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Reading Guidance for Standards I-VII FinQuiz.com FinQuiz.com CFA Level III Item-set - Question Study Session June 2018 Copyright © 2010-2018 FinQuiz.com All rights reserved Copying, reproduction or redistribution of this material is strictly prohibited info@finquiz.com FinQuiz.com © 2018 - All rights reserved Reading Guidance for Standards I-VII FinQuiz.com FinQuiz Item-set ID: 10528 Questions 1(10529) through 6(10535) relate to Reading Mark Webber Case Scenario Mark Webber, CFA is a research analyst serving Holler and Brookes Associates, a brokerage/dealer firm situated in the U.S The firm conducts its brokerage business on a national level The firm specializes in the trading of debt and equities of distressed firms However, in addition to distressed securities, the firm executes trade orders for conventional domestic and international securities (i.e equity and fixed income securities) Webber is currently conducting research on Y.T Automobiles, a small automobiles manufacturer, which is rumored to be the target of a takeover by a larger automobiles manufacturer Webber is invited to Y.T Automobiles’ production site where he engages in discussions with company management and factory employees His visit to the productions site leads him to conclude: Y.T Automobiles’ production activities have been halted due to an insufficient number of orders It is uncertain when production activities will resume The manufacturer’s production technology is considerably outdated in contrast to the technology used by competing manufacturers Factory worker’s salaries are low in contrast to those paid by competitors, which have been one of the sources contributing to employee resignations Following his visit, Webber decides to acquire further information on automobile industry practices with respect to salaries paid; production levels, technologies used, and industry participants’ financial health After discussion with a number of industry experts as well as representatives from different manufacturers, Webber arrives at the following conclusion: “The automobile industry has in general suffered from the slowdown in demand for automobiles across the country However based on comparisons between individual industry participants and Y.T Automobiles and between the industry and Y.T Automobiles, the latter manufacturer is either at risk of being acquired in a takeover or could potentially file for bankruptcy Thus the manufacturer is in dire need of external support which may steer the firm onto recovery.” Holler and Brookes Associates maintains an inventory of distressed company stocks which it terms the ‘distressed fund’ Corporations included in the distressed fund are mainly those requiring potential investors to take active equity positions and contribute to firm recovery The liquidity of the constituent stocks is low In order to improve the liquidity and enhance the depressed value of the fund’s stocks portfolio manager, Guy Bridges, transfers a percentage of the stocks to the ‘developed equity fund’, a fund comprising of securities from developed countries, to subsequently repurchase the stocks following a six-month period As a component of the latter fund, Bridges believes the demand for the stocks will rise, leading to an increase in stock values FinQuiz.com © 2018 - All rights reserved Guidance for Standards I-VII Reading FinQuiz.com To encourage investment in the distressed fund, Bridges recommends 30% of his existing clients invest in the fund (the circumstances of the clients highlighted below) Exhibit Breakdown of Bridges’ clients Client Category Circumstances Percentage of Bridges’ Clients Recommendation Issued? A • Short-term time horizon • Significant liquidity requirements • Below average risk tolerance 5% Yes B • Intermediate term time horizon • Significant liquidity requirements • Average risk tolerance 15% Yes C • Long time horizon • Moderate liquidity requirements • Above average risk tolerance 30% No D • Long time horizon • Low liquidity requirements • Above average risk tolerance 40% E • Intermediate term time horizon • Low liquidity requirements • Below average risk tolerance 10% No Yes Samuel Emerson is a Level III candidate who has recently transferred from Denver Associates, a brokerage firm Emerson will be managing client portfolios under the supervision of Webber Unbeknownst to Emerson, the human resource department at Holler and Brookes Associates has prepared an advertisement, which has been circulating amongst clients, that: FinQuiz.com © 2018 - All rights reserved Reading Guidance for Standards I-VII FinQuiz.com identifies Emerson’s achievements at Denver Associates as being achieved at Holler and Brookes Associates identifies Emerson as being ‘a CFA Program Level III candidate who will attain a completion status following the upcoming June examinations.’ FinQuiz Question ID: 10529 In context of Webber’s research activities conducted and his subsequent conclusion, he has most likely: A complied with the CFA Institute Codes and Standards of Professional Conduct B violated the standards, II (A) Material Nonpublic Information and V (A) Diligence and Reasonable Basis C violated the standard, II (A) Material Nonpublic Information FinQuiz Question ID: 10530 With respect to the transfer of stocks from the ‘distressed fund’ to the ‘developed equity fund’, Bridges has most likely: A complied with the CFA Institute Codes and Standards of Professional Conduct B violated the standards, II (B) Market Manipulation and III (C) Suitability C violated the standard, II (B) Market Manipulation FinQuiz Question ID: 10531 By recommending the distressed fund’s stocks to 30% of his clients, Bridges has most likely violated standard(s): A III (B) Fair Dealing and III (C) Suitability B III (B) Suitability only C III (B) Fair Dealing only FinQuiz Question ID: 10532 In context of the breakdown of Bridges’ clients, which of the following clients should not have received a recommendation? A A and E B A and B C All three clients FinQuiz Question ID: 10533 The advertisement circulated by Holler and Brookes Associates has least likely violated: A III (D) Performance Presentation B V (C) Record Retention C VII (B) Reference to CFA Institute, the CFA Designation, and the CFA Program FinQuiz.com © 2018 - All rights reserved Reading Guidance for Standards I-VII FinQuiz.com FinQuiz Question ID: 10534 Holler and Brookes Associates have recently hired a compliance officer to aid the firm with complying with the CFA Institute Standards of Professional Conduct and Code of Ethics Which of the following ethical codes will the officer least likely recommend? A Investment professionals must act in an ethical manner in their relationships with clients, prospective clients, employers, and global market participants B Investment professionals must exercise diligence, independence, thoroughness and independence when analyzing investments, making recommendations or taking investment actions C Investment professionals must use reasonable care and exercise independent professional judgment when engaging in professional activities FinQuiz.com © 2018 - All rights reserved Guidance for Standards I-VII Reading FinQuiz.com FinQuiz Item-set ID: 10542 Questions 7(10543) through 12(10548) relate to Reading Memchuk Investment Associates (MIA) Case Scenario Memchuk Investment Associates (MIA) is a small asset management firm located in Eringdale, a developing country The firm is host to wide array of local clients including individuals and institutions Its institutional clients base primarily include three major clients: The pension plan of Grace Incorporated, a surgical equipment manufacturer; The Hortwitz Trust, a foundation whose main purpose is to provide education to unprivileged children in the country’s rural areas; The Senior Citizen Endowment, a non-governmental organization providing housing and medical care facilities to the country’s senior citizens Yuri Peltier, CFA is one of the portfolio managers serving MIA He is responsible for managing the investment portfolio of Grace Incorporated’s pension plan The plan’s portfolio is indexed to a large-cap international index invested in the securities of stable companies The pension plan’s investment policy stresses industry diversification, stability, and avoidance of growth stocks as critical Peltier is exploring three large-cap stocks as potential investments for inclusion in the plan’s investment account Exhibit Potential Stocks P/E ratio P/B ratio Dividend yield Projected EPS growth Industry Classification Stock A 11.2 13.4 2.3% Stock B 4.5 3.6 0.0% Stock C 3.8 13.6 0.7% 22.4% - 5.6% 4.4% Technology Medical Equipment Supplier Automobile Manufacturing Based on the data gathered, Peltier allocates stocks B and C to the pension plan’s investment account Cassandra Lawson is another portfolio manager serving the firm She is responsible for managing the portfolios of individual clients The development of Eringdale’s economy and the provision of grants to help local companies compete on international levels, by the government, have been two factors which have contributed towards the increasing trend of local companies seeking public listing Trent Engineering Corporation is the latest corporation to seek a public listing of its shares The high level of demand and limited supply for its shares has forced Lawson to allocate 80% of the purchased shares to suitable client accounts She decides to hold back 20% of the purchased shares and deposit them in her personal account The shares will be held in her account for an eight-month time period after which they will be allocated to the FinQuiz.com © 2018 - All rights reserved Reading Guidance for Standards I-VII FinQuiz.com accounts of those clients who have exhibited an interest in the shares at the time of the 80% allocation During the eight-month period, she expects these stocks to appreciate in value The recent investment craze for IPO-listed firms amongst the local market investors has significantly increased the values of stocks such as that of Trent Engineering Corporation Tyrone Schmidt, Lawson’s biggest client, has requested that Lawson allocate 40% of the 20% shares, held in her personal account, to his investment account If Lawson agrees to so, Schmidt has promised her a round trip cruise to the Bahamas Lawson is unsure of whether to accept or decline the offer but she has informed MIA inwritten of the offer Francisco Brewer is a Level III candidate and a junior portfolio manager serving the firm Outside office hours, Brewer has arranged to meet his long time friend at a local restaurant While waiting for his friend, Brewer overhears the conversation of two individuals He gathers that the two individuals are retired and prior to their retirement were working at a software development corporation The two retirees discuss a software development problem present in the corporation’s largest products prior to their retirement They move on to discuss that a flaw in the source code of the corporation’s largest software product line may lead to a drop in the product line’s forecasted revenues Brewer shares this piece of information with his friend, upon his arrival, and decides to inform a fellow portfolio manager who manages the software development corporation’s stocks for his clients’ accounts As MIA’s junior portfolio manager, Brewer has been tasked with managing the investment account of The Senior Citizen’s Endowment under the supervision of Peltier The endowment is relatively new and has a small asset base The endowment’s investment policy exclusively mandates the inclusion of socially responsible companies in its investment account Apart from this requirement, the investment policy provides no further guidance The endowment’s chief investment officer has complained to Brewer of a recent allocation of emerging market socially responsible companies introducing significant risk to the endowment’s portfolio FinQuiz Question ID: 10543 By allocating stocks B and C to Grace Incorporated pension plan’s investment account, has Peltier violated the CFA Institute Standards of Professional Conduct? A No B Yes with respect to stock B C Yes with respect to stock C FinQuiz.com © 2018 - All rights reserved Reading Guidance for Standards I-VII FinQuiz.com FinQuiz Question ID: 10544 By allocating 80% of Trent Bridge Corporation’s stocks to his clients and retaining 20% of the stocks for his personal account, respectively, has Lawson violated any standard(s)? A B C Allocating 80% of the stocks to his clients? Allocating 20% of the stocks for his personal account? No standards have been violated III (B) Fair Dealing and VI (B) Priority of Transactions III (C) Suitability III (B) Fair Dealing III (A) Loyalty Prudence and Care and III (B) Fair Dealing No standards have been violated FinQuiz Question ID: 10545 If Lawson allocates 40% of the 20% Trent Bridge Corporation’s stock, held in her personal account, to Schmidt’s investment account and accepts the round trip cruise offer she will most likely be violating all of the following standards except for: A I (B) Independence and Objectivity B III (B) Fair Dealing C IV (B) Additional Compensation Arrangements FinQuiz Question ID: 10546 10 Brewer has most likely violated the standard, II (A) Material Nonpublic Information, by sharing information on the software development corporation with: A neither of the two B his friend and the fellow portfolio manager C the fellow portfolio manager only FinQuiz Question ID: 10547 11 By recommending emerging market socially responsible companies for the investment account of The Senior Citizen’s Endowment, has Brewer violated any Standards of Professional Conduct? A Yes, Brewer has violated III (C) Suitability B Yes, Brewer has violated III (B) Fair Dealing C No FinQuiz.com © 2018 - All rights reserved Reading Guidance for Standards I-VII FinQuiz.com FinQuiz Question ID: 10548 12 As Brewer’s supervisor, has Peltier violated any standards? A Yes, he has violated IV (C) Responsibility of Supervisors B Yes, he has violated III (C) Suitability and IV (C) Responsibility of Supervisors C No FinQuiz.com © 2018 - All rights reserved Reading Guidance for Standards I-VII FinQuiz.com FinQuiz Item-set ID: 10556 Questions 13(10557) through 18(10562) relate to Reading Rice & Helmore Associates Case Scenario Rice & Helmore Associates is a regional firm which provides investment banking and investment counseling/management services to individual clients The firm generates a significant proportion of its annual revenues from its investment counseling department CEO and senior compliance officer, Radolph Herrera, ensures the two divisions are segregated and interact as little as possible Herrera is working on developing additional procedures to ensure greater compliance with the CFA Institute Standards of Professional Conduct G&J is a medium-sized local food wholesaler The wholesaler is an important client of the firm’s investment banking division and is the firm’s most prized client In order to expand its consumer base, the wholesaler is planning to launch its own clothing line However in order to implement this plan it will need to hire designers and arrange for the necessary financing Feral Sutton, an investment banking employee in charge of the wholesaler, recommends it arranges 40% of its financing by issuing equity and 60% of its financing by issuing 10-Year Corporate BBB-rated bonds Brent Mullins is an investment analyst serving Rice & Helmore Associates Mullins and Sutton studied together and now work at the same firm They are close friends and frequently spend time with each other during lunch hours Mullins is closely following the food wholesale industry, including G&J To avoid the appearance of any conflicts, Mullins avoids discussing any information acquired during his research activities Sutton, who is unaware that Mullins is covering the wholesale industry, discusses with Mullins G&J’s expansion plans Following the discussion with Sutton, Mullins returns to his department and informs Herrera of this valuable piece of information Herrera, aware of the wholesaler’s plans, tells Mullins to ensure he concludes his report with a buy recommendation Contrary to Herrera’s instructions, Mullins analysis of G&J indicates that the company’s plan may not prove to be successful due to the clothing line being too expensive for its consumers Mullins is yet to arrive at a conclusion Mighty-You Inc is a sports equipment manufacturer and retailer which is locally based and operates on a global scale The manufacturer/retailer targets a small market segment by producing fitness equipment for an older age bracket, 55-85 years Mighty-You Inc solely uses the firm’s investment counseling services Salvatore Delgado, CFA is the investment counselor managing the manufacturer’s investment portfolio Mighty-You Inc has requested Delgado to locate a new broker for directing its trades since it is unsatisfied with the current’s performance Delgado conducts a broker search for his client using factors such as fees charged, execution speed and price, access to global research, and broker skills amongst others to screen the potential broker-candidates His screening process leaves him with two potential brokers: Mace Brokerage and Harold & Haroon Associates Mace Brokerage is situated in a different country, charges a fee which is substantially higher than the existing broker, provides a relatively higher FinQuiz.com © 2018 - All rights reserved Reading Guidance for Standards I-VII FinQuiz.com FinQuiz Question ID: 10562 18 By allocating the highly volatile securities to his client portfolios and justifying his allocation, Strickland has violated: A Standards III (C) Suitability and V (A) Diligence and Reasonable Basis B Standards I (D) Misconduct, III (C) Suitability, and III (D) Performance Presentation C Standards I (C) Misrepresentation and III (A) Loyalty, Prudence and Care FinQuiz.com © 2018 - All rights reserved Guidance for Standards I-VII Reading FinQuiz.com FinQuiz Item-set ID: 10570 Questions 19(10571) through 24(10576) relate to Reading Trinity Limited Case Scenario Trinity Limited is a financial services provider composed of three distinct departments: research, portfolio management, and financial consultancy The firm outsources any tax consultancy service requested by its clients Chief executive, Oscar Meyer, CFA is a strong supporter of ethical codes and professional standards To support his beliefs, Meyer has implemented a compliance system which is consistent with the standard compliance system structure adopted by a majority of local firms in his country Wilson Thackeray is a Level III candidate serving as portfolio manager at the firm’s portfolio management department To ensure his security purchases are well-reasoned, Thackeray purchases relevant research from the firm’s research department at a 0.20% standard fee One of Thackeray’s recent purchases pertains to research covering H.O Zone, a petrochemical manufacturer The research report has been prepared by Isaac Howell, a research analyst employee, rumored to have a family relation with the manufacturer’s executive director Thackeray has confirmed the rumors to be true and believes Howell’s buy recommendation, based on inside sources, may be a well-reasoned recommendation and thus purchases the manufacturer organization’s securities for his client portfolios Lamont Byrd is a research analyst serving the research department His research activities focus on analyzing local pharmaceutical and technology industries His vast experience with both industries has led him to conclude that the two are somewhat connected with the technology industry supplying laboratory technology to the pharmaceutical industry Thus any problem with the technology industry, he notes, may be reflected in the future outlook for the pharmaceutical industry To aid his research analysis, Byrd has developed a model which analyzes technology industry factors such as raw material supplies, production levels, transportation facilities and pharmaceutical industry factors such as profitability, production levels, efficiency levels, and annual industry revenues This analytical model uses data from industry reports published by local government agencies and annual industry forecasts obtained from discussions with relevant industry experts Byrd’s model structure was originally inspired by a model developed a former pharmaceutical industry corporate executive Byrd’s model has been considerably modified and is only similar with respect to the factors being analyzed Byrd markets the model as his own Janelle Terry and Gwendolyn Sosa are two Level III candidates who have been recently hired by the firm To advertise their new employees, Trinity Limited publishes a newsletter to be sent to all its clients and prospects The newsletter states: “Janelle Terry and Gwendolyn Sosa are the latest individuals to join Trinity Limited Both Terry and Sosa are CFA Level III candidates with Terry expected to attain the Passed Finalist status this coming June.” FinQuiz.com © 2018 - All rights reserved Reading Guidance for Standards I-VII FinQuiz.com For his first assignment Terry has been assigned Stuart McFadden McFadden has approached Trinity Limited for retirement planning advice McFadden has expressly desired the firm to devise a strategy which will help prevent taxation effects from reducing his portfolio’s value at retirement Terry has assured that the financial consultancy department will provide any tax consultancy advice McFadden needs in addition to retirement planning advice As a starting point, Terry recommends McFadden sell his portfolio securities which have fallen in value The losses generated on these securities, she states, can further be used to reduce any gains generated on portfolio securities which have risen in value She believes this strategy will help to reduce the basis of taxation in the current and future years Sosa has been assigned as an assistant to Meyer to help him strengthen the firm’s ethical codes and compliance with the CFA Institute’s code of ethics and professional standards As an assistant, Sosa will be responsible for monitoring any inconsistency in the firm’s reporting structures and practices which may violate the ethical codes and/or professional standards and reporting these violations to Meyer who will be responsible for taking the necessary action During her first day of work Sosa observes three practices which may constitute violations of the Institute’s ethical codes and/or professional standards Practice 1: A few managers from the portfolio management and research departments often conduct meetings after office hours Upon questioning one of these managers, the manager openly admitted that the purpose of their meetings is to discuss the purchase of the firm’s financial consultancy department Sosa is the first firm employee to be aware of such a plan Practice 2: Unbeknownst to their clients, several portfolio managers have set up an arrangement with their respective broker Under this arrangement, managers refer client portfolio trades to their broker in exchange for high quality research which will benefit these managers in portfolio management activities Practice 3: Research analyst, Lamont Byrd’s resume quotes experience with the pharmaceutical and technology industries of 20 and 15 years, respectively However after discussions with competing analysts and a noteworthy financial magazine editor, Sosa discovers Byrd’s resume has incorrectly stated his experience with the two industries Byrd’s actual experience with the former and later industries is 25 and 20 years, respectively FinQuiz.com © 2018 - All rights reserved Reading Guidance for Standards I-VII FinQuiz.com FinQuiz Question ID: 10571 19 In context of the publication of Howell’s research report and Thackeray’s purchase of H.O Zone securities, have Howell and Thackeray violated any standards? A Yes, Howell has violated standard VI (A) Disclosure of Conflicts while Thackeray has violated standard V (A) Diligence and Reasonable Basis B Yes, Howell has violated standards VI (A) Disclosure of Conflicts and II (A) Material Nonpublic Information while Thackeray has violated II (A) Material Nonpublic Information C No FinQuiz Question ID: 10572 20 With respect to Byrd’s analysis of the pharmaceutical and technology industries, he: A has violated I (C) Misrepresentation with respect to his analytical model and should only cite the use of annual industry forecasts in his research report B has not violated any standards with respect to his analytical model but should cite the use of government agency industry reports and annual industry forecasts used in his research report C has violated I (C) Misrepresentation with respect to his analytical model and should cite the use of government agency industry reports and annual industry forecasts in his research report FinQuiz Question ID: 10573 21 Trinity Associates has most likely violated VII (B) Reference to CFA Institute, the CFA Designation, and the CFA Program with respect to its reference to: A Terry and Sosa B Terry only C Sosa only FinQuiz Question ID: 10574 22 With respect to her meeting with McFadden, Terry has most likely violated standard(s): A I (D) Misconduct, II (B) Market Manipulation, and III (A) Loyalty Prudence and Care B I (C) Misrepresentation and II (B) Market Manipulation C I (C) Misrepresentation FinQuiz.com © 2018 - All rights reserved Reading Guidance for Standards I-VII FinQuiz.com FinQuiz Question ID: 10575 23 Based on Sosa’s observations of the firm’s practices, the individual(s) in question has most likely: A violated standards IV (A) Loyalty and VI (A) Disclosure of Conflicts in the case of practice and standard IV (B) Additional Compensation Arrangements in the case of practice B violated standard VI (A) Disclosure of Conflicts in the case of practice and standard III (A) Loyalty, Prudence and Care in the case of practice C not violated any standards in the case of practice and standard VI (C) Referral Fees in the case of practice FinQuiz Question ID: 10576 24 In context of practice 3, which of the following standards has Byrd most likely violated? A I (C) Misrepresentation B III (D) Performance Presentation C V (C) Record Retention FinQuiz.com © 2018 - All rights reserved Guidance for Standards I-VII Reading FinQuiz.com FinQuiz Item-set ID: 10584 Questions 25(10585) through 30(10590) relate to Reading Riku Associates Case Scenario Riku Associates is a small branch of the Riku-Tadashi Corporation, a family firm which was established by the two Ezakiya brothers, Riku and Tadashi Unlike its parent organization situated in Osaka, Japan, the branch is located in the neighboring country of Shimauta Riku Associates provides research and investment management services to the local Shimautanian market The Shimautanian laws are considerably lax especially with regard to the enforcement of corporate rules and regulations As a result, many local investors have complained of the lack of attention paid to their interests by portfolio managers serving the asset management firms Riku Associates, however, plans to revolutionize the current state of affairs and emerge as one of the first corporations with a strong corporate governance system and sound ethical principles in the industry Senior portfolio manager Masuyo Sayuki advises that the firm will need to restructure the corporation’s infrastructure and policies to attain such a level Sayuki advises the firm to commence the restructuring plan early next year Japanese laws prohibit all resident firms from employing individuals, who have violated national securities and/or trading laws, as either portfolio managers or research analysts On the other hand, Shimautanian laws permit resident firms to employ individuals with past infractions of national securities and/or trading laws provided they have not been guilty of violating such laws on more than two counts Ronald Smith is one of Riku Associates’ clients His investment portfolio has been managed by Sayuki for the past two years Due to his growing responsibilities, Sayuki has now decided to shift Smith’s portfolio to Antwon Lowery, a portfolio manager serving the firm Sayuki transfers Smith’s investment policy details to Lowery and instructs Lowery to conduct a review of the portfolio after every 18 months He tells Lowery, “The relative illiquid and passive nature of the portfolio securities requires infrequent updates to Smith’s portfolio To save unnecessary evaluation and review costs, conducting a portfolio review after every 18 months is thus justified.” Lowery manages Smith’s portfolio as instructed Lowery has discovered that one of the stocks held in Smith’s portfolio is far riskier than his stated risk appetite However, the stock belongs to a corporation which is owned by Smith’s close family friend Despite Lowery’s insistence, Smith has refused to sell the stock due to his loyalty to the corporation Lowery decides to contact Smith’s family friend and urge him to convince Smith to remove the stock from his portfolio as the stock may prove to be disastrous for Smith’s portfolio Furniture Ltd is a multinational furniture retailer and manufacturing organization which is based in Shimauta The local lumber industry is one of the chief suppliers to the organization A FinQuiz.com © 2018 - All rights reserved Reading Guidance for Standards I-VII FinQuiz.com number of supplier firms from the industry have withdrawn their supplier contracts with the organization in response to an extended delay in the receipt of payments for their supplies Furniture Ltd has always purchased its raw materials on credit Douglass Conway, CFA is one of Riku Associates’ senior research analysts and is covering Furniture Limited Conway has been invited by its chief executive to the organization’s head office in Shimauta In a discussion between Conway and the chief executive concerning the organization’s future plans, the executive shares with him that the organization is planning to shut down its luxury furniture line and sell the affiliated factory assets (exclusively used for the product line) The proceeds from the asset sales will be used to pay the organization’s disgruntled suppliers Upon returning to his firm Conway shares this previously undisclosed information with Sayuki Yoko Fukui and Taiki Gifu are two junior portfolio managers and colleagues working at Riku Associates Both managers have been considering migrating to Australia for better employment opportunities and quality of life Fukui sends her resume to Howell S Erwin Associates and participates in an online interview arranged by the firm for overseas interview candidates During the interview she learns that the firm will initially employ her as an internee and convert her status to a permanent employee eight months following her induction after which she will be entitled to remuneration With little savings to support her during the internship period, she decides to decline the offer She does not inform her supervisor of this offer Gifu sends his resume to A Carl Investment Limited and also participates in an online interview After returning from his interview, Gifu decides to resign from Riku Associates and join A Carl Investment Limited He submits his resignation letter to Sayuki and returns all firm documents stored in his workstation and a laptop which was given by the firm for office use purposes but retains backups of past firm information stored on his home computer He believes the information is now obsolete and need not be returned Following her trip to Australia, Fukui has been tasked with a new client Fukui is extremely enthusiastic about managing the client’s portfolio as the client has invited her to visit his underwater farm if Fukui achieves a portfolio return greater than 10% over a six-month period However, Fukui fails to achieve the minimum target and instead achieves a portfolio return of 9.8% at the end of the six-month period Desperate not to miss the client’s offer, Fukui increases the portfolio return to 10% Fukui announces to her client that she has achieved a 10% return on his portfolio and informs her supervisor of the offer by describing the location of the underwater farm FinQuiz.com © 2018 - All rights reserved Reading Guidance for Standards I-VII FinQuiz.com FinQuiz Question ID: 10585 25 When employing individuals with past infractions of securities and or/trading laws which of the following policies should Riku Associates undertake in order to avoid violating the guidelines laid out by the CFA Institute Standards of Professional Conduct? A Riku Associates may employ individuals with past infractions of securities and/or trading laws as portfolio managers and/or research analysts provided the infractions not exceed the two count limit B Riku Associates may not employ individuals with past infractions of securities and/or trading laws as portfolio managers and/or research analysts C Riku Associates may employ individuals with past infractions of securities and/or trading laws as portfolio managers and/research analysts irrespective of the violation counts FinQuiz Question ID: 10586 26 With respect to the transfer of his responsibilities to Lowery and Sayuki’s subsequent instructions to Lowery have any standards been violated? A Sayuki has violated IV (C) Responsibility of Supervisors and both managers have violated III (C) Suitability B Sayuki has violated IV (C) Responsibility of Supervisors but Lowery has not violated any standards C Sayuki has not violated any standards but Lowery has violated III (A) Loyalty, Prudence and Care FinQuiz Question ID: 10587 27 By contacting Smith’s family friend, Lowery has most likely: A complied with the CFA Institute Professional Standards of Conduct B violated III (A) Loyalty, Prudence and Care C violated III (E) Preservation of Confidentiality FinQuiz Question ID: 10588 28 By sharing Furniture Limited’s plans with Sayuki has Conway violated any standards? A Yes, he has violated II (A) Material Nonpublic Information B Yes, he has violated III (E) Preservation of Confidentiality C No FinQuiz Question ID: 10589 29 With respect to their responses to their employment offers, have Fukui and Gifu, respectively, violated IV (A) Loyalty? A Yes and Yes B Yes and No C No and Yes FinQuiz.com © 2018 - All rights reserved Reading Guidance for Standards I-VII FinQuiz.com FinQuiz Question ID: 10590 30 Which of the following standards has Fukui least likely violated when managing her new client’s portfolio? A I (B) Independence and Objectivity B III (D) Performance Presentation C IV (C) Additional Compensation Arrangements FinQuiz.com © 2018 - All rights reserved Reading Guidance for Standards I-VII FinQuiz.com FinQuiz Item-set ID: 10598 Questions 31(10599) through 36(10604) relate to Reading Greenwich Limited Case Scenario Greenwich Limited is a medium-sized asset management partnership founded and run by the O’Hara siblings, Jacquelyn and Allen The partnership firm is established in Nairobi, Kenya and caters the African and Asian markets from the Kenyan capital Both Jacquelyn and Allen supervise the research activities of the firm’s employees Jacquelyn is responsible for supervising the research activities pertaining to the African markets with Allen supervising the activities conducted with respect to the Asian markets The recent political violence in some African countries has not been received optimistically by investors who have responded to the crisis by dissolving their equity investments in those countries The heavy sales activity, as a result, has triggered a downward movement in these countries’ equity securities Kenya is the latest country to be affected by political violence The severity of the crisis is considerably lower than the crises in fellow African nations and the cause of the crisis different Unlike recent crises, investors have not yet responded to the Kenyan political crisis Ahmet Youssef, a research analyst covering the African markets, has been closely following the situation and after considerable research and analysis has arrived at the following recommendation: “Similar to its fellow nations, the Kenyan political crisis will grow in intensity, triggering a foreseeable bear equity market Presently, selling your Kenyan equity investments is the most apposite course of action.” While reviewing his recommendation, Jacquelyn asks Youssef what he means by ‘foreseeable’ Youssef responds by informing her that he has used surveys and quotations obtained from two analysts’ reports, both of whom follow the Kenyan market Additionally, he informs her that he has created an online database which contains all the material used to create his report Within the database, he has attributed the analytical data using the statement, “Analysts’ reports, surveys, and quotations have been used to create the report and formulate its conclusions.” The database is freely available to particular investor categories while available to the remainder investors at a nominal fee Due to a major breakdown in one of the firm’s communications channels, Youssef has not been able to release his report The firm has promised that the problem will be solved in two days’ time During this period, Youssef decides to issue his recommendation, using his own communication channel Nathaniel Hanson is a Level III candidate and a junior research analyst serving the firm Lately, Hanson has been convincing his fellow analysts to enroll in the CFA Program by stating, “The CFA Program will help enhance your analytical skills while ensuring that a high level of ethical FinQuiz.com © 2018 - All rights reserved Reading Guidance for Standards I-VII FinQuiz.com standards is maintained at all times.” He tells his fellow employees that the CFA Program is quite challenging and only individuals that are apt enough for the Program should participate Hanson is covering Janseng Training Limited (JTL), located in Malaysia JTL conducts training for individuals seeking employment opportunities in the aviation industry JTL has hired Greenwich Limited to conduct research on the training firm The training firm hopes the research firm’s report and conclusion on its future prospects will be positive Hanson has temporarily shifted to Malaysia where he is expected to stay for the next two months so that he may effectively conduct his research assignment To ensure Hanson’s stay is comfortable, JTL has arranged a fully paid modest accommodation and provided him with a car so that he may commute to the training firm’s headquarters, which is half an hour away from his residence Due to his heavy workload, Hanson has not yet informed his employer of the transportation and residence provided but accepts any residential allowances provided by his firm He intends to return the allowances to his employer upon his return to Nairobi in two month’s time During his stay in Malaysia, Hanson has been requested to cover a steel manufacturer Hanson has accepted the assignment and will be paid a flat fee for preparing the research report During a discussion with one of the steel manufacturer’s executives, Hanson has stated that he works as an independent analyst in Nairobi Local Kenyan laws require research firms to be well informed on corporate and securities trading laws prior to establishing a firm While Jacquelyn and Allen have carefully studied the local corporate laws, prior to commencing their firm practice, they have not fully studied local trading laws FinQuiz Question ID: 10599 31 In context of the recommendation statement, has Youssef violated any CFA Institute Standards of Professional Conduct? A No B Yes, he has violated I (C) Misrepresentation C Yes, he has violated V (B) Communication with Clients and Prospective Clients FinQuiz Question ID: 10600 32 With respect to his online database, Youssef has most likely violated all of the following standards except for: A V (C) Record Retention B III (B) Fair Dealing C I (C) Misrepresentation FinQuiz.com © 2018 - All rights reserved Reading Guidance for Standards I-VII FinQuiz.com FinQuiz Question ID: 10601 33 By issuing his research recommendation only, has Youssef complied with the CFA Institute Standards of Professional Conduct? A No, he should have published the research report and recommendation simultaneously B No, he should limit the time lag between the recommendation and research report from two days to one C Yes FinQuiz Question ID: 10602 34 In context of his comments pertaining to the CFA Program, has Hanson violated any professional conduct standards? A No B Yes with respect to his statement, “The CFA Program will help enhance your analytical skills while ensuring that a high level of ethical standards is maintained at all times.” C Yes with respect to his comments concerning the eligibility criteria required to participate in the CFA Program FinQuiz Question ID: 10603 35 While covering JTL, has Hanson violated any standards? A Yes, he has violated I (B) Independence and Objectivity B Yes, he has violated IV (A) Loyalty C No FinQuiz Question ID: 10604 36 With respect to covering the steel manufacturer, Hanson has least likely violated: A I (B) Independence and Objectivity B IV (A) Loyalty C VI (A) Disclosure of Conflicts FinQuiz.com © 2018 - All rights reserved Reading Guidance for Standards I-VII FinQuiz.com FinQuiz Item-set ID: 10612 Questions 37(10613) through 42(10618) relate to Reading Ashcroft Associates Case Scenario Ashcroft Associates is a multinational investment advisory firm which is based in and operates from the U.S The advisory firm caters to a multinational client base, which are geographically dispersed Estella Russet, CFA is the firm’s senior investment advisor Russet has recently taken in interest in the stocks of emerging market nations Russet believes that the low correlations of emerging market stocks with international stocks will provide risk diversification to all its client portfolios (risk tolerant and risk averse client portfolios) He instructs his portfolio managers to select emerging stocks which accordingly meet the return objectives of client portfolios and conduct a suitability analysis prior to purchasing these stocks for the portfolios The suitability analysis involves analyzing client factors such as risk and return objectives; current wealth; liquidity needs; investment time horizon; and unique circumstances These factors are analyzed and revised on a quarterly basis for those clients situated in countries with rapidly developing markets and revised on an annual basis for clients in stable markets In addition to international securities, Ashcroft Associates invests in crude oil commodity futures for the purposes of earning active returns through speculation These commodity futures investments are primarily undertaken for those clients who can endure the highest level of risks and are held in large quantities in their portfolios A majority of the future investments are now close to expiration Portfolio manager, Norberto Green, has been tasked with rolling the futures contracts into newer contracts Green times the trades to coincide with a downward crude oil commodity futures curve The rolling of the futures contracts turns out be more profitable than expected due to the liquidation of the large futures positions depressing the crude oil futures price and producing a significantly large positive roll return upon rolling into the new contracts Anika Sanchez is one of Russet’s clients Sanchez is experiencing personal bankruptcy To make the necessary payments associated with her bankruptcy, Sanchez has withdrawn large sums of money from her portfolio In order to improve her client’s situation and avoid losing Sanchez, Russet consults a banking consultant and informs the consultant of Sanchez’s present situation She believes the consultant may be able to help her client Sanchez has requested Russet liquidate any commodity futures investments held within his portfolio Russet, however, does not believe liquidating the investments is necessary as she is optimistic about Sanchez’s circumstances improving Russet does not roll the expiring futures contracts into newer contracts Bennet Cooper is a junior portfolio manager serving the firm He believes the stock of L-See Pharmaceuticals Manufacturers will be a valuable addition to his client’s portfolios The pharmaceutical manufacturer has recently undertaken a secondary offering of its shares The attractiveness of its stock has made this issue the latest investment craze in the equity market FinQuiz.com © 2018 - All rights reserved Reading Guidance for Standards I-VII FinQuiz.com leading to an oversubscription As a result, Cooper decides to allocate the manufacturer’s shares to suitable as well as interested client accounts on a pro-rata basis He decides to withhold a fraction of the shares, equaling the amount allocated to the client portfolios, for his aunt’s account He intends to allocate the shares to this account a day following the allocation to other accounts His aunt is a regular fee-paying client Ashcroft Associates’ new investment policy dictates all portfolio managers, executing client trades, to delay personal trades for two days following the date a client order is executed In addition, the firm requires all its employees to pre-clear all personal trades When asked by a client of the firm’s personal trading policies, one of the firm’s portfolio manager replies by informing the client that the firm has personal trading policies in place the details of which cannot be disclosed without the express consent of the firm FinQuiz Question ID: 10613 37 With respect to allocating emerging market stocks to client portfolios, has Russet violated any standards? A Yes, she has violated III (A) Loyalty, Prudence and Care B Yes, she has violated III (C) Suitability and IV (C) Responsibility of Supervisors C No FinQuiz Question ID: 10614 38 The suitability analysis utilized by firm portfolio managers to allocate stocks to client portfolios is most likely: A inconsistent with the standards in regard to the client factors being analyzed B inconsistent with the standards in regard to the two distinct portfolio revision schedules followed C consistent with the standards FinQuiz Question ID: 10615 39 Green’s commodity futures contract trading is most likely: A in compliance with the CFA Institute Standards of Professional Conduct B violates II (B) Market Manipulation C violates V (B) Communication with Clients and Prospective Clients FinQuiz Question ID: 10616 40 With respect to Sanchez, has Russet fully complied with the professional standards? A Yes B No, she has violated III (E) Preservation of Confidentiality and III (C) Suitability C No, she has violated III (E) Preservation of Confidentiality only FinQuiz.com © 2018 - All rights reserved Reading Guidance for Standards I-VII FinQuiz.com FinQuiz Question ID: 10617 41 In context of trading the stock of L-See Pharmaceuticals Manufacturers, Cooper is least likely: A in violation of Standard III(B) Fair Dealing B in violation of Standard VI(B) Priority of Transactions C in compliance with the CFA Institute Standards of Professional Conduct FinQuiz Question ID: 10618 42 With respect to the client’s inquiry pertaining to the firm’s new investment policy, the portfolio manager has most likely: A complied with the CFA Institute Standards of Professional Conduct B violated I (C) Misrepresentation C violated VI (B) Priority of Transactions FinQuiz.com © 2018 - All rights reserved ... portfolios and justifying his allocation, Strickland has violated: A Standards III (C) Suitability and V (A) Diligence and Reasonable Basis B Standards I (D) Misconduct, III (C) Suitability, and III... III (C) Suitability III (B) Fair Dealing III (A) Loyalty Prudence and Care and III (B) Fair Dealing No standards have been violated FinQuiz Question ID: 10545 If Lawson allocates 40% of the 20 %... has most likely violated standard(s): A III (B) Fair Dealing and III (C) Suitability B III (B) Suitability only C III (B) Fair Dealing only FinQuiz Question ID: 105 32 In context of the breakdown
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