdings.

D) tell investors he cannot give advice on the fund because of a conflict of interest.

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Answer and Explanation

The employees to whom Stephens owes fiduciary duty are the ones who are seeking his advice, even if acting on that advice hurts other employees who might eventually become clients.

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Brenda Clark is an investment advisor. Two years ago Clark decided to stop calculating a return composite because of the time required to make those calculations. A prospective client asks Clark what she thinks her performance would have been over the past two years. Clark:

A) can answer the question orally but cannot state the numbers in writing.

B) cannot answer the question because it would be misleading.

C) cannot answer the question, nor can she discuss potential future market returns with the prospective client.

D) must surrender her Charter immediately.

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Answer and Explanation

Any discussion of past performance would imply that Clark had made some calculations, which would be misleading. However, Clark need not calculate historical performance to be an advisor. She can also talk about her view on the future of capital markets.

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June Carter passed Level III of the CFA examination in June but will not complete her work experience requirement until August of next year. Carter can state on her resume that she:

A) is a CFA in waiting.

B) passed Levels I, II, and III of the CFA examination.

C) has earned the CFA charter as long as she is on track to complete her work experience.

D) will be a CFA charterholder in August of next year as long as she is on track to complete her work experience.

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Answer and Explanation

A candidate cannot use any form of the CFA designation until receiving her charter.

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While having a conversation with a prospective client, John Henry states that his performance across all of his past clients over the past five years was over 20 percent, which was 200 basis points higher than his benchmark. He tells the client that while the benchmark may rise or fall over time, his excess performance will remain consistent. Henry violated the Standards of Professional Conduct because:

A) he cannot discuss prospective future performance in any manner.

B) he cannot discuss performance without clearly stating that the composite does not conform to PPS.

C) the statement of excess performance is misleading with respect to its certainty.

D) he cannot discuss performance orally without first putting his numbers in writing.

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Answer and Explanation

Guaranteeing performance on investments that are inherently volatile is misleading to clients.

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Ken James has been an independent financial advisor for 15 years. He received his CFA Charter in 1993, but did not feel it helped his business, so he let his dues lapse this year. He still has several hundred business cards with the CFA designation printed on them. His promotional materials state that he received his CFA designation in 1993. James:

A) must cease distributing the cards with the CFA designation and the existing promotional materials.

B) can continue to use the existing promotional materials, and can use the cards until his supply runs outhis new cards cannot have the designation.

C) must cease using the existing promotional materials, but can use the cards until his supply runs outhis new cards cannot have the designation.

D) must cease distributing the cards with the CFA designation, but can continue to use the existing promotional materials.

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Answer and Explanation

Use of the CFA designation must be stopped immediately, however, the receipt of the Charter is a matter of fact.

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Brian Williams is a portfolio manager with Santo Capital and works on the Banks Company's account. Santo has a policy against accepting gifts over $500 from clients. The Banks' portfolio has a fantastic year, and in appreciation, the pension fund manager sent Williams a rare bottle of wine that he estimates is worth $300. Williams must:

A) report the pension fund manager to the CFA Institute Professional Conduct Program.

B) return the bottle to the client.

C) donate the wine to charity.

D) inform his supervisor in writing that he received additional compensation in the form of the wine.

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Answer and Explanation

The Standards require that he inform his supervisor in writing about the gift.

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Judy Gonzales is a portfolio manager with Brenly Capital and works on Johnson Company's account. Brenly has a policy against accepting gifts over $25 from clients. The Johnson portfolio has a fantastic year, and in appreciation, the pension fund manager sent Gonzales a rare bottle of wine. Gonzales should:

A) return the bottle to the client explaining Brenly's policy.

B) present the bottle of wine to her supervisor.

C) inform her supervisor in writing that she received additional compensation in the form of the wine.

D) share the wine at a company function.

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Answer and Explanation

By not returning the bottle she would be violating the Standard on disclosure of conflicts to the employer, which states that employees must comply with prohibitions imposed by their employer.

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Maggie McCarthy is an individual investment advisor who uses mutual funds for her clients. She typically chooses from a list of 40 funds that she has thoroughly researched. The Figgs, a married couple that are a client, asked her to consider the Boilermaker fund for their portfolio. McCarthy had not previously considered the fund because when she first conducted her research three years ago, Boilermaker was too small to be considered. However, the fund has now grown in value, and after doing thorough research on Boilermaker, she found the fund was by far the most outstanding large company value fund in her list of funds. She puts the fund in the Figgs' portfolio, and in all new clients portfolios, but not in any of her other clients' portfolios. Her reasoning is that her existing clients were comfortable with their current holdings, and she did not want to risk disturbing their comfort. Has McCarthy violated any Standards? McCarthy has:

A) not violated the Standards.

B) violated the Standards by not dealing fairly with clients.

C) violated the Standards by not maintaining independence and objectivity.

D) violated the Standards by not having a reasonable and adequate basis for making the recommendation.

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Answer and Explanation

The fund should have been considered for the existing clients' portfolios. There may have been reasons not to add the fund to their portfolios, such as tax consequences or a lack of suitability, but disturbing their comfort is not sufficient.

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One year ago, Karen Jason left the employment as a portfolio manager of Howe Advisors. The departure was contentious and both parties threatened legal action. As a result, both parties signed a settlement in which Jason was paid a pro rated bonus, but agreed not to work on the portfolios of any existing Howe client for two years. The terms of the agreement were that both parties agreed to keep all aspects of the agreement confidential, including the fact that there was hostility surrounding the departure. Jason now works for Torre Advisors, who has the Stein Company as a new client. At the time Jason left Howe, Stein was a client of Howe, although Jason did not personally work on the Stein portfolio. Jason's supervisor at Torre wants Howe to work on the Stein portfolio. Jason should:

A) inform her supervisor that she cannot work on the portfolio because of a legal agreement, but cannot tell him why.

B) work on the portfolio because she did not personally work on the portfolio when she was at Howe.

C) inform her supervisor that she cannot work on the portfolio because of a non-compete agreement.

D) leave the employment of Torre because of a conflict of interest.

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Answer and Explanation

Jason must inform her supervisor of the conflict, but she cannot violate the terms of the confidentiality agreement and she cannot work on the portfolio.

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David Lynch is an individual investment advisor who uses mutual funds for his clients. He typically chooses funds from a list of 40 funds that he has thoroughly researched. The Palmers, a married couple that are a client, asked him to consider the Twin Peaks fund for their portfolio. Lynch had not previously considered the fund because when he first conducted his research three years ago, Twin Peaks was too small to be considered. However, the fund has now grown in value, and after doing thorough research on the fund, he finds the fund has suitable characteristics to be included in his acceptable list of funds. He puts the fund in the Palmers' portfolio but not in any of his other clients' portfolios. The fund ends up being the best performing fund of any of the funds on his list. Has Lynch violated any Standards? Lynch has:

A) violated the Standards by not disclosing conflicts to clients.

B) violated the Standards by not maintaining independence and objectivity.

C) violated the Standards by not dealing fairly with clients.

D) not violated the Standards.

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Answer and Explanation

Prior to the discovery of the fund, Lynch did not put all of the same funds in all of his clients' portfolios, so there was no reason to do so now. The fund was among a list of other good funds. Lynch did not fail to maintain independence and objectivity, had no conflicts to disclose to clients, and did not deal unfairly with clients.